Interview – October 13, 2006

HDS: Hi this is Ann Marie Fleming with HomelandDefenseStocks.com.

HDS: October marks the beginning of the fiscal year for the U.S. government so it is time for us to follow the money.

In this month’s conversation with Scott Sacknoff, manager of the SPADE® Defense Index, ticker symbol, DXS, we will be going inside the FY-07 budget for Homeland Security and discussing the opportunities that exist for small businesses in the Secure Border Initiative and at the nation’s ports.

HDS: Mr. Sacknoff, good afternoon.

SMS: Good afternoon, Ann Marie.

HDS: Let’s start with the Department of Homeland Security. Congress recently approved a $34.8 billion budget for the agency, what should we take from this level of support?

SMS: The most important thing is that spending on Homeland Security remains a favorite for legislators. The fiscal year 2007 budget that was just approved was $2.7 billion more than President Bush requested and in 2006, $2.3 billion was added. In September, the Senate vote on a $3.5 billion port security spending initiative passed 98-0.

HDS: Going inside the budget, where are the funds going?

SMS: $21.3 billion is devoted to border protection; $5.2 billion toward securing the border, $2.8 billion to the border patrol to add 1500 agents and bring their total up to 14,800; and $1.2 billion to improve fencing at the border and for vehicle barriers. More specifically, DHS is planning to apply the funds to:

• Install cameras and high-tech sensors to monitor U.S. borders
• Search more electronic databases to identify individuals
• Install radiation monitors at all major U.S. ports
• Increase the amount of baggage and cargo scanned at airports; and
• Increasingly scan fingerprints at the nation’s port of entry.

HDS: Earlier this year, there was a lot of discussion and controversy related to increasing security at the nation’s ports. Can you give us some specifics on where the money is going?

SMS: As part of a $3.4 billion port security bill passed by Congress, $400 million a year through 2011 is being allocated for direct grants to ports which can be spent on equipment and training including communications gear, software to share information, surveillance and security equipment to protect critical infrastructure. As part of this bill, the largest 22 ports, which represent more than 90% of volume coming into the U.S., will be required to upgrade their systems to scan for radiological materials.

HDS: Let’s shift over to the Secure Border Initiative. DHS announced a winner in this $2.5 billion competition.

SMS: Yes, the team led by Boeing was announced the winner. DRS, L-3, Unisys, Perot Systems, and Kollsman (a division of Elbit) are also members of that team. According to sources, one of the reasons why their proposal was selected was that it focused on existing, proven technology. This is in light that a prior border surveillance program, America’s Shield Initiative, which was also valued in the $2.5 billion range, was cited as having ‘too many gadgets’ and of being ‘a science project’ by DHS Secretary Michael Chertoff.

HDS: Describe for us the program and if there will be an opportunity for small companies to get a piece.

SMS: To start with, Boeing’s deal includes a 3-year performance period with three one-year extensions. For the first stage, DHS has authorized $67 million to set up a program office and deploy an initial system along a 28-mile stretch south of Tucson, Arizona. Over the course of the contract, the program is designed to leverage modern tracking and video surveillance technologies and Boeing plans to use ground-based and tower-mounted sensors in combination with airborne unmanned platforms. Sometime in 2007, Boeing anticipates being able to add facial recognition technology to the sensors employed.

As far as small businesses looking for a piece of the action, Boeing has stated their intent to subcontract out nearly 40% of the project. In particular, while it focuses on designing and developing the network, it is actively seeking technology and infrastructure from small businesses including cameras, motion detectors, and other electronic devices and sensors. Companies should realize though that the Department of Homeland Security is going to proceed carefully and slowly on this project so one should not expect a quick windfall.

HDS: For investors, how can they capitalize on the SBI program?

SMS: Of the companies involved, Boeing, DRS, L-3, and Elbit are all public companies actively involved in the homeland security market. Perot Systems and Lucent are also public. For those investors worried about the risk associated with putting money into an individual company, they should consider a product that offers diversified exposure to a number of companies in the sector. Powershares Aerospace & Defense Portfolio ETF, of which the SPADE is the underlying Index, is one example. Trading under the ticker of ‘PPA’ it gives investors a stake in more than 50 companies operating in defense and homeland security including Boeing, DRS, and L-3. Of course, before investing in any product, investors should review the prospectus, as not every investment is appropriate for every investor.

HDS: Once again, thank you for taking the time to discuss the homeland security market.

SMS: You’re most welcome.

HDS: If you are interested in getting more information about the SPADE Defense Index, please visit www.spadeindex.com. Investors should note that the exchange traded fund trades under the symbol ‘PPA’. Historical data for the SPADE Defense Index can be found using the index symbol ‘DXS’.

Disclaimers: The information presented in this interview is for informational purposes and should not represent a solicitation or an offer to purchase an investment product. SPADE and the SPADE Defense Index are registered trademarks of the ISBC. Powershares is a registered trademark of Powershares Capital Management.