The DOD provides Congress with estimates of its free-asset monies so that they can be considered in decisions regarding appropriations. Most free assets accrue from foreign military sales. In response to a Congressional request, GAO surveyed the authorizing legislation, examined fiscal 1974 transactions, and interviewed responsible military officials at Washington, D.C. headquarters. Detailed audit work was conducted at selected Army Armament, Missile, and Tank-Automotive commands. Historically, the free-asset estimates given to Congress have been low. Funds appropriated for defense programs could have been reduced if accurate estimates had been available. Almost $1.1 billion in freeassets were generated in the DOD's procurement accounts during fiscal years 1972 through 1975. Because DOD has not provided its individual services with a standard definition of free assets, each department defines them differently. In addition, definitions varied among the Army commands reviewed. Army control over generation of its free assets has been limited by management problems in its customer-order program, such as poor enforcement of reporting requirements, unreported generation and use of free-asset amounts at the command level, and inaccurate records from which the free assets are calculated. GAO recommends that the Secretary of Defense establish and enforce standard criteria for classifying sales of defense items as free-asset sales. Criteria should specify the time period for replacement and what constitutes replacement in kind. Army officials should enforce customer-order reporting requirements and cease further reprogramming of free-asset amounts until the relevant records are purified and adequate control established. GAO also suggests specific accounting procedures that Congress should require of DOD for recording sales of inventory items. Statistical data on free-asset generations for the DOD and the three Army commands reviewed are appended, along with a copy of the Congressional request for the GAO review and a list of military officials responsible for activities discussed in the report. (Author abstract modified) ABI mjm