The following is adapted from “Paying Off Israel’s Military Bills,” a talk given by Philip Giraldi at the press briefing “Questioning Military Aid to Israel” on June 8, 2011, sponsored by the Council for the National Interest.
Mr. Giraldi’s text has been silently abridged and copyedited for clarity, but not his quotes. Footnotes have been added based on the links within the original article. [*]
|One good reason why Israel should not receive billions of dollars in military assistance annually is its espionage against the United States. Israel, a Socialist country where government and business work hand in hand, systematically steals American technology with both military and civilian applications. The Israelis then reverse engineer this US-developed technology and use it in their own exports with considerably reduced research and development costs.|
The military technology sometimes winds up in the hands of a US adversary. For example, Israel sold advanced weapons systems to China that incorporated technology developed by American companies—including the Python-3 air-to-air missile and the Delilah cruise missile.  There is evidence that Israel stole Patriot missile avionics to incorporate into its Arrow system and that it used US technology obtained in its Lavi fighter development program – which cost the US taxpayer about $1.5 billion – to help the Chinese develop their J-10 fighter.
The reality of Israeli spying is indisputable. Israel always features prominently in the annual FBI report called “Foreign Economic Collection and Industrial Espionage.” The 2005 report, for example, states:
Israel has an active program to gather proprietary information within the United States. These collection activities are primarily directed at obtaining information on military systems and advanced computing applications that can be used in Israel’s sizable armaments industry.It adds that Israel recruits spies and carries out computer intrusion to gain this information. The 2005 report concluded that the thefts eroded US military advantage, enabling foreign powers to obtain technologies that had taken years to develop. 
A 1996 Defense Investigative Service report noted that Israel steals technology by exploiting the numerous co-production projects that it has with the Pentagon. “Placing Israeli nationals in key industries … is a technique utilized with great success.”  A General Accounting Office (GAO) examination of espionage directed against American defense and security industries, also completed in 1996, described how Israeli citizens residing in the US stole sensitive technology to manufacture artillery gun tubes, obtained classified plans for a reconnaissance system, and passed sensitive aerospace designs to unauthorized users. An Israeli company was caught monitoring a Department of Defense telecommunications system to obtain classified information, while other Israeli entities targeted avionics, missile telemetry, aircraft communications, software systems, and advanced materials and coatings used in missile re-entry. 
In June 2006, a Pentagon administrative judge overruled an appeal by an Israeli who had been denied a security clearance, stating, “The Israeli government is actively engaged in military and industrial espionage in the United States. An Israeli citizen working in the US who has access to proprietary information is likely to be a target of such espionage.”  Recently FBI counter intelligence officer John Cole reported that many cases of Israeli espionage are dropped under orders from the Justice Department. He provides a conservative estimate of 125 investigations into Israeli espionage involving both American citizens and Israelis that were stopped due to political pressure. 
Stewart David Nozette, a U.S. government scientist who was arrested in an October 2009 FBI sting operation after offering to spy for Israel, has been waiting to go to trial on espionage charges. [Update: He was convicted in 2011.] Documents confirm that Nozette was a paid consultant for Israeli Aerospace Industries and it is believed that he passed them classified material in return for an estimated $225,000. The FBI’s examination of his computer revealed that he was planning to crack into NASA and other scientists’ computers to obtain more classified material. Other documents demonstrate that he was cooperating with two Israeli scientists who were administrators with Israeli Aerospace Industries, Yossi Weiss and Yossi Fishman. Nozette made several trips to Israel without reporting them, which his security clearance required him to do. 
Israel is set to buy twenty F-35 fighter planes, one of the most advanced fighter planes in the world. The $130 million planes would be purchased with US military assistance, meaning they would be a gift from the [largely unwilling] US taxpayer. But Israel is balking at the sale because it wants to install some of its own equipment and software in the aircraft. The Pentagon has already made some concessions but is disinclined to grant approval for all the changes because it would require giving the Israelis access to the plane’s advanced avionics and computer systems.
Israel also wants to independently maintain the aircraft, which again would require access to all systems. The reason for the standoff is that Lockheed-Martin and the Pentagon both know, judging from Israel’s past behavior, that Israel will steal whatever it can if it gains access. 
ARI says: “Israel is our ally in the Middle East.”
This is our ally?
|1 “Israel apologizes to U.S. over sale of technology to China”|
Defense News, June 2005.
