The 1976 Arms Export Control Act provides that charges for nonrecurring research, development, and production costs can be waived or reduced by the DOD if the sale would significantly advance U.S. interests in the North Atlantic Treaty Organization (NATO) or foreign procurement in the U.S. under coproduction arrangements. DOD is not required to report on the waivers to Congress, and the value of these exemptions is not included in the President's arms sales ceiling. GAO reviewed the military services' systems for authorizing, accounting for and reporting costs waived for foreign military sales, as well as the pricing of these sales in Washington, D.C., headquarters and three other sites. The DOD has justified substantial cost waivers by claiming that the sale would advance NATO standardization. Cost waivers should only be granted in accordance with the law's intent, and GAO recommends that Congress be informed of the amounts being subsidized and the reasons why. GAO also reported that foreign governments were being subsidized because DOD has authorized a waiver of milions in royalty fees for the use of a U.S. developed technical data package. GAO discovered that opposition of foreign countries to charges for administrative costs has resulted in GAO officials intentionally undercharging customers. In addition, the Army subsidized a foreign government by transferring unanticipated costs of overhauling equipment to an Army project instead of billing the government. GAO recommended that the military services make every effort to recover applicable costs which their auditors have identified as not being charged to foreign governments. The Army should ensure that costs incurred in doing work for foreign governments are charged only to their accounts. This is the unclassified version of a classified report and some portions are deleted. Comments on the review from DOD and the Department of State are appended. (Author abstract modified)