TIL that in the mid-1990s, a man in Montana was able to build fully armed Cobra attack helicopters out of supposedly demilitarized military surplus parts. He then used them to hunt coyotes.

By Peter Cary with Douglas Pasternak and Penny Loeb

This Cobra attack helicopter was built from surplus parts. The Pentagon sells millions of them a year. Many fall into the wrong hands.

To the uninitiated, "military surplus" generally conjures up images of old web belts, clanky canteens and threadbare fatigues sold in funky stores at the edge of fading Army bases. But to a sophisticated few, it means something very different: aircraft, weapons and weapons parts worth billions of dollars. Most taxpayers don't know it, but every year the Pentagon declares all kinds of equipment--attack helicopters, rocket launchers, even Stealth fighter parts--"surplus," or unneeded. Then, through a little-known network of sales offices at military bases, the stuff is offered for purchase to the highest bidder.

A three-month investigation by U.S. News in collaboration with CBS's 60 Minutes has documented serious problems with the surplus sales program. Relying on internal Pentagon records, Customs Service documents and interviews with scores of federal agents and officials, the inquiry identified thousands of instances where weapons and parts that should have been rendered militarily harmless before sale were not, where weapons that should have been designated for destruction were not and where key weapons parts that should have been prevented from reaching foreign buyers were not. This system "on its best day is morally embarrassing to the government," says William Portanova, an assistant U.S. attorney in California heading a Justice Department task force investigating the program. "And it never has a best day. It is absolutely a disaster of the highest magnitude."

No Pentagon officials responsible for this program were willing to be interviewed on the record. These are the principal findings of the U.S. News--60 Minutes inquiry:

Foreign buyers are purchasing many of the Pentagon's high-tech surplus military parts and shipping them overseas, hiding them in seagoing containers under tons of metal scrap, seizure records show. Customs officials say Iran and Iraq are active buyers, but by far the biggest customer is China. Among the items seized from Chinese "scrap dealers" were fully operational encryption devices, submarine propulsion parts, radar systems, electron tubes for Patriot guided missiles, even F-117A Stealth fighter parts. Many of these parts, sold as "surplus," were brand new.

So overloaded is the Pentagon's surplus sales system that some offices responsible for disposing of the materiel have suffered significant breakdowns. At an Air Force base in Georgia, the Pentagon's surplus sales office lost track of $39 million in materiel. Today, no one can say where the stuff went.

The sheer volume of surplus materiel generated by the Pentagon's downsizing is one reason for the system overload, but the modern Pentagon's insistence on profitability is another. Last year, the surplus sales system generated $302 million, and it is one of the few Pentagon programs capable of covering its own costs. A Pentagon E-mail message written in April 1994 illustrates clearly the premium placed on profits by senior military officials. Authored by a top-level official and addressed to all surplus sales directors on the East Coast, the memo is blunt: "The work priorities at your sites as I see them are: 1. Profits. 2. Profits. 3. Profits. 4. Profits," the official wrote. Priority No. 6 on his list was "accountability." No. 7 was rendering lethal weaponry harmless.

Surplus Pentagon weapons are regularly traded away by Army and Navy museums scattered around the country, and some have been responsible for questionable if not illegal activities (story, Page 39). A federal law allows the museums to trade tanks, jet fighters, and attack helicopters to private citizens for other vehicles or "services." Two museums are under federal criminal investigations for such activities.

Within the cloistered world of the Pentagon, the problems of properly disposing of surplus weapons are nothing new, although the public has been kept largely in the dark. Surplus weapons sales are overseen by a Pentagon office called the Defense Logistics Agency, which manages all the military's supplies and equipment. The DLA has spent much of the past two decades trading barbs with the four military services about how to fix the surplus sales system. Progress has been virtually nonexistent. Nearly a decade ago, an internal memorandum signed by William Taft, then the deputy secretary of defense, leveled a startling charge. "A joint U.S. Customs- investigation [has] confirmed," Taft wrote, "that the defense disposal system is a source of supply for arms traffickers." Since then the number of surplus weapons and critical parts has increased, and the problems have only worsened.

