Since 9/11, national security has become big business. Whether it’s securing borders or the nation’s airports and seaports, the need for screening is crucial.

American Science and Engineering () is one company rising up to meet the country’s security needs.

The firm specializes in X-ray inspection systems that promote border security, fight terrorism and combat the smuggling of drugs and humans.

There are about 1,800 security concourses in the nation’s airports. Providing security is a daunting task for the Transportation Security Administration.

On Aug. 1, the TSA awarded American Science a $10.8 million contract to use its SmartCheck personnel screening system.

The contract’s first phase provides funding to lease five systems with an option to purchase. The TSA also can buy an additional 75 SmartCheck systems, which are used as secondary screening devices.

Last year, the American Civil Liberties Union objected to the screening device because the group felt it infringed on people’s privacy.

At the time, SmartCheck could see through clothes in order to spot bombs and weapons.

Phoenix Trial

But the TSA ran a trial for the system at the Phoenix International Airport, the eighth busiest in the U.S. The agency found that the public preferred the machine over security pat downs.

Analyst Stephen Levenson of Stifel Nicolaus said American Science made the decision easier by creating an algorithm that blurred the image on the screen.

“This (contract) offers TSA the ability to deploy our SmartCheck personnel screening system on a broad basis for use as a safe and effective tool for aviation threat detection,” CEO Anthony Fabiano said in a press release.

“SmartCheck provides the most comprehensive personnel screening technology available . . . while ensuring the privacy of the traveling public.”

Levenson credits the contract to the effective management team led by Fabiano. He said the CEO, who was brought in to restructure the company earlier this decade, expanded the firm’s technology into new applications.

“Some called American Science a one-trick pony,” he said. “But it has improved margins and operating efficiency while extending its product line and core technology with new devices.”

The Billerica, Mass.-based company has built its business around its Z Backscatter technology that can better uncover dangerous and elusive threats. It is protected by more than 20 patents.

Unlike traditional X-rays, the company’s systems pick up lower-frequency waves that bounce off softer objects. Software assembles the data into images to reveal drugs, plastic and liquid explosives, ceramic weapons, human bodies and radioactive devices, such as dirty bombs.

Its biggest seller has been its Z Backscatter Van, which was introduced in 2003. The ZBV is a mobile, X-ray scanning system built into a van. Costs vary depending on options, but on average ZBVs have a price tag of about $800,000.

The ZBV can screen static objects while it is moving or can scan moving objects while it’s parked.

In dangerous environments, like Iraqi checkpoints, an unmarked ZBV sits inconspicuously so the operator can scan from a safe distance.

The system requires servicing, which provides the company with a recurring revenue stream. That stream accounts for 30% of total sales. Sixty percent stems from sales of inspection systems.

The company makes smaller systems that screen people entering government buildings, such as the White House.

It makes larger systems ideal for scanning cars, vans, trucks and sea cargo containers. The CargoSearch mounts a system on top of a framework that a truck towing a container can drive through for inspection.

Its Z Backscatter technology attracts an elite class of clientele, which includes the U.S. Department of Defense, Homeland Security, Customs and Border Protection as well as other federal agencies.

The company also has international customers ranging from the British government to custom agencies in Hong Kong, New Zealand, Egypt and Thailand. Major corporations also are on the list.

While newer systems have gained traction, its ZBVs accounted for about a third of the company’s revenue in the first quarter, said analyst Timothy Quillin of Stephens.

Sales climbed 49% to $44.47 million in the quarter, while operating profit rose over 47%. It boosted earnings by 61% to 66 cents a share. Analysts expected 48 cents.

Shares of American Science rose nearly 9% a day after results were released.

“(We) recorded the highest first-quarter revenue and operating profit in the company’s history,” Fabiano said in a press release.

“Revenue increased across all product areas bolstered by the continued rise of international orders for our proprietary X-ray inspection systems.”

American Science’s short interest amounted to 10.5 days of average volume in July, which means some investors were bearish on the company. Quillin said the reason is the stock’s lack of predictability.

