AXON ENTERPRISE, INC. - Annual Report: 2007 (Form 10-K)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to

TASER International, Inc.

Delaware		86-0741227
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
17800 N. 85th St.
Scottsdale, AZ		85255
(Address of principal executive offices)		(Zip Code)

(480) 991-0797
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.00001 par value per share (Nasdaq Global Market)
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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):

Large accelerated filer þ		Accelerated Filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

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

The aggregate market value of the Common Stock held by non-affiliates of the issuer, based on the last sales price of the issuer’s common stock on June 29, 2007, which is the last business day of the registrant’s most recently completed second fiscal quarter, as reported by NASDAQ, was $807,452,277. The number of shares of the registrants’ common stock outstanding as of February 25, 2008, was 63,321,312.

Parts of registrant’s definitive proxy statement to be prepared and filed with the Securities and Exchange Commission not later than 120 days after December 31, 2007 are incorporated by reference into Part III of this Form 10-K.

 

 

TASER INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
Year Ended December 31, 2007
TABLE OF CONTENTS

				Page
		PART I
Item 1.		Business			3
Item 1A.		Risk Factors			12
Item 1B.		Unresolved Staff Comments			17
Item 2.		Properties			17
Item 3.		Legal Proceedings			17
Item 4.		Submission of Matters to a Vote of Security Holders			17
		PART II
Item 5.		Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities			18
Item 6.		Selected Financial Data			20
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			31
Item 8.		Financial Statements and Supplementary Data			32
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclousre			56
Item 9A.		Controls and Procedures			56
Item 9B.		Other Information			57
		PART III
Item 10.		Directors, Executive Officers and Corporate Governance			58
Item 11.		Executive Compensation			58
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			58
Item 13.		Certain Relationships and Related Transactions and Director Independence			59
Item 14.		Principal Accounting Fees and Services			59
		PART IV
Item 15.		Exhibits and Financial Statement Schedules			59
		Signatures			61
EX-10.16
EX-23.1
EX-31.1
EX-31.2
EX-32

PART I

     The statements contained in this report that are not historical are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions or strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things:

	(1)		expected revenue and earnings growth;
	(2)		estimates regarding the size of our target markets;
	(3)		our ability to successfully penetrate the law enforcement market;
	(4)		growth expectations for existing accounts;
	(5)		our ability to expand product sales to the private security, military, corrections, airline, and private citizen self-defense markets;
	(6)		fluctuations in gross margins;
	(7)		expansion of product capability;
	(8)		new product introductions;
	(9)		product safety;
	(10)		our target business model;
	(11)		the automation of our production process;
	(12)		our insulation from competition;
	(13)		our focus on future development initiatives;
	(14)		our expectation that research and development costs will continue to increase; and
	(15)		our litigation strategy and the importance of recent favorable verdicts.

     These statements are qualified by important factors that could cause our actual results to differ materially from those reflected by the forward-looking statements. Such factors include but are not limited to: (1) market acceptance of our products; (2) our ability to establish and expand our direct and indirect distribution channels; (3) our ability to attract and retain the endorsement of key opinion-leaders in the law enforcement community; (4) the level of product technology and price competition for our products; (5) the degree and rate of growth of the markets in which we compete and the accompanying demand for our products; (6) risks associated with rapid technological change and new product introductions; (7) challenges to our intellectual property; (8) competition; (9) litigation including lawsuits alleging product related injuries and death; (10) negative media publicity and reporting concerning our products and their uses; (11) TASER device tests and reports; (12) product quality; (13) implementation of manufacturing automation; (14) potential fluctuations in our quarterly operating results; (15) financial and budgetary constraints of current and prospective customers; (16) order delays; (17) dependence upon sole and limited source suppliers; (18) fluctuations in component pricing; (19) government regulations and inquiries; (20) dependence upon key employees and our ability to retain employees; (21) execution and implementation risks of new technology; (22) aligning manufacturing production with sales demand; (23) medical and safety studies; (24) the outcome of any current or future tax audit of us, and (25) other factors detailed in our filings with the Securities and Exchange Commission, including, without limitation, those factors detailed in ITEM 1A. of this annual report entitled “Risk Factors.” The risks included in the foregoing list are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. New risk factors emerge from time to time, and it is not possible for management to predict all such factors, nor can it assess the impact of all such risk factors or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to update or revise any forward looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to expectations over time.

     We own the following trademarks: TASER^® and AIR TASER^tm, TASER-Wave^tm, T-Wave^tm, AUTO TASER^tm, ADVANCED TASER^®, Shaped Pulse Technology^tm, X-Rail^tm, TASER M18^tm, TASER M26^tm, TASER X26^tm, TASER Cam^tm, TASER XREP^tm, TASER C2^tm, TASER X26c^tm and AFID^tm. Each other trademark, trade name or service mark appearing in this report belongs to its respective holder.