Guns and money. How much Pentagon weaponry is getting into the wrong hands is impossible to know, but it is happening, law enforcement officials say. When a Hell's Angels methamphetamine lab was raided in California last year, police also found military weaponry: three working machine guns and an M-79 grenade launcher. The grenade launcher was traced to a Pentagon surplus sales outlet in Crane, Ind. That same outlet had sold 70 of the launchers in 1989. Pentagon documents certified that the launchers had been cut into scrap; in fact, only their firing pins had been filed down. In 1992, in Illinois, a man was sentenced to 41 months in prison for illegal possession of 10 unregistered machine guns; the man had bought the weapons through Pentagon surplus sales and welded them up to make them work. The weapons should have been mutilated so they could never work.

Smuggling is an even bigger concern. A 16-month Customs Service investigation that ended earlier this year resulted in the interception of surplus military parts worth $157 million. Foreign countries can use these parts to resupply their own armies, to find out how American weapons work or to build their own weapons, avoiding years of costly development.

Despite a handful of successes prosecuting those who abuse the Pentagon's surplus sale system, federal officials who have tried to plug the holes in it are frustrated and angry. A few Pentagon officials have found themselves demoted or reassigned for being too aggressive. Federal task forces have been quietly disbanded with few results while prosecutors who take on inquiries involving illegal surplus-weapons sales say they find the criminal justice system unable or unwilling to cope. "Whenever we tried to do something bold or aggressive, the bureaucracy at the Justice Department said `No,' " said Jim Wiggins, a former U.S. attorney in Georgia who investigated surplus-weapons sales.

In theory, the system for surplus disposal is simple. Whether it is a part from a jet fighter or a pair of socks, once an item is designated as surplus, it is trucked to a warehouse-cum-sales lot known as a Defense Reutilization and Marketing Office, or DRMO. There all surplus items are checked in and sorted. Then they are offered free to other government agencies and to museums and nonprofits. What's left after that is sold to the public at auctions where buyers must submit sealed bids.

Before that can happen legally, however, weapons and weapons parts must be "demilitarized," or rendered militarily harmless. Machine guns, for instance, are "demilled"--the Pentagon term of art--by being cut into six pieces, reducing them to scrap metal. Many electronic parts are demilled by crushing or chopping--again, reducing them to scrap. Some items--radios with military-channel crystals, for instance--can be demilled by removing key parts. In such instances, buyers get a functional piece of equipment but one that has no military application. Many items, like desks, require no demilitarization. Other things, like parts of military aircraft that have commercial use, can be sold in the United States without being demilitarized, but buyers must obtain licenses to ship them overseas.

How or whether something should be demilitarized is determined by its "demil code," which is normally assigned when a piece of equipment is purchased by the Pentagon. In theory, the codes should reflect how militarily sensitive an item is, and the code for a specific item should rarely be changed. Theory, however, has little to do with practice. Three years ago, for instance, a team of nine demilitarization experts went to Battle Creek, Mich., the home of the Defense Reutilization and Marketing Service. That office is the headquarters of the surplus sales program, responsible for the operation of the 170 DRMOs around the country. In Battle Creek, the team reviewed the demilitarization codes on 2.6 million pieces of equipment in the 14 million-item inventory. The team found that 45 percent of the demilitarization codes were wrong and that about half the items were coded too leniently. This meant that weapons and weapons parts that should have been rendered militarily harmless before being offered for sale were not. Some .38-caliber revolvers, for instance, were coded demil "A"--the same as tables and chairs. Other, far more sensitive equipment was similarly miscoded, the team found. Electronics that guide bombs and aircraft gunnery, sensitive communication and navigation gear, cryptographic equipment, even hardware that allows U.S. fighter jets to jam antiaircraft missiles--in those categories, the team found between 80 percent and 90 percent of coding was wrong. In nine tenths of the errors discovered in this instance, the codes applied were too lenient.

