Project TALON stands for Threat and Local Observation Notice. Gen. Robert W. Noonan Jr said in 2001 that although the Military could not actually spy on American citizens, it could “collect” information from other sources.

From William M. Arkin (Early Warning)
It is the military's equivalent of the FBI and intelligence community's post 9/11 shift, and Wolfowitz directed the sharing of reports on ambiguous activity. This new reporting mechanism -- called TALON for Threat and Local Observation Notice -- applies to seven reporting categories:
1.Non-specific threats
2.Surveillance
3.Elicitation
4.Test of security
5.Unusual repetitive activity
6.Bomb threats
7.Other suspicious activity
According to a classified Standing Joint Force Headquarters-North document on "intelligence sharing" dated July 20, 2005, and obtained exclusively by this washingtonpost.com blogger, collection of intelligence on U.S. persons is allowed by military intelligence units if there is a reason to believe the U.S. person is:
"Connected to international terrorist activities;
Connected to international narcotics;
Connected to foreign intelligence;
A threat to DoD installations, property, or persons; or,
The subject of authorized counterintelligence."

More on the program can be found here:

http://www1.cq.com/cq.com/www.cq.com/public/20060131_homeland.html

http://www.newsmax.com/archives/articles/2003/6/29/204152.shtml

http://www.washingtonpost.com/wp-dyn/content/article/2005/12/10/AR2005121000893.html

http://www.sourcewatch.org/index.php?title=TALON