Item 1. Business

Overview

     TASER International, Inc.’s (the “Company” or “TASER” or “we” or “our”) mission is to protect life by providing safer, more effective force options and technologies. We are a market leader in the development and manufacture of advanced Electronic Control Devices (“ECDs”) designed for use in the law enforcement, military, corrections, private security and personal defense markets. Since our founding in 1993, we have remained committed to providing solutions to violent confrontation by developing devices with proprietary technology to incapacitate dangerous, combative, or high-risk subjects who pose a risk to law enforcement officers, innocent citizens, or themselves in a manner that is generally recognized as a safer alternative to other uses of force.

     To that end, we have focused our efforts on the continuous development of our technology for both new and existing products as well as providing industry leading training services. We have done this while building distribution channels for marketing our products and services to law enforcement agencies and consumers, primarily in North America with increasing emphasis placed on expanding these programs in international markets.

Products

Electronic Control Devices

Our Technology

     We make ECDs for two main types of market segments; the law enforcement, military, corrections and professional security markets and the consumer market. Our ECDs use propelled wires or direct contact to conduct energy to affect the sensory and motor functions of the nervous system. Our products use a replaceable cartridge containing compressed nitrogen to deploy two small probes that are attached to the ECD by insulated conductive wires with lengths ranging from 15 to 35 feet. Our ECDs transmit electrical pulses along the wires and into the body affecting the sensory and motor functions of the peripheral nervous system. The energy can penetrate up to two cumulative inches of clothing, or one inch per probe. The initial effect lasts 5 seconds for our law enforcement, military and corrections products and up to thirty seconds for our consumer market models. This effect can be extended, if necessary, by the operator.

Law Enforcement, Military, Corrections and Professional Security Products

     For the law enforcement, military, corrections and professional security markets we manufacture two product lines. Our primary product is the TASER X26 with Shaped Pulse Technology which we introduced in 2003. Shaped Pulse technology is a refined energy pulse that concentrates a small portion of energy to first penetrate any barriers, while the majority of the energy flows into the target freely after the barrier has been penetrated. The TASER X26 product line consists of the TASER X26, various cartridges (described below), a proprietary battery system, a digital power magazine, download software and equipment, extended warranties, and a number of holstering options and accessories. The TASER X26 product line (excluding individual cartridge sales) accounted for approximately $61.0 million, or 60% of our net sales, for the year ended December 31, 2007 and for approximately $44.4 million, or 66% of our net sales, for the year ended December 31, 2006.

     Our second law enforcement product line is the ADVANCED TASER M26 which we originally launched in November 1999. The ADVANCED TASER M26 product line consists of the ADVANCED TASER M26, various cartridges (described below), rechargeable batteries, a battery charging system, data download software and equipment, extended warranties, and a number of holstering options and accessories. The ADVANCED TASER M26 product line (excluding individual cartridge sales) accounted for approximately $1.3 million, or approximately 1% of our net sales, for the year ended December 31, 2007 and for approximately $1.4 million, or 2% of our net sales, for the year ended December 31, 2006.

Consumer Products

     For the personal defense market we introduced our new TASER C2 consumer product in 2007. This new device is a compact system that provides the same proven Neuro-Muscular Incapacitation (NMI) effectiveness as our market leading TASER X26 but in a less intimidating, more compact form and at a price point more attractive to private citizens. Our sale and marketing of the TASER C2 promotes responsible ownership and aims to prevent misuse by keeping the device inactive until the owner has successfully completed a background check either online or via a toll-free telephone number.

     We also manufacture the TASER X26C, ADVANCED TASER M18 and ADVANCED TASER M18L, devices for use by consumers. The X26C was developed in conjunction with the law enforcement TASER X26 version; however, its effect lasts longer allowing the owner more time to escape danger. The ADVANCED TASER M18 and ADVANCED TASER M18L are designed after the law enforcement ADVANCED TASER M26 version; however, the electrical pulse rate is lower. The ADVANCED TASER M18 and ADVANCED TASER M18L are identical except that the ADVANCED TASER M18L has an integrated laser-aiming device. These three product lines consist of the units themselves, air cartridges, batteries and digital power magazines, and a number of holstering options and accessories.

     The consumer products line accounted for approximately $5.7 million, or 5.7% of our net sales, for the year ended December 31, 2007 and for approximately $2.0 million, or 3.0% for the year ended December 31, 2006.

Cartridges and Accessories

     We manufacture six cartridge types; a 15’ cartridge, a 21’ cartridge, a 25’ XP cartridge, a 35’ cartridge, a 21’ training cartridge and a 15’ cartridge for the C2. The 15’ cartridge is capable of firing a distance of 15’ and is sold primarily to the law enforcement market for training and the consumer market for use in the ADVANCED TASER M18, ADVANCED TASER M18L, and TASER X26C devices. The C2 15’ cartridge is designed specifically for use in the TASER C2. The 21’, 25’ XP, 35’, and 21’ training cartridge are sold only to the law enforcement, military, and corrections market. The 25’ XP cartridge is different from the 21’ cartridge in that it has a longer range and its probes are longer and heavier, which allows it to penetrate a thicker clothing barrier. The training cartridge contains non-conductive wiring, which allows law enforcement, military, and corrections trainers to use the cartridge during training role-playing scenarios. Individual cartridge sales accounted for approximately $25.3 million, or approximately 25% of our net sales, for the year ended December 31, 2007 and for approximately $15.3 million, or 23% of our net sales, for the year ended December 31, 2006.

