The 15-page classified report, accuses defense contractor and retired U.S. Army officer Michael Furlong of running what amounted to an illegal spying ring of military contractors.

The report, dated June 25, says Furlong's human intelligence collection program, known as "Information Operations Capstone," amounted to a "violation of executive orders" and Defense Department policy.

The dispute over the Capstone operation centers on the military's struggle over the past two years to ramp up intelligence gathering to support counterinsurgency.

The outgoing head of military intelligence operations in Afghanistan, Maj. Gen. Michael Flynn, wrote a controversial public critique of intelligence gathering in the war zone earlier this year.

Flynn criticized the military intelligence gathering structure as being too focused on hunting al-Qaida, to the exclusion of building a multilayered picture of Afghan civil society.

The program criticized by the Pentagon inquiry was set up to provide just that sort of non-targeting intelligence.

The Pentagon report also accuses Furlong of "deliberately misleading" the military leadership on the "legal basis" for the program.

The inquiry recommends that the Pentagon clarify what is legal, and what's not, when it comes to human intelligence and information operations, a recommendation initialed by Gates as "approved." It also calls for "better coordination and de-confliction" of intelligence and information operations.