In October 1918, it was becoming clear to the Austro-Hungarian government that they were going to lose the war. Part of the Empire was starting to split away, forming the State of Slovenes, Croats and Serbs (an early precursor state to Yugoslavia); the Austro-Hungarian government could do little about this. In the hope of avoiding further unrest, the government recognised the National Council of the State of Slovenes, Croats and Serbs. There was another reason for this recognition: the Austro-Hungarian Fleet (k.u.k Kriegsmarine). In the hope of avoiding having to transfer the k.u.k Kriegsmarine to the Allied Powers, the Austro-Hungarian government instead handed it over to the neutral National Council (which was, in any case, holding much of the formerly-Austro-Hungarian coastline). The hand-over was carried out on the 31st October 1918 for the ships at the base at Pula and on the 1st at Kotor. The following day, however, the Italians attacked Pula. A human torpedo was used to lay charges against the hull of the battleship Viribus Unitis, which had been renamed Jugoslavija by the State of Slovenes, Croats and Serbs, sinking her. It's unclear whether or not the Italian Navy was aware of the handover, or if they knew about it but allowed the attack to go ahead, as the Italian government viewed the handover as illegitimate.

On the 3rd of November 1918, Austria-Hungary and Italy signed the Armistice of Villa Giusti, which came into effect the following day. As part of the Armistice, the Italians demanded the surrender of a considerable number Austro-Hungarian vessels, ignoring the handover to the State of Slovenes, Croats and Serbs. Paragraph 1, Article 3 of Section II of the Armistice, which lists the ships to be surrendered, reads:

Surrender to the Allies and United States of America, with their complete armament and equipment, of 3 battleships, 3 light cruisers, 9 destroyers, 12 torpedo boats, 1 mine layer, 6 Danube monitors, to be designated by the Allies and United States of America.

The 15 most modern submarines, and any German submarines in Austro-Hungarian waters were to be surrendered as well. All other ships were to be completely disarmed, and placed under the supervision of the Allied powers. The ships that were handed over to the Allies were to be sent to Venice on the 6th November. This included the battleships Tegethoff, Prinz Eugen and Ferdinand Max, and the light cruisers Saida, Novara and Helgoland. The remaining ships would be concentrated at the ports of Buccari and Spalato. However, the armistice had been drafted solely by the Italians, without the knowledge of the other Allied powers. Once the other Allies got involved, these instructions were annulled by the end of the month, and instead the fleet remained in its Adriatic ports.

Shortly after the Austro-Hungarian surrender, the Allies formed a Naval Committee for the Adriatic. This would ensure Austro-Hungarian compliance with the terms of the armistice. It would also survey Austro-Hungarian ships for possible transfer to the Allied powers. Such transfers were a source of much complaining between the Allied nations while the various peace treaties were drawn up. Light cruisers were a particular bone of contention; neither France nor Italy had any modern light cruisers in service, and both wished to retain some of the German and Austro-Hungarian ships of this type. Britain and the USA were generally more reluctant. Ultimately, agreement on the topic was gained by splitting up the German and Austrian ships into three groups. The first group consisted of a battleship, a cruiser and three destroyers for each power (though Italy would not receive a cruiser). These ships could be used for short-term experimental or propaganda use, but had to be sunk or broken up shortly afterwards. Most of the ships allocated for this role were German, but Italy would receive the Austrian battleship Tegetthoff and three Austro-Hungarian destroyers. The Italians hoped to keep Tegetthoff as a replacement for the battleship Leonardo da Vinci, which suffered an internal explosion in 1916. However, the Washington Naval Treaty of 1922 brought an end to these hopes, and she was scrapped in 1925.

