The burgeoning military and intelligence alliance between the countries is causing growing concern in Iran, Azerbaijan's southern neighbor, and in nearby longtime rival Armenia.
The Israeli Aerostar and Orbiter 2M UAVs are being manufactured by Baku's Azad Systems Co., a joint venture between Azerbaijan's Defense Ministry and Aeronautics Defense Systems of Israel.
That's the country's third largest UAV manufacturer after Israel Aerospace Industries and Elbit Systems.
Around 70 percent of the components are produced in Israel, the rest in Azerbaijan.
Sixty of the drones are to be delivered to Azerbaijan's armed forces by the end of the year, primarily for intelligence, surveillance and reconnaissance missions.
Azerbaijan's military already operates Elbit Systems' Hermes 450 and IAI's Searcher reconnaissance drones, as well as some of Aeronautics Defense Systems' Aerostar and Orbiter craft.
Azerbaijan Minister of Defense Industry Yavar Jamalov told the Azerbaijan Press Agency that Baku is considering the production of missile-armed UAVs within the next two years, a development guaranteed to deepen Iranian and Armenian concerns.
The UAV deal with Azerbaijan allows Israeli manufacturers to pick up some of the slack that appeared when Israel's strategic military alliance with Turkey collapsed in 2010.
APA reported that Aeronautics Defense Systems beat out several Turkish defense firms, including TAI, Baykar Makina and Global Teknik, for the UAV venture set up in March.
Azerbaijan, which lies in the energy-rich Caspian Basin, has oil reserves of more than 1.2 billion barrels as well as 4.4 trillion cubic feet of natural gas. It is one of Israel's largest suppliers of crude oil.
Last Sunday, Israel's air force marked the 40th anniversary of the formation of its first UAV unit, Squadron 200 at the Palmachim Air Base on the Mediterranean coast south of Tel Aviv from where IAI satellites are launched.
The squadron was equipped with a drone named the Scout, built by what was then Israel Aircraft Industries, and became operational in October 1981. The Scout made its combat debut in the June 1982 Israeli invasion of Lebanon.
That campaign evolved into a counter-terrorism conflict that has dragged on to this day, even after Israeli withdrew from its last foothold in south Lebanon in May 2000.
In the years since the Scout took to the skies, but particularly after 9/11, Israel has become one of the world's leading UAV manufacturers, second only to the United States.
The Israeli Defense Ministry's defense export and defense cooperation arm, known as SIBAT, says Israel's export of counter-terrorism systems, including UAVs, has risen from $2 billion a year 10 years ago to nearly $7 billion.
Defense experts expect the export of counter-terrorism systems to increase.
"The threats aren't getting any smaller," SIBAT Deputy Director Itamar Graff told Bamahane, the armed forces' magazine.
"We constantly cope with terrorist threats …The world's moving in the direction of dealing with terrorist threats.
"On issues such as home front protection, shore security and missile defense, people from around the world come to learn from us," Graff said.
"We're dealing with a variety of possible threats and we'll continue to be a dominant and significant factor in the world."
The Scout was retired in 2004. It was replaced by, among others, IAI's Searcher, which carried advanced navigation, communication and sensor systems and is in service with 10 countries.
IAI has since developed the long-endurance, 1-ton Heron that can operate at altitudes of 30,000 feet and can loiter over targets for 24 hours.
The Heron Turbo Prop, known as the Eitan, introduced into military service with Squadron 210 in February 2010, is the air force's largest and most sophisticated unmanned aerial system.
Its takeoff weight is 5 tons and can carry payloads of 2,200 pounds. It has a wingspan of 84 feet, about the same as a Boeing 737. It can stay airborne for 24 hours and has a range of around 650 miles.