The increasingly volatile nature of the Middle East and the inherent difficulties in moving forward with a peace process between Israel and the Palestinians suggests that Israel will have to rely on a strong, innovative and viable military apparatus for at least several decades. Consequently, Israel’s defense industry will remain large, modern, and continue to rely on high-quality human capital and breakthrough innovation. The main challenges for Israel’s defense industry in the next several decades are as follows. First, Israel’s defense firms must continue to reinforce their R&D investments, recruit and maintain high-quality human capital, and further improve their close connections with Israel’s military apparatus. Second, it is essential for Israel’s defense firms to cooperate, rather than compete, with each other on defense contracts for the IDF and abroad. Third, Israel’s defense firms will have to increase their exports over the next several years to maintain their revenues and profits. A lower level of concentration of Israel’s defense industry will likely lead to higher aggregate profits by Israel’s defense industry. Finally, Israel’s defense firms will have to establish partnerships and open new production lines in the USA and/or move existing production lines from Israel to the USA.