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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

Commission File Number 0-16182

AXSYS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

(860) 257-0200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   x   No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( §232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was Required to submit and post such files).  Yes o  No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   o  No   x

The number of shares outstanding of the registrant’s common stock as of July 24, 2009 was 11,625,187.

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AXSYS TECHNOLOGIES, INC.

INDEX

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PART I — FINANCIAL INFORMATION

ITEM 1. — FINANCIAL STATEMENTS

AXSYS TECHNOLOGIES, INC.

Consolidated Balance Sheets

(Dollars in thousands, except share and per share data)

See accompanying notes to consolidated financial statements.

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AXSYS TECHNOLOGIES, INC.

Consolidated Statements of Operations

(Dollars in thousands, except share and per share data - Unaudited)

See accompanying notes to consolidated financial statements.

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AXSYS TECHNOLOGIES, INC.

Consolidated Statements of Cash Flows

(Dollars in thousands - Unaudited)

See accompanying notes to consolidated financial statements.

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AXSYS TECHNOLOGIES, INC.

Consolidated Statements of Stockholders’ Equity

For the Six Months Ended June 27, 2009 and June 28, 2008

(Dollars in thousands - Unaudited)

See accompanying notes to consolidated financial statements.

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AXSYS TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share and per share data - Unaudited)

Note 1 — Basis of Presentation

The accompanying unaudited consolidated financial statements of Axsys Technologies, Inc. (“Axsys” or “we”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP. In the opinion of management, all significant adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the three and six months ended June 27, 2009 and June 28, 2008 have been included. Operating results for the three and six months ended June 27, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.  The financial information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes in Axsys’ Annual Report on Form 10-K for the fiscal year ended December 31, 2008. The consolidated balance sheet dated December 31, 2008 included in this quarterly report on Form 10-Q has been derived from the audited consolidated financial statements at that date.

Basic earnings per share have been computed by dividing net income by the weighted average number of common shares outstanding. The dilutive effect of stock options on the weighted average number of common shares was 198,880 shares for the three months ended June 27, 2009 and 201,020 for the six months ended June 27, 2009 compared to 403,661 shares for the three months ended June 28, 2008 and 428,587 shares for the six months ended June 28, 2008. Diluted earnings per share exclude 11,659 potential common shares for the three months ended June 27, 2009 and 74,746 potential common shares for the six months ended June 27, 2009 related to our stock compensation plans because they were anti-dilutive.

The company has performed a review of subsequent events through the date of the filling of this document.

Note 2 — Agreement and Plan of Merger

On June 4, 2009, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with General Dynamics Advanced Information Systems, Inc. (“General Dynamics”), and Vision Merger Sub, Inc., a wholly owned subsidiary of General Dynamics’ parent (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Axsys will merge with and into Merger Sub (the “Merger”), with Axsys continuing as the surviving corporation (“Surviving Corporation”) and as a wholly owned subsidiary of General Dynamics’ parent. During the second quarter of 2009, we incurred $2,460 of sale-related costs. Theses costs are included in other expenses and are primarily related to investment banking and legal fees.

Following the June 4, 2009 announcement of the plan of merger, three shareholders class actions were filed in the Superior Court of Connecticut and the Delaware Chancery Court seeking to enjoin the merger or, in the alternative, seeking post-merger monetary relief in unspecified amounts. The actions generally allege that the our board of directors violated their fiduciary duties to our shareholders by entering into the proposed merger on unfair terms, and by failing to accurately disclose all material information in the proxy statement distributed to shareholders in advance of their vote on the merger. We are in the process of discovery and have not yet responded to any of the complaints. No date had been set for a trial of for a hearing on a preliminary injunction motion.

Note 3 — Acquisition Earn-Out

On April 13, 2007, Axsys acquired substantially all of the assets of Cineflex, LLC (“Cineflex”), a privately held manufacturer of high-precision gyrostabilized aerial camera systems. The initial purchase price of this acquisition, after a working capital adjustment, was $27,042. Additional incremental cash payments of up to $42,500 are possible if certain revenue targets are exceeded as part of a three-year earn-out agreement. In addition, a second contingent payment of up to 10% of all revenues recognized from multi-year orders in backlog at the end of the earn-out period is possible if revenues in the fourth year from the acquisition date exceed $40,000. During 2007, an earn-out of $2,966 was earned, which increased the purchase price to $30,008. This $2,966 earn-out was paid in the first quarter of 2008. Additionally, during 2008, an earn-out of $802 was earned, which increased the purchase price to $30,810. The 2008 earn-out is also additional consideration resulting in an increase to goodwill and was paid during the first quarter of 2009.

