(FORTUNE Magazine) – MARCH OUT 10,000 naked soldiers and I can equip them overnight with clothing, arms, vehicles, helicopters, mortars, even mobile laundries and kitchens.'' -- MICHAEL KOKIN, president of Sherwood International Export Corp., Los Angeles

''The military market is based on human folly, not normal market precepts. Human folly goes up and down, but it always exists. Its depths have never been plumbed.'' -- SAMUEL CUMMINGS, president of Interarms Inc., Alexandria, Virginia

Such is the philosophy -- and swagger -- of America's arms merchants, a motley that includes ex-military men, entrepreneurs, and, yes, thieves who trot the globe buying and selling the capital goods of combat. To hear them talk, theirs is just another plain-vanilla business. ''Selling arms is just like selling wallpaper,'' says one. ''You advertise, pound pavement, take orders.'' Not quite. The arms trade is among the most secretive, byzantine, and risky of businesses. Says Anthony Cordesman, vice president of defense research at Eaton Corp.: ''In a well-executed arms deal, someone cheats everyone. It's an exercise in pure capitalism -- and it's very nasty.'' The most notorious weapons merchant is Saudi Arabian Adnan Khashoggi, a mastermind behind the U.S. arms sales to Iran. But dozens of lesser-knowns share Khashoggi's zest for arms deals, intrigue, and big, big profits. In the U.S. they include: wisecracking Sam Cummings, one of the world's largest sellers of small arms; Sarkis Soghanalian, a Lebanese citizen of Armenian descent who operates out of Miami and frequents battlefronts with customers; and David Duncan, a redheaded former intelligence agent and James Bond look- alike who competitors say runs guns to the Nicaraguan contras for the Central Intelligence Agency. Some of these middlemen stick to the legitimate, or ''white,'' market. Cummings trades carloads of surplus military equipment among friendly Third World nations and represents buyers and sellers too small to operate their own international networks. Others, like Khashoggi and Duncan, concentrate on the ''gray'' market, making clandestine deals on behalf of the very governments, like the U.S., whose laws the sales sometimes violate. Theirs is a shadowy world of unlisted phone numbers, Swiss bank accounts, and front corporations where the only constants are illusion and profits. Still others dip into the ''black'' market, where sales are patently illegal, the dealers do not have clandestine government backing, and the returns reflect the risks. In one recent transaction, a jet fighter part stolen from the U.S. Navy in San Diego and sold to Iran was marked up 1,000%. Though clearly the glamour guys of the industry, arms dealers handle only a small portion of the world trade in weaponry. Governments and weapons manufacturers dominate the white market in international arms sales, which amounted to $30 billion or so last year. About two-thirds of those deals are direct government-to-government sales. Most others are negotiated by major corporations under the watchful eyes of their governments. The gray and black markets, dominated by the freelancers, total only a few billion dollars a year, according to most authorities. But unlike the legitimate trade, which has dropped sharply since 1982 (see page 68), the gray and black markets are awash with orders. Says arms expert Michael Klare of Hampshire College in Massachusetts: ''It's boom city.'' The importance of these back alley fixers far exceeds the dollar value of their transactions. They supply the world's hot spots, the warring countries and revolutionary groups put off limits by most governments. Among them: Iran, Iraq, South Africa, and rebels in Central America, Afghanistan, and Angola. For the buyers, a timely planeload of spare parts and ammunition can mean the difference between victory and defeat. Moreover, since the tight-lipped brokers often operate as fronts for governments anxious to hide their arms trafficking, they can have inordinate sway over the course of nations. Witness the bungled U.S. sales to Iran. Who are the big guns in America's arms trade and how do they operate? Those who concentrate on the white market tend to specialize in automatic rifles, grenade launchers, and other small arms. The dean of this business is Sam Cummings, 59, an amiable, American-born British citizen and former CIA agent. Cummings learned his trade traveling around Europe after World War II buying stashes of surplus weapons for the CIA. In 1953 he