“It is an inherently difficult company to project short-term earnings,” he said. “It is a relatively volatile stock.” However, Levenson said, “American Science will blow the shorts out of the water.”

Analysts have mixed views on the company. The reason is American Science can take on a big order in one quarter and the next record next to nothing. This aspect gives it a forward visibility that can be cloudy at times.

But Levenson said the company has a good long-term outlook. The proof is in the pudding.

“This company runs its business for the long-term, not quarterly,” he said. “It issued a statement of confidence to its shareholders when it declared an annual dividend of 80 cents a share. It wouldn’t do that if it couldn’t deliver.”

Backlog

American Science recorded $104 million in backlog in the first quarter. It was the fourth straight quarter it posted a backlog of $100 million or more.

That could grow to almost half a billion dollars if it wins part of a Homeland Security contract issued by Homeland Security’s Domestic Nuclear Detection Office (DNDO).

American Science was selected along with L3 Communications () and SAIC () to come up with a Cargo Advanced Automated Radiography System for the DNDO, which detects radiological threats hidden behind lead cargo containers.

Rival Smiths Detection protested the selection of the three competitors, but the U.S. Government Accountability Office denied the security firm’s claim.

American Science’s prototype was given the most R&D money and received an overall rating of exceptional. The contract is valued at about $1.2 billion and the winner or winners will be announced later this year.

“I’ll be surprised if American Science doesn’t at least win part of this contract,” Levenson said. “This contract would put them in the big leagues.”

(10-05) 09:10 PDT Redmond, Wash. (AP) —

Microsoft Corp. will spin off the creator of the blockbuster “Halo” video game trilogy but maintain a stake and close ties to the company.

Publishing agreements for Microsoft-owned “Halo” intellectual property, and for future games developed by Bungie, will continue, Microsoft said Friday.

Gamers have already plunked down more than $300 million for “Halo 3″ since the game was released less than two weeks ago.

The latest installment costs between $60 and $130, depending on special features and commemorative packaging.

“While we are supporting Bungie’s desire to return to its independent roots, we will continue to invest in our ‘Halo’ entertainment property with Bungie and other partners,” Shane Kim, corporate vice president of Microsoft Game Studios, said in a statement.

Shares of Microsoft added 25 cents to $29.96 in midday trading.

Bungie is based in Kirkland.

It was August 23, 2006 when John Koten, CEO of Mansueto Ventures, and Ed Sussman, head of our online publishing division, called me into John’s office to discuss the 2007 Inc. 500. I’m pretty sure it was Ed who said “Fasten your seat belts.”

Our company was a little more than a year old, having been formed by Joe Mansueto, founder of Morningstar, which is itself a five-time Inc. 500 company. After five constrained years as a small part of a multinational conglomerate, we at Inc. were eager to once again walk the entrepreneurial walk that had made the company so successful in the 1980s and 1990s. John and Ed saw an opportunity to expand our journalistic reach. We would build on the magazine’s most successful franchise, the Inc. 500 list of the fastest growing privately held companies in America. In fact, we would expand it tenfold, and integrate it with a brand new social network for private companies. Thus was the Inc. 5,000 conceived.

Covering private companies is more difficult than the far more common job of covering public companies. The main reason is that leaders of private companies, unburdened by laws requiring public disclosure, don’t have to tell us anything. But that’s precisely what makes our reporting so valuable. For more than 25 years, the Inc. 500 has been the essential guide to the most entrepreneurial companies in America. Now we’re digging deeper to explore an even broader cross section of entrepreneurial America. To complete this task, for almost a year we unleashed more than 70 researchers, reporters, editors and interns on the project, and we enlisted the help of dozens of business organizations and trade associations to boldly go where no news organization had gone before, to identify and profile the 5,000 fastest growing companies in America.