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AXSYS TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share and per share data - Unaudited)

Note 4 — Inventories — net

Inventories, determined by lower of cost (first-in, first-out or average) or market, consist of:

Note 5 — Segment Data

We are organized into two business segments: the Surveillance Systems Group and the Imaging Systems Group. Our segments are evaluated on an operating income basis, and a stand-alone tax provision is not calculated for each segment.

The Surveillance Systems Group designs, manufactures and sells highly precise camera systems for deployment on ground, marine and aerial vehicles. These products are typically used in surveillance, reconnaissance, tracking and targeting applications. Our products can be grouped into two primary areas: non-stabilized camera systems and gyrostabilized camera systems. Non-stabilized camera systems are often deployed as fixed mounts on poles or masts. Typical applications for non-stabilized camera systems include border surveillance, port threat detection and perimeter security.  Gyrostabilized camera systems are usually deployed on airborne vehicles such as helicopters, manned and unmanned aerial vehicles and marine vehicles. Gyrostabilization is usually necessary in air and sea-based applications in order to maintain a steady image while the vehicle is moving on several axes. Typical applications for gyrostabilized camera systems include search and rescue, drug interdiction, border surveillance, criminal pursuit and movie production. The Surveillance Systems Group has design and manufacturing facilities in Nashua, New Hampshire and Grass Valley, California.

The Imaging Systems Group designs, manufactures, and sells optical and motion control subsystems and components for deployment in larger, integrated systems.  Products in the Imaging Systems Group include visible and infrared lenses, scanning systems, laser positioners, long-range telescopes, stabilized sensor positioning systems, precision motion-control components, and imaging optics.  The Imaging Systems Group has design and manufacturing facilities in Nashua, New Hampshire; San Diego, California; Cullman, Alabama; and Rochester Hills, Michigan.

The following tables present our business segment information:

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AXSYS TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share and per share data - Unaudited)

Note 5 — Segment Data (Continued)

Included in non-allocated expenses are general corporate expense, interest expense, and other income and expense, as well as sale related costs of $2,460 million associated with the proposed merger with General Dynamics.  Identifiable assets by segment consist of those assets that are used in the segment’s operations. Non-allocated assets are comprised primarily of short-term investments, cash and cash equivalents, corporate assets and deferred income tax assets.

The following table presents the non-allocated identifiable assets:

Major Customer Information

During the first six months of 2009, BAE Systems represented 28.2% of our total sales while Raytheon represented 13.3% and Northrop Grumman Corporate represented 12.5%. These sales were generated from various product lines across both reporting segments and were in support of several U.S. government programs including, but not limited to, common remotely-operated weapons stations, thermal weapons sites, land-based perimeter security, unmanned aerial vehicles and targeting and missile defense systems.

Note 6 — Income Taxes

The consolidated effective tax rate was 37.5% for the three months and 36.5% for the six months ended June 27, 2009 and was 37.2% in each of the comparable periods of 2008.

At June 27, 2009, we had approximately $3,450 of unrecognized tax benefits, all of which may favorably affect our effective tax rate if recognized. We expect a net decrease of $3,116 to unrecognized tax positions within the next twelve months primarily as a result of the expiration of the statutues of limitations for items currently accrued.

We recognize interest and penalties related to uncertain tax positions in income tax expense.  As of June 27, 2009 and June 28, 2008, we had approximately $1,593 and $1,429, respectively, of accrued interest and penalties related to uncertain tax positions included in the unrecognized tax benefits mentioned above.

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AXSYS TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share and per share data - Unaudited)

Note 7 — Warranty Accruals

We provide warranties for certain of our products.  Provisions for estimated expenses related to product warranties are made at the time products are sold.  These estimates are established using historical information on the nature, frequency and average cost of warranty claims.

The following table summarizes product warranty activity:

Note 8 — Stockholders’ Equity

We use treasury shares for general corporate purposes, including the satisfaction of commitments under employee benefit plans and stock options.

