Ten federal agencies participate in the SBIR program. Five of them—DOD, the National Aeronautics and Space Administration (NASA), the Department of Health and Human Services and, particularly, its National Institutes of Health (NIH), Department of Energy (DOE), and the National Science Foundation (NSF)—provided over 95 percent of SBIR funds in fiscal year 1996. (See table 1.) DOD provides over 50 percent of SBIR funding. Each agency manages its own program, while SBA plays a central administrative role, such as issuing policy directives and annual reports for the program. The Small Business Innovation Development Act of 1982 required that agencies with extramural R&D budgets of $100 million or more set aside not less than 0.2 percent of that amount for the SBIR program and provided for annual increases up to a ceiling of not less than 1.25 percent of the agencies’ budgets. The act provided for a three-phase program. Phase I is intended to determine the scientific and technical merit and feasibility of a proposed research idea. Work in phase II further develops the idea, taking into consideration such things as the idea’s commercialization potential. Phase III generally involves the use of nonfederal funds for the commercial application of a technology or non-SBIR federal funds for continued R&D under government contracts. The Small Business Research and Development Enhancement Act of 1992 reauthorized the SBIR program through fiscal year 2000. The act emphasized the program’s goal of increasing the private sector’s commercialization of technologies and provided for further incremental increases in SBIR funding up to not less than 2.5 percent of agencies’ extramural R&D budgets by fiscal year 1997. Moreover, the act directed SBA to modify its policy directive to reflect an increase in funding for eligible small businesses, that is, businesses with 500 or fewer employees. The funding was increased from $50,000 to $100,000 for phase I and from $500,000 to $750,000 for phase II, with adjustments once every 5 years for inflation and changes in the program. The agencies’ SBIR officials reported that they have adhered to the act’s requirements that they not use SBIR funds to pay for the administrative costs of the program, such as salaries and expenses for support services used in processing awards. However, they added that the funding restriction has limited their ability to provide some needed administrative support. For example, DOD reported that its laboratories and field organizations do not have the necessary funds to provide personnel to act as mentors to their SBIR contractors or engage in activities that could possibly increase the program’s success in phase III. Similarly, NIH, NASA, and NSF have also reported problems in providing outreach for current and potential SBIR participants because of this funding restriction. According to NSF’s SBIR official, this funding restriction has resulted in NSF’s inability to provide SBIR participants with much-needed training in business skills. DOE has reported experiencing administrative problems that are attributed to cuts in the Department’s administrative budget. DOE’s SBIR officials reported that further cuts, without the lifting of the restrictions on the use of SBIR funds, would diminish their ability to complete award selections in a more timely fashion, respond to the needs of the program’s constituents, and ensure that high-quality research is being performed. Although program officials believe that their agencies are adhering to statutory funding levels, some expressed concern because they feel that agencies are using different interpretations of the “extramural budget” definition. This may lead to incorrect calculations of their extramural research budgets. For example, according to DOD’s SBIR program manager, all eight of DOD’s participating military departments and defense agencies that make up DOD’s SBIR program have differing views on what each considers an extramural activity and on the appropriate method for tracking extramural R&D obligations. As a result, the program and budget staff have not always agreed on the dollar amount designated as the extramural budget. Of the five agencies we reviewed, only two—NSF and NASA—have recently audited their extramural R&D budgets. DOD, NIH, and DOE have not audited their extramural R&D budgets nor do they plan to conduct any audits in the near future. Both NSF and NASA audited their extramural R&D budgets in fiscal year 1997. NSF’s audit, which was performed by its Office of Inspector General (OIG), concluded that NSF was overestimating the size of its extramural R&D budget by including unallowable costs, such as ones for education, training, and overhead. NSF estimated that these unallowable costs totaled over $100 million. The OIG audit report concluded that the SBIR portion of NSF’s extramural budget should be reduced by approximately $2.5 million. The OIG audit report further concluded that by excluding these “unallowables,” NSF will reduce the funds available for the SBIR program by approximately $13 million over a 5-year period. These funds could then be used for other purposes that further NSF’s objectives. Likewise, NASA has completed a survey of fiscal year 1995 budget data and is currently reviewing fiscal year 1996 data at its various field centers. NASA officials say this is an effort to (1) determine the amount spent on R&D and (2) categorize the R&D as for either intramural or extramural activities. According to NASA’s SBIR official, the results of these surveys will be used to establish appropriate future funding levels for the SBIR program. The SBIR officials we interviewed felt that neither the application review process nor the current funding cycles are having an adverse effect on award recipients’ financial status or their ability to commercialize their projects. Specifically, DOD, DOE, NSF, and NASA stated that their respective review processes and funding cycles have little to no adverse effect on the recipients’ financial status or the small companies’ ability to commercialize their technologies. Furthermore, NIH believes that having three funding cycles in each year has had a beneficial effect on applicants. While the effects of the review processes and funding cycles on the recipients’ financial status and ability to commercialize projects were not specifically mentioned as problems, SBIR officials did state that some recipients had said that any interruption in funding awards, for whatever reason, affects them negatively. One SBIR program manager who did think that these were problems, stated that at DOD, most award recipients often have no way of paying their research teams during such a funding gap. As a result, ongoing research may be delayed, and the “time-to-market”—that is the length of time from the point when research is completed to the point when the results of the research are commercialized—may be severely impaired, thus limiting a company’s commercial potential. The DOD official said that time-to-market is of paramount importance in most high-tech industries—so much so, that a new product that reaches the market a year late may be partly or mostly obsolete. Most of the participating SBIR agencies have established special programs and/or processes in an effort to mitigate any adverse effect(s) caused by funding gaps. One such effort is the Fast Track Program, employed at DOD, whereby phase I award recipients who are able to attract third-party funding are given the highest priority in the processing of phase II awards. At DOE and NIH, phase I award recipients are allowed to submit phase II applications prior to the completion of phase I. NASA has also taken steps to lessen any adverse impact on small businesses while applications are being processed. For example, NASA has established an electronic SBIR management system to reduce the total processing time for awards and is currently exploring the possibility of instituting a fast-track program similar to DOD’s. Unlike the other participating federal agencies, NSF has not established any programs or procedures to mitigate the possible impacts of funding gaps on its SBIR participants. The reason for this, according to NSF, is that the agency’s experience has been that phase I awardees, when given the choice, request more time to submit phase II applications, thus effectively increasing the funding gap by their own choosing. The third phase of SBIR projects is expected to result in commercialization or a continuation of the project’s R&D. During this phase, additional federal funds or private-sector funds may be included, but additional SBIR funds may not be included. In 1991, we surveyed 2,090 phase II awards that had been made from 1984 through 1987. Our survey received responses on 1,457 awards—a response rate of 77 percent—and included questions that covered phase III activity. In 1996, DOD conducted its own survey, which closely followed our format, and also gathered information on phase III activity. DOD provides almost half of the total federal funding for SBIR, which amounted to over $500 million in fiscal year 1997. DOD’s survey included all 2,828 of DOD’s SBIR projects that received a phase II award from 1984 through 1992. DOD received 1,364 responses to this survey, for a response rate of 48 percent. SBA currently has a survey under way that also follows our format and will similarly cover phase III activity. This survey will include all projects that received a phase II award through 1993 and will cover all of the 10 SBIR agencies except DOD. Because of the SBA survey, we did not conduct our own; however, we did additional analyses of our 1991 survey information. We also performed our own analysis of DOD’s survey data, which we obtained from the contractor. While analyzing the response data from our 1991 survey, we found that approximately half of the phase II awards were followed by phase III activity (e.g., sales or additional funding), while the other half had no phase III activity. (See table 2.)