These companies are the eliteДa mere sliver of the seven million or so companies in the U.S. that have employees. What have we learned about them? The 5,000 fastest-growing private companies in the U.S. produced $194 billion in 2006 revenue, about 1.5 percent of the national gross domestic product, and employed more than 900,000 people, about 0.6 percent of the jobs in the U.S. Not surprisingly, the average Inc. 5,000 company had more revenue than the average company on this year’s Inc. 500 list-$38.9 million for the Inc. 5,000 compared to $34.4 million for the Inc. 500. It had a little over one and a third times as many employees-187 for the Inc. 5,000; 138 for the Inc. 500. And it was nearly twice as old, with the average Inc. 5,000 company having been around 15 years, and the average Inc. 500 company just eight years old.

We’ll be continuing our analysis for months, but, among other things, we’ve noticed that the «www.inc.com» and «www.inc.com» industries, historically not particularly well represented on the Inc. 500, are the two largest categories on the Inc. 5,000, with each one constituting more than 10 percent of the list. These larger, more substantial firms represent the backbone of the economy, and while they may not produce the gazelle-like growth required to make the Inc. 500, their growth is impressive nonetheless. The median three-year growth for construction firms on the Inc. 5,000 is 108 percent; for manufacturing firms it’s 98 percent.

Typical in the construction arena is Ace Asphalt of Arizona, which builds parking lots in the fast-growing Phoenix area and whose revenue has grown from $56.6 million to $95.2 million over the past three years. A nice example of high tech innovation in the traditional manufacturing fields is American Leather, which grew from $50 million to $70.9 million in the last three years, in part from its implementation of a computer-controlled cutting system that enables it to build and ship any of 700,000 possible custom furniture variations within three weeks. And we can’t drop the topic of Manufacturing without a fond mention of perennial Inc. 500 applicant Big Ass Fan Co., which makes, well, these really big ass fansДanywhere from six to 24 feet in diameterДthat help cool Southern factories inexpensively. The firm has grown from $7.4 million in revenue to $26.9 million over the past three years.

There are some familiar names on the Inc. 5,000, including some former Inc. 500 companies that are now too large to be growing at a pace fast enough to make the 500. In fact, three of the top five by revenue are former Inc. 500 companies: computer memory product maker Kingston Technology, No. 1 on the 1992 list, took in $3.7 billion last year. «www.inc.com»>, a wireless product distributor that was No . 154 on the 2003 list, had $3.6 billion in revenue last year. And ABC Supply, 1986’s number one, had almost $3 billion in revenue last year. ABC is headed by Ken Hendricks, our 2006 Entrepreneur of the Year. His company is now the nation’s largest wholesale distributor of roofing, siding, and gutters.

You’ll find these companies at the top of our list of the companies with the most 2006 revenue. We’ve carved out all kinds of additional lists: we’ve got the fastest growing companies in each «www.inc.com» and in each major metropolitan area. There’s also a list ranking the companies by dollar amountДas opposed to percentageДrevenue growth, and a list of companies on the Inc. 5,000 that intend to go public.

For us, the launch of the Inc. 5,000 marks a new era, an era where the discovery will be ongoing and participatory. In September we will launch IncBizNet, our social network for private companies. All of the Inc. 5,000 will become charter members of this network, and any U.S.-based private company can join. Members will be able to connect with other entrepreneurs in the same industry or region. They’ll be able to share their company backgrounds, business philisophies, press releases, and multimedia marketing materials on customizable web pages. They’ll be able to discover which vendors other companies trust the most. They’ll be able to create company blogs they can export to their own websites. All of these pages will be under the control of the member companies.

In the meantime, please play around with the robust sorting and searching functions we’ve introduced this year with the Inc. 5,000. Let us know what you discover. (Send all comments to feedback5000@inc.com>.) We’ll be doing quarterly polls of companies on «www.incbiznet.com» on a variety of issues. Next year’s Inc. 5,000 applications will be integrated with IncBizNet. Applicants will indicate that they want to be considered for the list, and as long as they keep their financials up-to-date on the IncBizNet pages that they will control, they’ll be in the running. We look forward to day-to-day contact and development with America’s growing private companies in the coming years.

Copyright 2007 Mansueto Ventures LLC. All rights reserved.