Changes in common stock and treasury stock were as follows:

Note 9 - Environmental Contingencies

We are currently involved in two environmental remediation projects and a third site, which is in the final stage of monitoring. We accrue for environmental contingencies on an undiscounted basis when responsibility for clean up is determined and costs, including legal fees, are probable and can be reasonably estimated. We are the primary responsible party, or PRP, at sites located in Bedford, Ohio and St. Petersburg, Florida and have secondary responsibility for a third site in Norwalk, Connecticut. Pursuant to remediation plans approved by each state’s environmental protection agency, we investigated soils and groundwater and conducted certain remedial work, including soil removal.  The clean up of both sites is currently in process.  During the first six months of 2009, we have incurred costs of $153 for the Bedford, Ohio and St. Petersburg, Florida sites and $11 for the Norwalk, Connecticut site. To date we have incurred approximately $2,253 related to the Ohio and Florida sites and $305 for the Connecticut site. We anticipate remediation costs for theses sites to continue through 2013.

As of June 27, 2009, we have an accrual of $684 for future costs related to the Ohio, Florida and Connecticut sites.  These estimates have been developed in consultation with outside environmental and legal consultants handling these matters and are based upon an analysis of the anticipated remediation plans. Although liability under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) is joint and several, meaning that liability can exceed a PRP’s pro rata share of cleanup costs, we believe, based on currently available information, that it is remote that costs associated with these sites will have a material adverse effect on our business and financial condition.  It is possible, however, that our results of operations for a particular fiscal period could be materially affected.

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AXSYS TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share and per share data - Unaudited)

Note 10 — Discontinued Operations

During the second quarter of 2008, we incurred pre-tax charges of $200 for legal expenses related to activities of our formerly-owned bearings distribution business.

Note 11 — Contingencies

We are a defendant in various lawsuits, none of which are expected to have a material adverse effect on our business or financial position.

Note 12 — Restructuring Charges

In the second quarter of fiscal 2009, we implemented a restructuring plan to merge our Optics-Rochester Hills, Michigan facility with our Optics-Cullman, Alabama facility. We plan to relocate our optics product line from Rochester Hills to Cullman and operate the Rochester Hills facility as a satellite location.  We believe that merging the two facilities will allow us to integrate the engineering talent within our Rochester Hills facility with the manufacturing capacity of our Cullman facility to produce a single business entity that will support a more effective and efficient operating structure.  We expect to be substantially completed with the restructuring by the end of our third quarter of fiscal 2009. Total restructuring costs are anticipated to be approximately $1,286 and will include $589 in termination benefits and $697 in employee and equipment relocation costs. In the second quarter of fiscal 2009, we recorded charges of $139, related primarily to involuntary separation plans. All charges related to our restructuring plan were included in cost of sales within our income statement for the six months ended June 27, 2009 .

Note 13 — Adoption of Accounting Pronouncements

In May 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events” (“SFAS 165”). This standard is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  SFAS 165 is effective for fiscal years and interim periods ended after June 15, 2009 and will be applied prospectively. We adopted SFAS 165 during the second quarter of 2009, and its adoption did not have a material impact on our results of operations and financial position.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). This statement was effective as of the beginning of fiscal 2009 and is intended to improve financial reporting by requiring more disclosure about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”; and how derivative instruments and related hedged items affect its financial position, financial performance and cash flows.  We do not have any material derivative instruments requiring additional disclosures at this time.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”), and SFAS No. 160, “Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”).  These new standards will significantly change the financial accounting and reporting of business combination transactions and noncontrolling (or minority) interests in consolidated financial statements.

SFAS 141(R) is required to be adopted concurrently with SFAS 160 and is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The initial adoption of SFAS 141(R) and SFAS 160 did not have an impact on our results of operations and financial position; however, it is possible that this adoption may have an impact when certain tax contingencies related to prior acquisitions are resolved.

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AXSYS TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share and per share data - Unaudited)

Note 13 — Adoption of Accounting Pronouncements (Continued)

On October 10, 2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 157-2, “Effective Date of FASB No. 157” (“FSP SFAS No. 157-2”).  FSP SFAS No. 157-2 delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We adopted FSP SFAS No. 157-2 during the first quarter of 2009, and its adoption did not have a material impact on our results of operations and financial position.

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Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following discussion should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in Item 1 of this quarterly report on Form 10-Q.

