Surveillance and targeting is one of the fastest-growing sectors in the DoD budget. The U.S. military is increasingly deploying unmanned vehicles and remote weapons stations to fight the "war on terror," and Axsys Technologies (Nasdaq:AXYS) and Argon ST (Nasdaq:STST) are on the front lines, providing the advanced optics and control systems vital to this transformation.

Axsys Technologies designs and manufactures precision optical systems for defense, aerospace, homeland security and commercial applications. Its technologies are deployed in weapons systems, long-range surveillance cameras and high-precision telescopes. Axsys’ principal customers are the U.S. military, the U.S. Border Patrol and large defense contractors who integrate its tools into larger platforms. The company’s Surveillance Systems Group produces high precision camera systems used in ground, marine and aerial vehicles. Its Imaging Systems Group builds optical and control subsystems deployed in larger systems such as visible and infrared lenses, scanning systems, laser-positioning devices, motion control components and imaging optics. Axsyx participates in large-scale U.S. defense department programs such as the MRAP vehicle, Apache helicopter, Stryker vehicle, M1A2 Abrams tank and thermal weapons.

Axsys ended 2007 with record contract backlog of $140.2 million. During the first six months of 2008, the company’s sales rose 49% year over year to $116.7 million from $78.5 million, and earnings improved 64% year over year to $11.2 million, or $1.02 per share, from $6.8 million, or $0.64 per share. Margins improved because of faster growth in the higher-margin surveillance systems segment. Axsys contract backlog increased to a record $174.1 million at the end of the June quarter as a result of new lens orders from DoD remotely operated weapons and thermal weapons programs. The company recently increased its full-year 2008 guidance and is targeting sales in a $237 million to $241 million range and per-share earnings in a $2.09 to $215 range. This compares with 2007 sales and per-share earnings of $171.6 million . . .

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