When Peter H. Lee, a physicist with defense contractor TRW Inc., confessed to revealing classified national defense information to Chinese officials five years ago, the Los Angeles federal prosecutor handling the case wanted to charge him with espionage. Lee could have faced life in prison and possibly the death penalty.

Lee admitted to FBI agents that he had met with Chinese scientists at a Beijing hotel in 1985 and gave them classified material that the U.S. government concluded aided China's nuclear weapons program. Lee also confessed that during a May 1997 trip to China, he gave government scientists there classified data about a $100 million U.S. submarine detection program.

But, in the end, Lee served no jail time and did not cooperate with U.S. defense officials trying to assess the damage he had done.

Lawmakers were so baffled by the handling of the Lee investigation that they held a special hearing three years ago to review it. Their report attributed the outcome to disorganization and ineptitude, as well as to the Navy's reluctance to air its secrets in a public courtroom.

Now, with the arrests in Los Angeles of suspected Chinese double agent Katrina Leung and James J. Smith, her alleged lover and FBI handler of 20 years, lawmakers and government officials who worked on the Lee case wonder whether more purposeful efforts were to blame. FBI and Department of Energy agents are examining whether Leung, Smith or William Cleveland Jr., another former FBI counterintelligence agent who also had an affair with Leung, had roles in the outcome of the Lee case.

Sen. Arlen Specter (R-Pa.), who headed the congressional panel that looked into the case three years ago, said: "[T]he question in my mind is whether this woman, who is charged, is the cause of" the problems with the case.

The Lee case is a prime example of the 20 years of Chinese counterintelligence work that has been put at risk by Leung's alleged spying for China, authorities said. The special team of inspectors scrutinizing the FBI's handling of the Lee case is also looking into failings in other significant Chinese espionage cases of the past two decades, including several involving Smith that foundered badly.

Smith supervised the FBI's Chinese counterintelligence squad in Los Angeles, which ran the six-year Lee investigation, code-named "Royal Tourist." The government has accused Leung of obtaining from Smith an FBI document listing a "classified off-site location" related to the Royal Tourist probe and a phone list connected to the same investigation. She gained access to the material "for the purpose of obtaining information respecting the national defense with the intent and reason to believe that the document was to be used to the injury of the United States," according to Leung's indictment. The document was found in a Dec. 12 search of Leung's Los Angeles home.

FBI inspectors are now poring over the activities of Smith's squad. According to sources with knowledge of the FBI's Los Angeles office, two other agents who worked with the Chinese counterintelligence unit failed polygraph examinations in the past several years and were assigned less sensitive duties. One of the agents was put on administrative leave and has left the bureau, the sources said.

The U.S. senators who examined the Lee case in 2000 were concerned that the punishment did not fit the suspected crimes. Lee's hurried plea bargain required him to spend only a year in a halfway house, a sentence so light that Specter took the unusual step of traveling to California to interview the judge who had sentenced him.

Specter's judiciary subcommittee ended up baffled by what one panel investigator characterized as "inexplicable lapses" in investigative zeal to prosecute and debrief Lee. Back then, no one considered the possibility that the Chinese could have infiltrated the FBI's investigative ranks.

Some of the critical missteps that the oversight subcommittee discovered will be reevaluated in the damage assessment on the Leung case. Among them: The FBI's counterintelligence probe of Lee was exposed when Lee's wife discovered an FBI listening device in a ceiling duct while she was cleaning house in July 1997. The FBI ended eavesdropping efforts at a critical point two months later because it said the Justice Department would not renew a special warrant aimed at foreign spies -- a claim Justice officials disputed. And even though Lee confessed to disclosing classified submarine imaging data to the Chinese in May 1997, he was never prosecuted for that offense, for reasons that stemmed partly from miscommunication.

Intelligence officials and China watchers say the implications of Leung's suspected two-decade-long penetration of FBI counterintelligence efforts could take years to unravel. Because of Leung's access to high-level Chinese leaders, the FBI prized her information, circulating it to presidents, foreign policymakers and the intelligence community.

Leung was paid $1.7 million by the FBI for information on an untold number of issues, including Chinese military and intelligence capabilities, China's political intentions and its efforts to influence U.S. politics. All that and more is now suspect.

"The FBI acted on her information and used it in the conduct of various foreign counterintelligence investigations, including detecting efforts by the PRC [People's Republic of China] to clandestinely obtain technologies that have military applications," according to an FBI affidavit in support of a search warrant for Leung's home.

Leung is being held on charges she illegally copied and kept classified national defense documents. Smith, who is free on bond, has been indicted on charges of gross negligence and wire fraud for allegedly allowing Leung access to classified material and withholding information from his FBI superiors in evaluations of her.