went into business for himself, buying arms from both the East and West blocs and reselling them for whatever the market would bear. Cummings says he does about $80 million a year in sales from offices in Virginia, England, and a penthouse in Monte Carlo that is just steps from the onetime home of Sir Basil Zaharoff, an infamous turn-of-the-century arms dealer. LIKE MOST arms merchants, Cummings says he would sell to almost anyone if the government allowed it. But he draws the line at Libya's Muammar Qaddafi and a few others he considers too bloodthirsty. Showing off a collection of guns -- including a Russian Kalashnikov, an Israeli Uzi, and a classic Thompson submachine gun like the ones in old movies -- he contends that ''the arms trade isn't that risky or dangerous, it's just another business under strict controls.'' In decades past Cummings unabashedly sold guns and ammunition to brutal dictators, including Nicaragua's Anastasio Somoza, Cuba's Fulgencio Batista, and the Dominican Republic's Rafael Trujillo. Today he is buying a variety of weapons from the People's Republic of China, including surplus rifles from World War II, sporting guns, and Chinese-made knockoffs of Russian Kalashnikovs, and trying to expand his sales into such Asian countries as the Philippines, Indonesia, Malaysia, Singapore, and Thailand. Cummings says his profits average 10% to 15% of sales, or $8 million to $12 million a year. Cummings bristles at prohibitions the U.S. government has placed on sales to Iran, South Africa, and many guerrilla armies, including the contras. Coupled with the overall slump in worldwide demand, he says, the limits have resulted in a 15% slide in his business since 1980. Says he: ''The decade of the 1980s has been the worst decade for the small-arms trade since World War II. The market has been saturated with overproduction, and I see no radical improvement anytime soon.'' With a twinge of nostalgia for the freewheeling Seventies, the world's biggest white-market gun merchant adds: ''We're retrenching.'' The slump in the white market is also pinching Valmore Forgett Jr., president of Navy Arms Co. in Ridgefield, New Jersey (sales: $15 million a year). A gun aficionado and seasoned big-game hunter, soft-spoken Forgett, 56, has carved out twin specialties in selling precision sniper and antisniper weapons and making reproductions of the flintlock rifles used by American colonists (he made many of the rifles at the Colonial Williamsburg restoration). ''Buyers are all the same to us,'' says Forgett. ''There's no politics in the arms business.'' The proud owner of a collection of authentic 18th-century Kentucky rifles as well as more recent vintages, Forgett says he's now doing mostly barter deals with cash-poor Third World customers. ''We'll take anything,'' he says. In one deal with Chile, he ended up with 600 cavalry lances; Forgett sold them to decorators for use as curtain rods. In another, with Denmark, he exchanged 2,000 new Colt pistols for 4,000 used Swedish Lahtis, which he resold to collectors ''for a good profit.'' But not good enough. Last year Forgett's revenues dropped almost 20%. Considerably more upbeat is Michael Kokin, 50, a New Jersey native who is president of Sherwood International, an arms broker that offers a much wider variety of equipment. Flanked by more than 50 rifles, innumerable bullets, and an arsenal of military memorabilia in his suburban Los Angeles office, Kokin says he has 16,000 items in warehouses in California, Europe, and the Middle East offering ''virtually everything a Third World military or police force could require.'' After 25 years in the business, Kokin says, his annual sales are now about $40 million and growing 20% a year. Bubbles the crusty merchant, his New Jersey accent still strong: ''It's very profitable.'' KOKIN NOT ONLY has an enormous inventory, including ''25 million rounds of ammunition and thousands and thousands of weapons,'' but also is one of the few arms dealers who charters his own ships, ensuring fast delivery. He does barter deals like Forgett and is big enough and rich enough to offer his own financing. Says Kokin: ''If you don't have money, we'll take your coffee, old military equipment, anything we can resell, or we'll lend you the money.'' In 1985 he bought 72 West German armored vehicles from a Belgian dealer who could not get a license to export them to his intended customer in Lebanon. Kokin stored the vehicles for eight months and then sold them to Honduras. The