At my workplace salaried employees (exempt) fill out time cards as part of what I believe to be a DOD requirement, we are on a DOD contract.
One of the organizations has both hourly non-exempt and salaried exempt employees. The exempt employees are told not to put more than 40hours a week on their time cards unless they take the option to recieve overtime at the same rate.

The rest are told to bank their hours in a log and take this time off at a later date. When they take the time off they stil put it on their time cards as if they worked 40 hours. Is this legal? Can the organization tell you what or what not to put on your time card?

I am uncomfortable with the question as worded. You are asking about what the company can and cannot do with the timecard or what the company can or cannot tell the employee about what to do with the timecard, when the laws actually mostly talk about how employees are paid.

Non-exempt employees are paid based on actual hours worked during the work week. Period. If Bob is a Non-Exempt employee who works 45 hours in the work week, then under federal rules Bob should be paid 40 regular hours and 5 OT hours no matter what the timesheet does or does not say (or whatever the DOD regulations do or do not say).

Salaried Exempt employees are not paid based on actual hours worked worked and have no payroll-related timesheet requirements of any kind.

Your question is not talking about the major issue (whether or not employees are being legally paid the correct wages), but are instead focusing on the fairly trivial issue (for payroll anyhow) of what numbers are put on the timesheet.

You mentioned DOD requirements. Is your question that DOD regulations are somehow being violated? Or are you instead claiming that employees are being illegal paid the wrong amount of money? I am not sure exactly what your concern is based on what you said.

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I am not saying that no laws/regulations/whatever cannot be violated by falsifying timesheets, but if we are talking labor law only, paying the employee correctly is the "dog" and the timesheets are at best "the tail". There DOL regulations requiring that the employer maintain acurate timesheet records for Non-Exempt employees only. These regulations are not specific about who completes the timesheet or whether it was signed. Employers could indeed face fines for deliberately falsifying DOL mandated timesheets, but all of the significant penalties are related to the mispayment of wages (which your question did not address).

Perhaps there are some non-payroll DOD regulations also in play, such as falsifying government contracts.

If an employee is legitimately exempt, they do not have to be paid overtime, no matter how many hours they work.

Requiring such employees to report only 40 hours worked when they may work more than that does not set well with me.

Non-exempts are not eligible for comp time, at least if the intent is to trade overtime this week for time off next week.