Asked about Leung's possible role in the Lee investigation, including her possession of the FBI document related to it, Janet I. Levine, her attorney, said: "She never did anything the FBI didn't tell her to do, and she never had any documents the FBI didn't give her." Levine said Leung is "being stabbed in the back" by FBI officials embarrassed by the disclosure of Leung's affairs with Smith and Cleveland.

Smith headed the Lee investigation with Cleveland, who by then was director of security at Lawrence Livermore National Laboratory, which had contracts with Lee's company, TRW. Cleveland, who served as the Energy Department's chief agent on the Lee case, was formerly the supervisor of an FBI Chinese counterintelligence squad in San Francisco. According to prosecutors, he, too, had an intermittent affair with Leung, one that resumed in 1997.

Cleveland has not been charged and is said to be cooperating with authorities, but he was stripped of his security clearances, and he resigned his Livermore post last month.

"Cleveland was our on-site agent -- our most trusted agent and the lab's most trusted agent," said an official who was involved in overseeing the Lee investigation for the Energy Department.

The official said Energy Department agents were disturbed as they closed in on Lee in 1997 because he "seemed to know what we were going to do." Energy officials "asked the FBI how he knew," but they never found out, the official said.

The Chinese, this official said, "could have learned our investigative strategy on Peter Lee and Wen Ho Lee," the scientist at Los Alamos National Laboratory who was the subject of another botched government investigation. "They would have known who we suspected, when we turned documents up; they could have planted leads. We would [often] be running down a hot trail, and then it would go cold," he said. "If Leung was working for both sides, it explains our inability to put these cases together."

Porter J. Goss (R-Fla.), chairman of the House intelligence committee, who has received several FBI briefings on the unfolding spy scandal, said the Peter Lee case is ripe for review. "You don't want to get paranoid about contamination, [but] when you start connecting all these dots, there is sort of a seamless web," he said.

Peter Lee, a naturalized U.S. citizen born in Taiwan, worked on nuclear weapons research at Los Alamos National Laboratory in New Mexico during the 1980s. In the 1990s, he joined TRW, a contractor working on Livermore's submarine radar imaging project.

The FBI began tracking Lee in 1991, after he was seen with Chinese scientists visiting California. Agents began to make headway on their suspicions when Lee returned from a trip to China in May 1997 and failed to disclose to TRW that the Chinese had paid his way and that he lectured to scientists there.

The FBI questioned Lee in June 1997; in July, his wife discovered the FBI listening device. The next month, agents found e-mails in which Lee obtained what the FBI said were phony receipts from Chinese officials that made it appear he had paid his own way to China.

With agents closing in on Lee, however, the FBI's warrant under the Foreign Intelligence Surveillance Act lapsed. Asked why it was not renewed, Daniel Sayner, a top official of the FBI's Los Angeles office, told Specter's subcommittee that "the information in the preceding 90 days, which you have to use to renew FISA, was stale." Justice officials denied turning down a request to renew the warrant, saying they would not have judged the information stale.

Agents questioned Lee on several occasions in October, then had him take a polygraph test. His answers to questions about whether he had been involved in espionage or passed classified materials to unauthorized people were judged deceptive. He soon admitted to disclosing classified information to Chinese scientists in 1985 and in 1997, as well as to lying about the nature of his 1997 trip.

An arrest warrant was drafted accusing Lee of "acting clandestinely, corruptly and illegally as a conduit of classified information to the PRC, the People's Republic of China . . . with reason to believe that it would be used to the injury of the United States and the advantage of a foreign nation," according to congressional testimony. The federal prosecutor assigned to the probe told the oversight committee he thought he had a strong espionage case.

But the warrant was never served. Instead, almost immediately, Lee entered into plea negotiations that would be finalized in court in December, months before the Energy Department completed its damage assessment on Lee's disclosures. Lee admitted to one false statement charge and to passing classified data in 1985. That material had been declassified by the early 1990s, and the Justice Department did not want to base more serious espionage charges on material publicly available, according to testimony at the hearings.

Sayner told the congressional panel that Lee was not charged with the 1997 disclosures because "we were having difficulty getting a read on the classification of the material." But Richard Twogood, Livermore's associate director for electronic engineering, told Congress that he prepared a memo for Cleveland and the Los Angeles counterintelligence squad that classified the material "secret."

Peter Lee maintained that he was never a spy, only that he had crossed some lines in discussions with scientific colleagues. He received strong support from scientists in this country and in China, a factor in his sentencing. His lawyer did not return calls for comment on recent developments.

Government officials were satisfied enough with the probe that they later sent Cleveland to Los Alamos in 1998 to help in the investigation of Wen Ho Lee, an even more complex matter that is now also under review.

Suspected double agent Katrina Leung and her FBI handler, James J. Smith, have been indicted, prompting reviews of other cases from the past 20 years. Leung is accused of copying classified material and giving it to Chinese officials.