The Small Business Innovation Development Act of 1982 (P.L. 97-219) established the Small Business Innovation Research (SBIR) Program to assist small businesses in developing new ideas and technology. Under this Program, the Department of Energy sets aside 2.5 percent of its research and development budget for grants to small businesses, using a phased approach. Phase II SBIR grants, which were the focus of this audit, enable small businesses to evaluate commercial potential of new ideas and technology, often culminating in a prototype product or process that can be demonstrated to potential investors. Currently, the Department awards about $60 million annually in Phase II grants. Under the procedures for Phase II grants, small businesses can be reimbursed only for their actual costs incurred in accordance with the Federal Acquisition Regulation. Grant applicants can, at their discretion, propose to contribute a share of total project cost and, when doing so, receive extra credit in the grant evaluation process.