A comparative analysis of British and U.S. defense profit regulation to suggest improvement in current U.S. procedures. The basic regulatory task is the same in both countries: to reward contractors appropriately for the resources they provide and to motivate socially desirable entrepreneurial activities. The approach presently used in each country differs, however. The U.K. system links defense contract fees to a target rate of return on contractor-owned assets, while the U.S. system relates contract fees to target cost and other contract characteristics. The analysis indicates the need for a U.S. policy framework that permits more explicit comparison of the capital-compensation requirements of defense contractors. Comparison of the merits and limitations of the two systems indicates that the U.K. procedures might be difficult to apply in the U.S. context, but that the present U.S. system could be improved by weighting various cost factors to account for contractor-furnished assets. 58 pp.