Such mistakes have consequences. When Pentagon investigator Dave Barrington checked a DRMO outlet at Fort Benning, Ga., for example, he found three complete TOW antitank missile systems for sale. They were assigned a code allowing them to be bought by anyone in the United States. Says Barrington: "You can build yourself an army out of this stuff that's miscoded."

Defense Department officials blame the military services for the miscoding, since the services assign the codes. The services don't make coding a high priority because anything dealing with "surplus" is a far cry from their main mission, warfare.

The profit motive is also a factor. The more fully-operational weapons the Pentagon sells, the more money it makes. And the Pentagon is interested in selling. To encourage sales, in fact, the Defense Department has set up a Web page on the Internet listing every piece of equipment that has entered the surplus inventory. Anyone with a computer can call up the listings, type in "missiles" or "bombs" or other hardware and see what's available.

U.S. News did just that. After browsing the Web site at length, a reporter gave Defense Department experts a lengthy inventory of items listed and asked them to verify that the demilitarization codes for each were correct. The experts found that dozens of items had been wrongly coded. "Bomb, gen. purpose," for instance, had been given the same demilitarization code as a desk chair--"A." Similarly miscoded were "sight, rocket launcher," "controller, missile," and "missile guidance set." All should have been coded "D"--for destruction. "This is the computer memory for a Tomahawk [cruise] missile!" one of the Pentagon experts exclaimed, pointing to one item on the reporter's shopping list. "This should be classified! This is the brains of the missile!"

Even when the Pentagon codes are correct, there is no guarantee that weapons and weapons parts will be demilitarized properly. Curt Murphree, a former Pentagon investigator, recalls one visit to a DRMO near Texarkana, Texas, where he watched a worker trying to cut through the gun barrel of an M-60 tank. "The poor kid had a cutting torch," Murphree recalled, "that couldn't cut hot butter."

System overload. At the Defense Reutilization and Marketing Offices around the country, workers and managers say they have been so overloaded with equipment from the massive military drawdown--in recent years, the DRMOs have taken in more than $20 billion worth of materiel annually--that the demilitarization process was bound to have problems. Easily the biggest occurred at Robins Air Force Base near Macon, Ga. So much property came into the DRMO there three years ago that the system collapsed, and workers lost track of $39,784,198 in surplus equipment--about one fifth of their inventory. "The DRMO lost total accountability of . . . surplus property," an investigative board's report concluded.

Investigators assigned to examine the problems at Robins found that the Pentagon's DRMOs had developed what they called an "expedited processing" program. To speed things up, a Robins DRMO manager told investigators, she falsified demilitarization statements, registering weapons and other equipment as scrap that was later made available for sale fully intact.

The problems at Robins raised alarms. One day in 1994, an Air Force investigator jogging on the base saw a surplus-parts dealer named Hobart Burton carrying an electronic device from the DRMO to his truck. The investigator looked into the truck, jotted down the stock number of the item and checked it later. He found that the device should have been demilitarized but had not been. Not long after that, a team of Air Force and Pentagon agents visited the Burton Electronics warehouse in nearby Montezuma, Ga., where they found more electronic weapons parts that had not been demilitarized. The agents retrieved a pile of weapons pieces and aircraft parts that had cost the government $40 million when new. Burton said he had bought most of the materiel from other dealers; investigators believe much of it was sold by the Robins DRMO as scrap--for 16 cents a pound. It is not illegal to buy surplus materiel that was improperly demilled, and Burton was not charged with any crime. He is now trying to get his money back.

The episode resulted in some surprising leads. Investigators discovered that a Chinese-owned scrap company was legally buying surplus materiel from Burton and from the Robins DRMO. Further inquiries revealed a score of Chinese dealers operating from coast to coast. Although no proof developed that they acted as agents for China, that did raise concerns. In a memo to his Chinese boss in California, the buyer in Georgia called Robins "the candy store." The base, he wrote, "will fill our needs into the next century," according to an investigator who has seen the note.

