The Small Business Innovation Development Act of 1982, which authorized the SBIR Program, designated 4 major goals for the program: to stimulate technological innovation, to use small business to meet federal R&D needs, to foster and encourage participation by minority and disadvantaged persons in technological innovation, and to increase private sector commercialization of innovations derived from federal R&D. The Small Business Research and Development Enhancement Act of 1992 reauthorized the SBIR Program and established the STTR Program, closely modeled on the SBIR Program. Eleven federal agencies participate in the SBIR Program. Five major agencies—the Department of Defense (DOD); National Aeronautics and Space Administration (NASA); Department of Health and Human Services and particularly its National Institutes of Health (NIH); DOE; and National Science Foundation (NSF)—also participate in the STTR Program. Each agency manages its own program while the SBA plays a central administrative role and issues policy directives and annual reports for each program. The legislation establishing the SBIR Program required each agency with an external R&D budget in excess of $100 million to set aside a certain percentage of this amount for the program. The percentage was increased incrementally until it reached 1.25 percent in 1986. The 1992 reauthorization legislation increased program funding to not less than 1.5 percent for fiscal years 1993 and 1994, not less than 2 percent for fiscal years 1995 and 1996, and not less than 2.5 percent for fiscal year 1997 and thereafter. This increase will effectively double the funding for the program to nearly $1 billion in fiscal year 1997. In establishing the STTR Program, the legislation required each agency with an external R&D budget in excess of $1 billion to set aside not less than 0.05 percent of that budget in fiscal year 1994, not less than 0.1 percent in fiscal year 1995, and not less than 0.15 percent in fiscal year 1996 for the STTR Program. In the first year of the program, the agencies expended about $20 million; they estimate that funding will triple to $60 million in the third and last year of the pilot program. SBIR and STTR funding is provided in two phases. Phase I is intended to determine the scientific and technical merit and feasibility of ideas; it generally lasts about 6 months for SBIR and 1 year for STTR. Phase II further develops the proposed ideas and generally lasts about 2 years. The 1992 reauthorization directed SBA to set the general limits on the size of SBIR phase I and II awards at $100,000 and $750,000, respectively, although awards may be for less than these amounts. It also set the general limits for STTR awards at $100,000 and $500,000, respectively. A third phase for SBIR and STTR projects, where appropriate, involves the continuation or commercial application of the R&D. Although the two programs have many points in common, they differ in one important respect. To be eligible for an STTR award, a small business must collaborate with a nonprofit research institution such as a university, a federally funded research and development center, or other entity. This collaboration is permitted under the SBIR Program but is not mandatory. This special STTR requirement, according to a 1992 report, was to provide a more effective mechanism for transferring new knowledge from research institutions to industry. In addition to the two reports we have already provided, the legislation directed GAO to report on SBIR in 1997; the upcoming report will be a detailed study covering all of the major issues affecting the program. The quality of the proposed research in both programs was one of the principal issues discussed in our reports. In general, we believe the quality of the winning SBIR and STTR proposals is favorable. For the SBIR Program, the quality of research proposals appeared to have kept pace with the program’s initial expansion. However, at the time of our March 1995 report, it was too early to make a conclusive judgment about the effect of the funding increases on the quality of SBIR research proposals receiving awards because only the first (and smallest) of the three slated increases had occurred at the time of our report. In general, the level of competition for SBIR awards remained high following the initial increase in funding in fiscal year 1993. In all five major agencies during fiscal year 1993, the number of proposals rose between 9 and 30 percent. The increased numbers of proposals were important in maintaining the competitiveness of the program during the first year that the program’s funding percentage grew to 1.5 percent. In addition, the ratio of awards to proposals within each agency remained fairly constant, ranging from 8 percent (for DOE) to 28 percent (for NIH). Among all five agencies, the data for fiscal year 1993 showed virtually no change in the ratio from the previous 2 years, suggesting that the funding increase exerted no adverse effect on the competitiveness of the program. In addition, agencies deemed many more SBIR proposals worthy of award than they were able to fund. In some agencies, the large number of