We are a leading designer and manufacturer of precision optical solutions for defense, aerospace, homeland security and high-performance commercial applications. These sophisticated solutions are typically found in applications that demand the finest optical surfaces, highest accuracy and tightest motion control tolerances. Application examples include weapon systems, long-range surveillance cameras and highly precise imaging telescopes. We typically sell our products to government institutions such as the U.S. Border Patrol, Army, Navy, and Air Force, or to large defense contractors for integration into larger platforms. Our products are sold to both end user communities and original equipment manufactures in a variety of markets that demand the precision and performance that our products and capabilities provide.

On March 11, 2009, we announced that we were engaged in a formal process to evaluate the possible sale of the company with the assistance of an investment bank.  On June 4, 2009, Axsys entered into an Agreement and Plan of Merger with certain subsidiaries of General Dynamics. Pursuant to the terms and subject to the conditions of the agreement, General Dynamics will acquire us for $54 per share of our outstanding common stock with total acquisition costs of approximately $643 million. The pending merger has been approved by the boards of directors of Axsys and General Dynamics and is expected to close during the third quarter of 2009 subject to the satisfaction or waiver of customary closing conditions, including regulatory approvals and the approval of Axsys’ shareholders.

The company’s second quarter financial results were negatively impacted by three factors.  First, we incurred $2.5 million of one-time costs associated with the pending sale of the company to General Dynamics.  The costs consisted primarily of investment banking and legal fees associated with the transaction.

Second, management believes that the uncertainty surrounding Axsys’ change in ownership resulted in delayed orders and impacted the productivity of our distributors, resellers and employees.  The impact of this uncertainty manifested itself primarily in the Surveillance Systems Group because significant amount revenue within this segment is often booked and shipped within a single quarter.  Management believes that the June 4, 2009 announcement of the pending merger with General Dynamics was received favorably by our customers, resellers, distributors and employees.  Therefore, we believe that the transaction’s impact on our business is temporary.

Lastly, delays in expected orders from certain government entities pushed certain shipments into the second half of the year.  The delay in expected orders primarily impacted the Surveillance Systems Group because a significant amount of revenues within this segment is often booked and shipped within a single quarter.

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Results of Operations

Consolidated Results

The following table sets forth selected financial data on a consolidated basis (in thousands and as a percentage of sales).

For the second quarter and first six months of 2009, organic growth within our Imaging Systems Group remained strong.  However, management believes that the pending sale of the Company had an unquantifiable negative impact on the sales generated from the Surveillance Systems Group due to uncertainty among our resellers and customers coupled with the short book-to-ship cycle of the business. In addition, sales within the Surveillance Systems Group were negatively impacted by product development delays, longer than expected governmental procurement lead times and slower than expected orders in support of force protection programs.

Gross margins of 31.9% for the second quarter of fiscal 2009 and 32.6% for the first six months of fiscal 2009 decreased 250 basis points and 160 basis points, respectively, from the comparable periods in the prior year.  This decrease in gross margin was primarily due to lower sales volume within the Surveillance System Group.

Our selling, general and administrative spending was flat in the second quarter of fiscal 2009 and decreased $0.9 million for the first six months of fiscal 2009 compared to the same periods in the prior year. The decrease in the first six months of fiscal 2009 was due to reduced employee compensation costs as well as expense control efforts across both of our business segments.

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Our r esearch, development and engineering expenses increased $0.3 million in the second quarter of fiscal 2009 and $1.1 million for the first six months of fiscal 2009 compared to the same periods in the prior year. The increase was mainly due to enhancements in our cooled camera and infrared lens product lines and the continued development of our next generation of airborne gyrostabilized camera systems.

Other expense and income, net.  Net other expense was $1.5 million for the second quarter and first six months of fiscal 2009 compared to net other income of $0.1 million for the second quarter and first six months of fiscal 2008. Net other expense during fiscal 2009 includes $2.5 million of costs associated with the pending sale of the company to General Dynamics, which was partially offset by on the disposal of capital equipment. Net other income for fiscal 2008 reflected gains from the disposal of production equipment.

Income Taxes .  The consolidated effective tax rate was 37.5% for the three months and 36.5% for the six months ended June 27, 2009 was in line with the effective tax rate of 37.2% in each of the same periods of fiscal 2008.

Results of Segment Operations

The following tables and discussion set forth unaudited selected financial information on a segment basis.

Imaging Systems Group

(table in thousands and as a percentage of sales)