Israel “apologizes” when it is caught, and carries on as before. Their apology is a puff of air designed to manipulate the victim. The article begins (bracketed comments ours):
“It is impossible to hide the crisis between Israel and the United States with regard to the security industries. [They would have hid it if they could have gotten away with it?] We are doing everything possible to put it behind us,” Israeli Foreign Minister Silvan Shalom said on Israel Radio. [“Everything possible” etc. means getting away scott free now, and trying not to get caught in future.]
US employees have twice “spotted Chinese technicians working secretly with one of the Israeli companies involved in the laser weapon program.” A Chinese official in Israel exhibited hard knowledge of the super-secret program to build lasers to shoot down the Katyusha rockets used by Hezbollah on Israeli towns.
2 “Annual Report to Congress on Foreign Economic Collection and Industrial Espionage – 2005”
NCIX 2006-009 (August 2006)
Prepared by the Office of the National Counterintelligence Executive (NCIX).
3 “Defense Memo Warned of Israeli Spying; ‘Ethnic Ties’ Charge Draws ADL Rebuke”
By R. Jeffrey Smith, The Washington Post, January 30, 1996.
Selections from the article:
... The warning about Israel was “canceled” and withdrawn by the Pentagon in December after senior officials decided its author had improperly singled out Jewish “ethnicity” as a specific counterintelligence concern.
The warning ... provoked a vigorous protest yesterday by the Anti-Defamation League (ADL) of B’nai B’rith, a prominent Jewish organization, which made the matter public and called on the Pentagon to conduct an internal investigation.
... Many military counterintelligence officials remain ... [worried] by the 1985 revelation that Navy intelligence analyst Jonathan Jay Pollard stole what the memo refers to as “vast quantities of classified information” on Israel’s behalf over a 17-month period.
Pollard, who is Jewish, said he was motivated partly by sympathy for Israel. The Israeli government since then has granted him citizenship and unsuccessfully appealed to senior U.S. officials for his early release from a sentence of life in prison. ...
The confidential memo ... said Israel “aggressively collects [U.S.] military and industrial technology,” including spy satellite data, missile defense information, and data on military aircraft, tanks, missile boats, and radars.
Drawing on the example of the Pollard case and four other Israeli espionage operations in the United States, the memo said that the country’s recruitment techniques include “ethnic targeting, financial aggrandizement, and identification and exploitation of individual frailties” of U.S. citizens.
“Placing Israeli nationals in key industries . . . is a technique utilized with great success,” the memo said.
It alleged that Israeli agents stole “proprietary information” from an Illinois optics firm in 1986 and test equipment for a radar system in the “mid-1980s.” The memo also repeated previously publicized charges – denied by Israel and never officially proven by U.S. investigators – that Israel may have provided China with sensitive fighter jet technology obtained from the United States.
In publicizing the memo, which was first obtained by the Jewish weekly Moment Magazine, ADL director Foxman complained not only about its reference to Israeli recruitment techniques but also its harsh tone regarding an ally ...
Assistant Secretary of Defense Emmett Paige Jr., who has responsibility for military intelligence matters, replied in a letter to Foxman yesterday that “the content of this document does not reflect the official position of the Department of Defense.”
He described the author as “a low-ranking individual at a field activity of the Defense Investigative Service.”
“While we object to the document in general, singling out ethnicity as a matter of counterintelligence vulnerability is particularly repugnant to the Department,” Paige wrote. “We have instructed appropriate personnel that similar documents will not be produced in the future.”
or since that is behind a paywall
www.amnotes.net/doc_smith_ethnic.html (underlying link is to an Internet Wayback Machine copy)
4 “Defense Industrial Security: Weaknesses in US Security Arrangements With Foreign-Owned Defense Contractors” (1996) by the General Accounting Office, reported in“Pentagon, GAO Report Israeli Espionage And Illegal Technology Retransfer”
by Shawn Twing, The Washington Report on Middle East Affairs, April 1996
5 “Decision of Administrative Judge Roger E. Willmeth”
ISCR Case No. 02-27647.
www.dod.gov/dodgc/doha/industrial/02-27647.h1.html (underlying link is to an Internet Wayback Machine copy)
6 Scott Horton Interview of Sibel Edmonds and John M. Cole, October 26 [23?], 2009.
7 “U.S. Jew indicted as possible Israel spy”
By Yossi Melman, Haaretz Newspaper, Jan. 21, 2010.
“Court documents reveal ties between Israel Aerospace Industries and the man accused of spying for Israel.”
8 “Pentagon refusing Israeli F-35 demands”
The Jerusalem Post, Jan 20, 2010.