The Robins case had all kinds of reverberations. It led investigators to the discovery of a commercial listing service that offers thousands of military surplus weapons and weapons parts. The listing, called the Inventory Locator Service or ILS, is used worldwide by dealers in aircraft parts to advertise their inventories. Surplus dealers also use it to advertise weapons and weapons parts, all of which is perfectly legal too.

Fallout. The echoes from the Robins case would eventually be felt clear across the country, in Montana, of all places. Ron Garlick is a straight-talking businessman who runs a thriving helicopter-repair business about 40 miles south of Missoula. Garlick had modified UH-1 Huey helicopters for logging and construction use. Since the Cobra was a sleek and powerful follow-on to the Huey, he thought it would make a good logger. Garlick obtained an FAA license to build one for logging, firefighting or movie-making purposes.

When armed, the Cobra is one of the deadliest military attack vehicles ever invented. Before it is sold as surplus, it must be demilitarized. The demilitarization manual states that Cobra bodies must be cut into at least three parts and that their "airframe [must be] mutilated by destroying attaching structure by cutting, chopping, tearing, shredding, crushing or smelting to the degree that aircraft will be unfit for repair or flight." Garlick and other helicopter builders, however, knew that usable parts were plentiful, even at DRMOs. Says Garlick, who has amassed a huge store of Cobra parts, "If they were built once, I can rebuild it, and no one can stop me."

In September 1994, a flatbed truck pulled into the DRMO at Robins carrying three Cobra bodies that looked as if they had not been properly demilled. Air Force investigators questioned the truck driver, who said the Cobras had been purchased at a DRMO in Groton, Conn., and were headed for a warehouse in Joshua, Texas, owned by a man named Alan Sparks. "I don't know why you are so excited," the man reportedly said. "Sparks has 60 or 70 of these things."

Original crates. Sparks actually had 88 Cobra fuselages, which he hoped to use for logging. He also had the parts to go with them--the rotor blades, rocket tubes, gun pods, missile launchers, and weapons controllers, according to Pentagon records. "None of the items were demilled correctly," a Pentagon memo states. "Some items [were] in original packing crates."

Word of Sparks's covey of Cobras shocked Jim Wiggins, the top federal prosecutor for the middle district of Georgia, where Robins is located. A tall, sandy-haired man with a deliberate manner, Wiggins had won a Silver Star in Vietnam for piloting a Cobra gunship in a hazardous rescue mission. At the time of the Sparks discovery, Wiggins was overseeing something called the Middle Georgia Task Force, which consisted of military investigators and special agents of the Customs Service and the FBI. The task force had been set up after the $40 million retrieval of property from Hobart Burton.

The other person upset by Sparks's Cobras was Ron Garlick, in Montana, who telephoned the Pentagon to see what was going on. The call was lateraled to investigator Dave Barrington. Garlick was concerned over the Sparks seizures, he said, because he, too, was building Cobras--and he saw no reason to give his up. According to Barrington's notes, Garlick said he "had a significant amount of intact weapons and weapons systems." Garlick confirms this. "Mine was fully armed," he says of his chopper. "I had rockets on it and machine guns. I was out there shooting coyotes with them."

Garlick didn't want trouble. The government could have his Cobra weapons, he said, if they "want to buy them." Barrington finished scribbling his notes, thanked Garlick and hung up.

