Headley, a Pakistani-American who pleaded guilty to laying the ground work for the carnage, told the court that he had personally briefed two ISI Majors - Major Iqbal and Major Samir - after he recced all the targets in Mumbai for the 26/11 terror attacks.
He also told the court that he had received weapons and leadership training in Pakistan from the Lashkar-e-Taiba (LeT), the Pakistan-based terror outfit that India accuses of masterminding and executing the Mumbai attacks. "LeT told me I would be going to India to conduct surveillance," he said.
Among the exhibits produced in court were photographs taken by Headley in Mumbai. They are pictures of the Taj Hotel and the Chhatrapati Shivaji Terminus - two of the three places attacked by terrorists from Pakistan on 26 November 2008. Headley had carried out a recce of these targets during his trips to Mumbai in 2006 and 2007. (See: Headley's photographs of Mumbai that helped plan 26/11 attacks)
Headly said in court that it was Lashkar-e-Taiba (LeT) leader and Jamaat-ud-Dawa (JuD) chief Hafiz Saeed who "motivated" him by saying, "one second of jihad equals hundred years of prayer".
Headley also told the court that "he disliked India" because he held "India responsible for severing Pakistan" and "bombing his school in 1971". He added that he "wanted to fight against Indian troops in Kashmir" but Lashkar leaders told him they had "a better and more suitable use" for him because he was an American citizen.
According to the testimony, over lunch in 2004 with top leaders like Hafiz Saeed and Zaki ur Rehman Lakhvi, who Headley referred to as "Zaki sahib" in court, he proposed that Lashkar sue the United States government to challenge the LeT being called a terrorist organization.
He was told that the ISI would have to be consulted first, he said in court. When asked by the prosecution why this was necessary, Headley replied, "They coordinate with each other. With financial and military support." (Read: 'ISI helped LeT carry out 26/11 attacks')
Headley also told the court that he understood that the LeT and the JeM operated under the ISI and that the two terror groups coordinated with each other. He added that ISI gave military as well as financial support to the LeT. Headley has already told interrogators that the ISI provided training and funds for the attack.
Headley directly implicated serving ISI officer Major Iqbal by saying that LeT commander Zaki ur Rehman Lakhvi had told him that Major Iqbal would call him about an operation in India. He also said that Lakhvi spoke to Major Iqbal on major issues.
Indian government sources have told NDTV that Headley's testimony makes the case against ISI stronger and the Pakistani intelligence agency may now be forced to hand over Major Iqbal.
His testimony is also crucial as it vindicates what India has been saying all along - that Hafiz Saeed and Zaki ur Rehman Lakhvi were the masterminds of the 26/11 attacks, something that Pakistan has been willfully ignoring.
Cases have been filed against Saeed and Lakhvi in the 26/11 trial that is going on in Pakistan courts, but the two still remain free. They have been seen with Pakistani ministers at rallies in Islamabad. The UN has also blacklisted both Saeed and Lakhvi. The two appear on America's terror list as well.
Some experts expect that the trial will detail the workings of the LeT, which they say was created with ISI's help in the 1980s as a proxy fighting force against India over the disputed territory of Kashmir. Counter-terrorism officials say the group since then has gained strength partly because of the ISI, possibly with the help of retired officers. Pakistani officials have denied any ties with the group.
Meanwhile, opening their arguments earlier, the prosecution led by Assistant U.S. Attorney Sarah Streicker said that Rana, a Chicago businessman, provided cover for his friend and former schoolmate Headley, who took photos and videos of targets in Mumbai and that Rana led Headley to pose as a representative for his Chicago-based immigration business. (Watch - 26/11 accused Rana's wife to NDTV: 'This isn't the Headley I knew')
She described Headley as a clean cut man who could have been any tourist with a camera in Mumbai and that it was Rana who approved of the plot.
"The defendant knew all too well that when Headley travels to a foreign country, people may die," Streicker said.
Prosecutors also claimed that after the 26/11 attacks, Rana told Headley that "Indians deserved it".
Streicker said the government will show jurors evidence including emails between Headley and Rana that were written in code. She said Headley considered Rana "his best friend in the world."
"The defendant didn't carry a gun or throw a grenade. In a complicated and sophisticated plot, not every player carries a weapon. People like the defendant who provides support is just as critical to the success," Streicker said.
She also said Rana knew and supported a separate plot that never happened against a Danish newspaper that had printed cartoons of the Prophet Muhammad and that Rana and Headley had talked about at least four other plots. She gave no further details.
Headley had admitted that he made surveillance videos and conducted other intelligence-gathering for the Mumbai attack. He also told interrogators that he was in contact with another militant who was helping plot a separate bomb attack against a Danish newspaper whose cartoons of the Prophet Muhammad offended Muslims.
Attorneys for Rana said their client was innocent and was simply duped by his long-time friend and didn't know what plot was in store. Headley and Rana, a Pakistani-born Canadian, met at one of Pakistan's most prestigious military boarding schools and stayed in touch as adults.
Defence attorney Charles Swift told jurors during opening statements that Headley was a "manipulative man" who "balanced multiple lives" including working for the Laskhar-e-Taiba, Pakistani intelligence and the U.S. Drug Enforcement Administration at the same time. (Watch - David Headley has every reason to lie: Rana's attorney)
"David Headley...has been manipulating people for years. Dr. Rana is by far and away not the first," Swift said during opening statements.
Rana, who was arrested in 2009, is accused of giving Headley cover by letting him open an office of his Chicago-based immigration and law services business in Mumbai and travel as a supposed representative for the agency. He also allegedly helped Headley make travel arrangements in the Denmark plot.
Attention to Rana's trial has increased in recent weeks, especially amid questions about whether the ISI had knowledge of Osama bin Laden's whereabouts. Security has been tightened, with more armed guards and a metal detector outside the courtroom in downtown Chicago, and many reporters from Denmark and India are covering the proceedings.
Headley, born Daood Gilani, reached a plea deal with prosecutors in the terrorism case in exchange for avoiding the death penalty and avoiding extradition. He's also been an informant for the U.S. Drug Enforcement Administration after a drug conviction.
Rana is the seventh name on the indictment, and the only defendant in custody. Among the six others charged in absentia is "Major Iqbal" and Sajid Mir, allegedly another Lashkar-e-Taiba supervisor who also "handled" Headley.