worthy but unfunded projects greatly exceeded the number of projects receiving awards; for example, the Air Force deemed 1,174 proposals worthy of award in fiscal year 1993 but funded only 470. In general, the data showed substantial reserves of projects deemed worthy of funding but receiving no award. In addition, SBIR program officials in the five major agencies stated that, in their view, the quality of research proposals was being maintained or even improved. They cited the level of competitiveness and the large reserves of unfunded but worthy projects as the principal reasons for their view. Technical evaluations of STTR proposals, which served as the basis for the selection of winning proposals, also showed favorable views of the quality of proposed research. Nevertheless, it was too early for us to make a conclusive judgment about the quality because of the newness of the program. We reviewed all of the evaluations for each of the 206 winning STTR proposals in fiscal year 1994, the first year in which awards were made. The evaluations (1) rated proposals among the top 10 percent of research in certain agencies, (2) awarded perfect scores to many proposals, (3) described some proposals as “cutting edge,” and (4) generally found the quality of proposed research to be excellent. For example, DOE rated the quality of research in all of its winning proposals as being among the top 10 percent of all research in the agency. Of the 48 winning proposals in NIH, 14 were judged outstanding, 31 excellent, 2 very good, and only 1 good. There were none in NIH’s “acceptable” (or lowest fundable) category. In general, DOD rated its 105 winning proposals highly. Of NASA’s 21 winning proposals, 11 were considered above average, and 8 were judged as being among the top 10 percent of all NASA proposals for comparable R&D. NSF regarded the quality of research for its winning proposals as excellent. As part of our review of the quality of STTR research proposals, we also examined the technical evaluations of their commercial potential. These evaluations were generally favorable but somewhat more cautious. For example, in some cases there were concerns about the cost of the product that might result or the limited size of its potential market. Such reservations were understandable in view of the newness of the program and the innovation or risk associated with many of the proposed projects. One of the issues we discussed in our SBIR report was the duplicate funding of research proposals. According to agency officials, a few SBIR companies received funding for the same proposals twice, three times, and even five times before agencies became aware of the duplication. Several factors were contributing to this problem, including (1) the evasion of certification procedures whereby companies fail to identify similar proposals to other agencies, (2) the lack of a consensus on what constitutes a duplicate proposal, and (3) the general lack of interagency access to and exchange of current information about recent awards by other agencies. Officials from several agencies told us that the duplicate funding problem should be viewed in the context of the 20,000 or more proposals being submitted annually. They agreed, however, that the problem should be addressed. Accordingly, we made several recommendations to the Administrator of SBA, who has taken steps to implement them. One important effort has involved the development of software to provide interagency access to current information regarding recent SBIR awards. SBA officials have recently told us that they expect to make the system operational in the near future. In our STTR report, we found that the five federal agencies with STTR Programs have taken steps to avoid potential problems relating to conflict of interest with federally funded research and development centers. Such conflicts could occur if a center formed a partnership with a company submitting an STTR proposal and then helped a federal agency judge the merits of its own and other proposals. DOD, DOE, and NIH have specific policies intended to prevent such conflicts while NASA and NSF have more general procedures to avoid them. Under DOD’s policy, for example, only two R&D centers are currently approved research partners for its STTR awardees. In fact, the Air Force had to rescind some awards because the proposed research partners (certain DOD laboratories) were ineligible to participate. According to DOD’s STTR Program director, future proposals will be evaluated on a case-by-case basis to ensure that conflicts of interest do not occur. DOD and DOE, which accounted for 29 of the 32 awards involving centers during the first year of the program, have also taken steps to prevent centers from using privileged information in preparing STTR proposals. For example, DOE’s policy prohibits agency staff members from requesting or receiving assistance from personnel in research institutions (that are eligible to participate in the STTR Program) in preparing technical topics for the STTR solicitation. This policy is intended to prevent research institutions from using their expertise to influence DOE’s choice of STTR research topics.