The fate of the Cobras would hang in the balance for months, as a bitter wrangle ensued inside both the Pentagon and the Justice Department. Investigators, federal agents, demilitarization officers and prosecutor Wiggins pushed for seizure of the Cobras. But the Army, which owns most of the choppers, resisted, as did Col. Charles Masters, who was in charge of surplus disposal. Feelings ran so high that Wiggins hauled Masters before a grand jury. Masters says: "Quite frankly, I thought I was close to being charged. With what, I have no idea." Ultimately, Wiggins prevailed, and the government seized the helicopters and parts from Sparks. But as agents began to plan raids on Garlick and other owners of Cobras, the Justice Department brought all such seizures to a halt. The law that might authorize them was just too murky. On September 25 of this year, the FBI sent a letter to the Pentagon advising that 23 Cobras belonging to private citizens had been "discovered during several FBI investigations." (U.S. News has located two more.) Should the Pentagon choose to take "corrective action," the FBI letter advised, that would be agreeable to local U.S. attorneys. One senior Pentagon investigator calls this the FBI's "Pontius Pilate" letter. "They're washing their hands of the whole thing," he says.

Security threats. As worrisome as the Cobras may be to law enforcement, agents say that the greater threat to national security is the shipping of weaponry overseas. In September 1994, about the time the flatbed-truck driver with the three Cobras was pulling into Robins, Pentagon investigator Curt Murphree got word that a California company named Cal Industries was loading 14 seagoing containers at the Pentagon DRMO in San Antonio. The contents were listed as 240 tons of electronic scrap. Murphree, who knew that the base processed lots of sensitive weapons equipment, got Customs Service agents to stop the containers and pry them open. What they found were thousands of top-secret encryption devices, hard-cased field computers used for sending coded communications, as well as classified radio transmitter-receivers. None had been properly demilitarized. There was also a pile of banged-up Wang computers, but many still had their hard drives, and two had 5¼-inch floppy disks in them. One disk was marked "Classified SCI" (special compartmented information). The other was marked "Top Secret, SCI. Contains Special Intelligence." Murphree checked and found that the equipment had come from the most secure sector of Kelly Air Force Base, known as "Security Hill." "None of this material," Murphree said, "should have ever left the DRMO." The equipment's intended destination was Hong Kong, a common transshipment point for goods bound for China. Kelly Air Force Base took it all back. No charges were filed against Cal Industries, which had bought the stuff legally. "Candidly," says former U.S. Attorney Wiggins, "the way we handle this stuff so recklessly, it's hard to pin anyone down or hold them liable."

For 16 months, U.S. Customs ran an investigation that targeted surplus smugglers, says John Hensley, the special agent in charge of Customs Service investigations in Los Angeles. Dubbed "Operation Overrun," the investigation resulted in nine seizures of $157 million worth of parts bound for China, Hong Kong, Vietnam, the Philippines, Taiwan and elsewhere. None of the items seized had been licensed for export. Included in their overseas-bound shipments were radar systems, electronic-warfare black boxes, and some bizarre items--10,000 new chemical-warfare-protection suits headed to Ukraine.

In one case, records show, 28 boxes of tank and howitzer parts, valued at $800,000, were found buried inside a container beneath automotive parts. In another, bound for Shanghai, agents found 37 separate inertial guidance devices for the F-117A Stealth fighter and F-111 bomber. New, the devices had cost the government $21,759,400. The two Pentagon employees who were identified as responsible said they could not explain how the devices had been sold intact.

Of the many countries pursuing Pentagon surplus weapons, China is clearly running hardest. "China is the most aggressive country worldwide in the acquisition of military hardware," says customs agent Hensley. "Anything that seems to us to be mid-tech, or slightly out of date, is high tech to them. They can leapfrog R&D costs. They either reverse-engineer this stuff, or if they get enough, they just use them."

Operations. Customs agents are now convinced that a Chinese surplus-smuggling operation began as many as 15 years ago, when a flood of Chinese men and women entered the United States, established themselves as residents and then set up shop. Operating with little more than a fax machine and a bank account, they apparently form the lowest tier of the Chinese espionage network, agents say.