country planned to pay in coffee until he arranged a loan, at the prime rate plus 1%, so he could be paid in cash. Kokin works hard to develop new business. Equipped with six briefcases for different regions of the world, he logs 200,000 miles a year, mostly to Third World countries. In addition to trading used goods, he acts as a marketing agent for U.S. manufacturers. He is a voracious collector of everything from Chinese porcelain to American Indian artifacts. At the New York auction house of Christie's, Kokin recently sold for $220,000 a rare letter by Albert Einstein to President Franklin Delano Roosevelt about the atomic bomb (the buyer was Malcolm Forbes). Competitors claim the CIA is among Kokin's best clients. ''He's one of the CIA's main men for funneling arms to Afghanistan and Central America,'' says one dealer. Kokin denies the charge, yet says cryptically, ''We do a lot of business with the government, but that's classified.'' All arms dealers insist that they operate only in the white. Says Robert Brenner, president of Federal Ordnance Corp., another small international gun marketer in Los Angeles: ''Anyone who tells you he deals with the CIA is either a fool (for admitting it) or a braggart.'' But like any small club, the members of the arms fraternity usually know who ventures into the gray and black trade. As one puts it: ''It's easy to tell. They're the people making the big money.'' The hottest illicit market unquestionably is Iran, a country blacklisted by the U.S. and most of its allies since 1979. From a purchasing office in an unassuming building at 4 Victoria Street in the shadow of London's Big Ben, Iranian agents distribute a computer printout of equipment and U.S.-made parts needed for the war with Iraq. Brokers hustle to fill the Ayatollah's wish list, sometimes buying from unwitting manufacturers or, more often, from governments. Arms expert Stephanie G. Neuman, author of a new book, Military Assistance in Recent Wars, says 21 nations, including Israel, Brazil, China, and the U.S., have sold weapons to the Ayatollah, mostly through secret channels. The other big black and gray buyers are guerrillas in Central America, Afghanistan, and Angola. The sales to them, arms dealers say, are usually orchestrated by the CIA. For the most part, dealers buy Soviet-style small arms in the East bloc, China, and Egypt. The dealers say the CIA prefers Soviet weapons because they are less easily traced to the U.S.; they also are cheap (see page 66). In earlier times the CIA simply paid for the arms itself. But with budget constraints and congressional opposition to covert actions, government officials now sometimes prevail on private donors and friendly countries like Saudi Arabia and Brunei to kick in. The details are handled by the dealers, who function variously as procurers, financiers, and distributors. Their modi operandi are secretive and convoluted, often involving Swiss bank accounts and dizzying mazes of ''cutouts,'' front corporations in countries like Panama where it is virtually impossible to trace ownership. They buy the arms from manufacturers, other dealers, or governments willing to trade under the table. Sometimes the equipment is mislabeled as, say, sewing machines. Or it is properly labeled but accompanied by a false end-user certificate, typically bought from a corrupt official in a Third World country. The undisputed king of the gray market is Khashoggi, 52, who jets around the globe mixing business and diplomacy as easily as Scotch and soda -- or grape and watermelon juice if he is back home. As a Saudi citizen, Khashoggi is not limited by U.S. laws prohibiting trade with some buyers. And because he has close ties to the Saudi royal family and the Sultan of Brunei, his financial clout far exceeds his personal fortune and frequently limited cash flow. Recently, soured investments in Salt Lake City, the Sudan, and elsewhere have put Khashoggi in a particularly tight financial pinch. Still, he helped get financing for the arms delivered to Iran by the Reagan Administration (Israel insisted on payment before turning over the arms from its stockpiles, and Iran refused to pay until after the goods were delivered). MOREOVER, Khashoggi's political reach has no equal in the trade. He is on a first name basis with presidents and kings and has invaluable connections with intelligence agencies around the globe. In 1985 he was one of several mysterious operators who helped persuade the U.S. to secretly sell arms to