The remaining ships, including those scuttled at Scapa Flow, would be divided between the Allied powers in proportion to their war losses; the ships scuttled at Scapa would form part of Britain's allocation. These ships were divided into a group that had to be divested from service in a short period, and those that could be put into long-term service. The battleships of the Austro-Hungarian Navy fell into the first group. Britain received nine old battleships, with the most modern being the three Hapsburg class ships, Sankt Georg and Erzherzog Ferdinand Max. They remained in place in Pola until 1921, when they were sold to Italian shipbreakers. Britain also received the light cruiser Admiral Spaun, four older protected cruisers and 25 destroyers, all of which were sold to Italian scrappers in August-November 1920. The other two Erzherzog Karl class ships went to France, though Erzherzog Karl herself ran aground at Bizerte, and was scrapped in place. The remaining ship, Erzherzog Friedrich, would join her sister in Italy for scrapping. France would also receive the last Tegetthoff-class ship, Prinz Eugen, which would be sunk as a target in 1922. As for smaller ships, they got six destroyers and six submarines to be scrapped immediately. Italy received the three ships of the Radetzky class, which would again be broken up in the early 1920s, as well as 21 destroyers and 12 submarines which met a similar fate.

The main Austro-Hungarian contribution to the second group (the ships that could enter service) came in the form of their cruisers and destroyers, which were well-suited to operations in the Mediterranean. The French took the cruiser Novara and an Austro-Hungarian destroyer. Novara, despite foundering at Brindisi in March 1920, would enter service as the training cruiser Thionville, and would serve in the role until 1932, when she was converted to a barracks ship. She would linger in this role until 1941. The destroyer Dukla was renamed Matelot Leblanc, and served until being scrapped in 1936. Italy took the cruisers Heligoland and Saida (taking the names Brindisi and Venezia respectively), and seven destroyers. The cruisers would see regular service, but would be converted to auxiliaries in the early 1930s, and were scrapped in 1937. Two of the destroyers would not enter service, being cannabalised for spares for their sister ships and scrapped in 1923. The remaining five mostly served as training or patrol vessels in the 1920s. The Muggia (former Csepel) was sent to the Far East in 1926, to join the Italian presence in Shanghai. In March 1929, she ran aground in thick fog and sank. Two of the remaining ships became part of the Italian Navy's engineering school in 1932-33, and all four were scrapped in 1937-39.

The minor Allied powers received smaller allocations - but since they had smaller navies, they remained in service for longer. Portugal was awarded six Austro-Hungarian torpedo boats (small destroyers). Two of these were wrecked while being towed to Portugal in December 1921. The remaining four, all named after Portuguese rivers, would see considerable service; the last two survivors, Sadoand Ave, were scrapped in 1921. Greece received an older destroyer, which saw brief service and was scrapped in 1928. Six more modern torpedo boats were also handed over, which saw longer service. One, Panormos, was sunk in a collision in a gale in 1928, while the remaining five would be sunk during the Axis invasion of Greece in April 1941. Two were bombed, while the three others were scuttled. Romania received seven torpedo boats, but one was sunk in a storm while being delivered. Three of the ships were sold off in 1932, but the other three saw service in WWII. One, Naluca, was bombed in 1944, but the other two survived the war and served into the 1950s.

While Yugoslavia had received a large fleet in 1918, they were able to keep very little of it. The biggest ship they kept was the ancient battleship Kronprinz Erzherzog Rudolf. This was brought into service as the Kumbor, but quickly sold for scrap. The main part of the Yugoslav allocation was twelve torpedo boats and four minesweepers. The four oldest torpedo boats and three minesweepers were scrapped in 1924. Two more of the remaining torpedo boats were lost in the 30s, with one being wrecked and another scrapped. The remainder served through WWII, being taken over by the Italians in April 1941. Two survived to be handed back to the Yugoslavs following the Italian surrender in 1943, and served as patrol vessels until the 1960s. Two more were lost in Italian hands, a third was sunk by the British while under Croat control, and a fourth was lost in German hands. The remaining minesweeper ended up in Italian hands following the invasion, was taken over by the Germans after the Italian surrender, and sometime afterwards. The Yugoslavs also received the ancient ironclad Kaiser Max, which was serving as an accommodation hulk near Kotor. She remained in this role through to the 1940s, being captured by the Italians, seized by the Germans and then meeting an uncertain fate.