The buyers hunt surplus sales outlets for military electronic parts. When they find what they want, they bid high enough to be sure they get it. Bids of $50,000 or $100,000 for scrap are not unusual. Sometimes they buy huge piles of scrap knowing that valuable pieces of electronics equipment are included, or they share purchases with legitimate scrap dealers. One dealer with Chinese affiliations, says investigator Barrington, "was the high bidder on every piece of scrap electronic equipment on the East Coast."

In a year and a half of intense investigation of these buyers, the Customs Service has never found a smoking gun--a written shopping list from overseas, or anything that could link particular Chinese scrap buyers to Beijing or its defense agencies. "I think the reason for that, besides good intelligence tradecraft, is that they don't need to communicate directly," says a customs agent. "These people have been doing this for 15 years. They know exactly what their country wants."

Last March, after 16 months of dogging leads, the Customs Service abandoned Operation Overrun. The agency had run out of time and money; the investigation had not been a spectacular success. Besides the $157 million in seizures, only two criminal cases had been brought. A man named Richard Li had been intercepted smuggling sensitive electronic gear to Hong Kong and pleaded guilty to smuggling. A second man is currently under arrest, and his partner is on the run. Customs Agent Hensley says the investigation clearly put pressure on the network of Chinese traffickers. But he also is certain that once the pressure is off, the smugglers will resume their operations. "We definitely think they'll spring up again," he says. "The Chinese can get up to speed to buy the stuff again, and the U.S. is the biggest warehouse in the world."

One of the biggest listings of warehoused arms and arms parts can be found on a system called the Inventory Locator Service. ILS is a business located in Memphis. ILS offers a computerized classified listing to paid subscribers. About 3,000 aircraft-parts sellers and users worldwide subscribe to it, for a fee of several hundred dollars a month. The sellers list their inventories on the system, and buyers can scan the inventories as they browse for purchases. ILS President Bruce Langsen says the computer system is queried about 26,000 times each day.

Heavy-duty stuff. Pentagon investigator Barrington remembers vividly the first time he tapped into the ILS database. A former police officer and Army Criminal Investigations Division agent who won a Bronze Star in the gulf war, Barrington went to work for the Defense Logistics Agency in 1994. Back then, he thought he had a pretty good sense of the international arms market, but the stuff he saw listed in the ILS database disabused him of that. "I ran weapons, machine guns, flamethrowers and components of guided bombs," he says. "And immediately, I was getting hits!"

A printout Barrington made from his ILS visits is an eye-popper. It runs 26 pages, single spaced, and lists such items as AIM-9 Sidewinder missiles, GBU-10 guided bombs, Maverick missiles, machine guns and grenade launchers. Virtually everything on the list should have been demilitarized, and probably destroyed--but it was all available for sale.

Curious to figure out where the stuff came from, Barrington began to check those items against sales at DRMOs. Checking more than 100 weapons parts advertised on ILS, he found that one fifth had been sold to surplus dealers in just the past three years. All were available in the United States. With more research, he came to believe that the heavy-duty weapons, the bombs and rockets and missiles, had probably been sold legally by the Pentagon to foreign governments, which then sold them as surplus. Brokers using ILS then offered them for sale.

Langsen, the ILS president, says he has provided law enforcement agencies access to his company's computer listings, but he did not know the details of their investigations. Because there are 30 million items listed on the inventory, Langsen contended that searching for weapons is not easy. But when U.S. News gave him the stock number for a grenade launcher, Langsen was able to find it pretty quickly. "From what I have learned in the past 48 hours," he said, "we are going to need to find a better way of combing the database. We are not an armaments database, and we don't want to become an armaments database."

The U.S. News test of the ILS system shows how easily surplus weapons and weapons parts can be purchased by the public. Using a dummy letterhead, the magazine sent letters to many of the companies listing weapons parts on ILS, requesting price quotes and availability for a variety of weapons and parts. The sellers responded with price quotes for 35 items, ranging from bomb-arming devices to circuit cards for nuclear submarines' targeting systems to the key components of night-vision scopes. U.S. News even bought some, and, with 60 Minutes, went undercover to talk with surplus dealers. Several dealers said that in buying aircraft parts at DRMOs they often scooped up a lot of other hardware, such as weapons parts. They said they listed it all on ILS hoping that someone would spot it and buy it.