Iran in hopes of currying favor with moderates there and possibly winning the release of U.S. hostages in Lebanon. Khashoggi claims he lost money on the deal. Those who know him are skeptical. ''That's garbage,'' says one associate. But even if the slippery Saudi did take a loss, he was planning to profit mightily. In meetings in West Germany during 1985, Khashoggi talked with two others involved in the arms sales about forming an alliance to manage billions of dollars worth of new trade with Iran once relations with the U.S. resumed. They discussed major sales of farm and construction equipment, extensive oil contracts, and, of course, more arms shipments. While no other arms merchant rises -- or falls -- to Khashoggi's level, many in Europe, Asia, and the U.S. operate similarly. One is Albert Hakim, 51, an Iranian-born naturalized American and longtime arms trader who reportedly was another player in the Iran deal. Hakim runs a company called Stanford Technology and lives luxuriously in the hills overlooking Los Gatos, California. He represented Hewlett-Packard, Olin Corp., and other U.S. companies in the Middle East in the mid-Seventies. During those years he was associated with Edwin Wilson, a former CIA operative now in federal prison for arms smuggling. Wilson says he introduced Hakim to Richard V. Secord, then chief of the U.S. Air Force military assistance group in Iran. Hakim and Wilson had a falling out -- Wilson now calls him a ''dishonest sleezeball'' -- but Hakim continued a profitable alliance with Secord. In a lawsuit that reads like a John Le Carre novel, the Christic Institute, a liberal interest group in Washington, charges that Secord enabled Hakim to buy U.S. aircraft and weapons from the Pentagon at its cost. Hakim sold the stuff to Middle East countries at much higher prices. Secord, says a Christic lawyer, let him keep handsome commissions and put the rest of the ''profits'' in a secret account to finance arms sales to Somoza. In 1983, after Wilson was convicted of selling arms to Qaddafi, Secord retired from the government and became president of a Hakim company in Virginia. Wilson was sentenced to 52 years at the maximum security Club Fed in Marion, Illinois. CHRISTIC maintains that when Congress banned U.S. military aid to the contras, Lieutenant Colonel Oliver North of the National Security Council turned to Secord and Hakim to sneak arms to them. Later, Christic claims, the pair sold arms to Iran using the ''tried and tested procedure'' of buying equipment from the Pentagon. They supposedly funneled part of the profits to the contras through Swiss bank accounts and a bank in Grand Cayman. Secord's lawyer says the allegations are false. Hakim did not respond to FORTUNE's requests for an interview. Another U.S. dealer who has grown rich moving arms for governments is Soghanalian, 52, president of United Industries, an outfit with branches in Miami, Beirut, Madrid, Athens, Geneva, and Baghdad. Sitting in his office atop a private hangar at Miami International Airport, Soghanalian claims his sales exceed $1 billion a year, with profits he ''conservatively'' estimates at 10%. He has a stable of Arabian horses, homes in Athens, Madrid, and Paris, as well as Miami, and a fleet of jets and helicopters to whisk him and his weapons anywhere at a moment's notice. Could he be the world's biggest arms merchant? Quips the 300-pounder: ''I know no bigger.'' Raised poor in a Beirut suburb, Soghanalian grew up to become a freelance gunrunner and ace auto mechanic favored by Lebanese President Camille Chamoun and Jordan's King Hussein. In the late Fifties, after Soghanalian was nearly murdered in Beirut for selling arms to Christian groups, he drove a Mercedes sports car that Hussein had given him onto a ship and arrived weeks later in the U.S. with only $46 in his pocket. Says Soghanalian: ''I had to leave in a hurry.'' He struggled for years, working in a small garage in upstate New York and selling arms to Lebanese Christians whenever he could arrange financing. Says a fellow arms broker: ''He could barely afford gas.'' Then he picked up the CIA as a client and his fortunes turned. Soghanalian won't talk about his work for the U.S. government. But he says that in other deals he has sold arms to Somoza and Exocet missiles to Argentina; the missiles may have been the ones that sank two British ships during the Falklands war. He also has supplied contra leader Eden Pastora. Soghanalian says he sent those weapons for free ''because