Some dealers said they wouldn't sell weapons or parts to people who seemed shady. Others admitted that the system had almost no controls. "I could sell this to you," one weapons dealer explained, "and you could sell it to someone else, and he could sell it to someone else." Another dealer wrote that he had the parts we ordered, such as a pilot's targeting screen, known as a heads-up display, for an F-16 fighter, and had bought them from a DRMO but wanted more information about our company before selling to us. Another offered to ship us a similar part, with no questions asked.

One company, Aviarms Support Corp. in Westbury, N.Y., had a different story. A manager there said the items the company advertises on ILS are held by Israeli, German and Dutch companies for whom it acts as a broker. Many of the U.S. weapons parts came from the surplus stocks of the Israeli and German militaries, he said. Had they been demilitarized? No, he said, they were all in good working order.

One part that Aviarms was selling was listed as an "F-117A fire control memory." Asked how Israel could have obtained surplus parts for the U.S. F-117 Stealth fighter, the manager checked his computer. Aviarms was brokering it for an Israeli company, which got it from a German company, he said. He could trace it no further.

Barrington was outraged by what he found on ILS. His last year at work was consumed with tracking DRMO sales of sensitive weapons parts and trying to get his superiors at the Defense Logistics Agency to take action. He sent E-mail after E-mail message up and down the command chain. "Below are a few examples of obviously Demil-required property offered" at DRMO sales, he wrote in August 1995: "Payload section, nuclear missile. Warhead components: DRMO San Antonio . . . Multipurpose display, F-117A Stealth Fighter: DRMO McClellan Air Force Base, California . . . F-111 Navigation and attack computer: McClellan Air Force Base DRMO . . . Heads-up display, F-111B fighter-bomber: DRMO Davis-Monthan Air Force Base, Arizona."

Barrington had the support of his co-investigators, and even some higher officials at the logistics agency, but little was done. There were no seizures, no attempts to recover the items. On June 5, Barrington sent a final E-mail to his bosses. "Nearing the end of the trail here. I know all of you are very concerned about the OBVIOUS total lack of control of our vital defense technology and hardware, but I can't help but wonder after nearly two years of almost DAILY findings such as those above, why the government has not seen fit to attempt to recover ANY of the thousands of sensitive or classified items discovered via ILS." Barrington then quit to become a Baptist minister.

While no senior Defense Department official was willing to meet with U.S. News and 60 Minutes to discuss these problems on the record, a group of knowledgeable middle-level Pentagon and Defense Logistics Agency managers met reporters and confirmed many of their findings. The officials quibbled with some assertions. For instance, they acknowledged that there has been pressure in the past to cut corners to sell surplus materiel, as evidenced by the "profits, profits, profits, profits" memo. But they also insisted that the new management at the Defense Logistics Agency is not profits driven. The officials blamed the four military services, which control most of the demilitarization codes, for writing the codes too leniently and for failing to change them when errors are pointed out. They said the DRMOs are no longer accepting items with demilitarization codes that had been phased out two years ago.

They also said some fixes are in the works. One of their main goals, the officials say, is to set up a centralized demilitarization code office, which will assign and control all the codes, and try to enforce them. The first step toward that, they say, should occur next year. Investigations underway at two Pentagon museums could also result in tightening of the current rules allowing bartering of government aircraft for a variety of services.

If those steps happen as planned, they will clearly result in some improvement, but the problem is so great that it is difficult to say what real effect they might have. "The scope of this program and the amount of materiel going out the door is so huge, people normally don't believe you," says Portanova, the assistant U.S. attorney in Sacramento. "Only the government could have a program where they give everything away for free and they screw it up."

BY PETER CARY WITH DOUGLAS PASTERNAK AND PENNY LOEB