I like the guy.'' He is now selling arms to Iraq and to Christian groups in Lebanon. Soghanalian boasts that he is not just a broker but also a military consultant. ''I don't see Khashoggi as competition,'' he says. ''He's not a weapons technician. He throws parties and introduces people. Clients don't come to me because I'm handsome or charming, but because I can cure their problems. I go to a country, line up the troops, see what they need, and how to make military dollars go the furthest.'' He also frequents battlefronts to check out his equipment and the morale of the troops. In one such outing, he claims, he inadvertently became the Iraqi hero of the day by capturing a group of Iranian soldiers. Says Soghanalian: ''This is one business you can't learn in school.'' GOVERNMENT PATRONAGE also has brought big business to German-born Ernst Werner Glatt, a man who used to buy weapons for Cummings in East Germany. Colleagues say Glatt -- the name means smooth in German -- got rich supplying the CIA with East bloc weapons for Afghanistan and the contras. One arms dealer says East bloc countries are so desperate for hard currencies that they will eagerly sell guns to anyone, even for contras to shoot Sandinistas. Glatt also sells West German military equipment to many buyers. In a triangular arrangement, he contracts with West German manufacturers for the hardware he needs and then ships the same amount to the buyer from West German military stockpiles. The German army gets delivery of the new goods. ''Everybody is happy,'' says a competitor. ''The manufacturer gets his order. The army gets new equipment. The buyer gets fast delivery. And Glatt gets his commission.'' All that happiness has left Glatt with about $200 million a year in steady business and a multimillion-dollar Virginia farm called Black Eagle.

A relative newcomer on the contra arms scene is David Duncan, an elusive character who other dealers say has peddled guns for the CIA out of South Florida. Duncan made the headlines last August when the Panamanian government seized a ship, the Pia Vesta, laden with 1,500 Kalashnikov rifles and 1,500 Soviet antitank rockets belonging to him. Duncan said at the time that the cargo, initially bound for Peru, was rerouted to Panama and was to have been flown from there to El Salvador. The true identity of the intended recipients has never become public. A Christic lawyer says Duncan also runs an aircraft company that carries nonmilitary supplies and weapons to the contras. Says a veteran dealer: ''He's one of the CIA's pipsqueak smugglers.''

THE GOVERNMENT'S PART in gray-market sales sometimes complicates its attempts to prosecute suspected black-market operators. Consider the current case against Samuel Evans, Khashoggi's London lawyer, and 16 others charged with conspiring to sell to Iran $2.5 billion worth of U.S.-made military equipment. According to the federal indictment, the group had planned to acquire false end-user certificates from a number of U.S. allies, including Turkey, Pakistan, Greece, the Philippines, and, for a hefty 6% of the deal, one NATO country. But an arms dealer in London, angry at being cut out of Khashoggi's Iranian sales, helped U.S. authorities nab them. The U.S. Customs Service caught the group before the deal was completed. The defendants, not surprisingly, say they expected to win the government's secret blessing. Another recent court case is much less ambiguous. A ring of eight U.S. Navy employees, former employees and smugglers has been convicted of teaming up to supply Iran with hundreds of much-needed spare parts worth many millions of dollars for F-14 fighters, Phoenix missiles, and other weapons systems. Doing so apparently was not difficult. One defendant who pleaded guilty, a civilian employee at the North Island Naval Air Station in San Diego, said he simply took the parts from supply depot shelves, stuffed them into a paper bag, and walked off the base. Ultimately it was not the Navy's vigilance but two anonymous letters that sounded the alarm on the San Diego ring. Seemingly shocked by the details of recent black and gray arms deals, Congress appears determined to put new limits on sales of all colors. That's more bad news for dealers in the shrinking white market. But the demand for guns, as Cummings says, is driven by human folly, something far beyond the reach of Congress. So it is most likely that the black and gray marketeers, with their clever, clandestine ways, will continue to prosper.