     All of our cartridges, with the exception of the training cartridge, contain numerous colored, confetti-like tags bearing the cartridge’s serial number. These tags, referred to as Anti-Felon Identification tags, or AFIDs, are scattered when one of our cartridges is fired. We require sellers of our products to participate in the AFID program by registering buyers of our cartridges. In many cases, we can use AFIDs to identify the registered owner of cartridges fired.

     In 2006, we launched an accessory to the X26 called the TASER Cam. The TASER Cam is a video recording device that captures both video and audio of potential and actual TASER use incidents. The device captures video and audio before, during and after a TASER deployment, which provides law enforcement with a greater level of accountability to support their use of TASER devices against a resistant subject. The TASER Cam is capable of recording in zero light conditions through the use of an infrared illuminator. A non audio version of the device is also available for agencies operating in states where legislation prohibits the use of audio recordings.

     In 2004, we introduced an accessory to the X26 that allows the X26 electronic control device to be attached to military and law enforcement rifles via a Picatinny rail giving the user lethal and non-lethal options on the same weapon.

Product Warranties

     We offer a one year limited warranty on all of the TASER X26 and ADVANCED TASER devices. After the warranty expires, if the device fails to operate properly for any reason, we will replace the TASER X26 at a discounted price depending on when the product was placed in service and replace the ADVANCED TASER device for a fee of $75. These fees are intended to cover the handling and repair costs and include a profit. We believe this policy is attractive to our law enforcement, military, and corrections agency customers. In particular, it avoids disputes regarding the source or cause of any defect. Extended warranties which provide additional coverage beyond the limited warranty, ranging from one to four years are also offered for specified fees.

     We offer a 90 day limited warranty on the TASER C2 and the X26C devices. Our TASER C2 and the X26C are designed to disable an attacker for up to 30 seconds. We encourage private citizens to leave the units and flee after firing them. As a result, we also provide free replacement units to private citizens who follow this suggested procedure. To qualify for the replacement unit, users must file a police report that describes the incident and confirms the use of the TASER C2 or the X26C.

Markets

Law Enforcement and Corrections

     Federal, state and local law enforcement agencies in the United States and overseas currently represent the primary target market for our TASER X26 and ADVANCED TASER device products. In the law enforcement market, over 12,400 law enforcement agencies in 44 countries have made initial purchases of our TASER brand devices for testing or deployment. In addition, approximately 4,300 police departments have purchased or are in the process of purchasing one TASER device to issue to each of their on duty patrol officers. In 2007, additional federal agencies began or increased deployment of TASER devices. The U.S. Marshal Agency approved the TASER X26 for use and decentralized procurement, which made it significantly easier for the regional U.S. Marshal Offices to make their own purchases. The National Park Service made it mandatory to have TASER devices in 2007 and 145 Park Service locations are now carrying TASER X26 devices.

     In 2007 we increased our focus on educating correctional facility personnel in the benefits of using TASER brand products. We hired a sales manager to develop new relationships and cultivate existing relationships within the Corrections community. We developed training programs and command staff demonstrations specific to the Corrections market. We attended several Corrections tradeshows and conferences to expand our reach into the market. As a result of these efforts we received commitments from several state correctional agencies to start pilot tests. We currently have 162 correctional agencies deploying or testing our products. We continue to have TASER devices deployed in county correctional facilities such as those operated by the Los Angeles Custody Division and Maricopa County, Arizona Sheriff. State correctional agencies deploying TASER devices include Arizona, Colorado, Kentucky, Nevada, Oregon, Utah and Wisconsin. We hope to obtain many new correctional facility sales from our sales and marketing efforts in this market segment in the coming years.

Military Forces, both United States and Foreign Allies

     During 2007, TASER devices continued to be deployed in support of key strategic military operations in locations around the world. In total, we have shipped military users approximately 13,000 TASER devices through the end of 2007. In 2007, we continued our focus initiative on supporting our military customers. We expanded our sales efforts by hiring the former head of the Military Joint Non Lethal Weapons Directorate as our Vice President of Government and Military Programs. Additionally, we met quarterly with our Senior Executive Advisory Group (SEAG) comprised of a team of professionals with extensive military, homeland defense and law enforcement experience with the purpose of advising on business models in support of military users. The business group (Federal Programs) has concentrated on supporting military and other federal use of our existing products as well as developing new technology through contracted support. In 2007, we received our first long term Indefinite Quantity, Indefinite Delivery, (IDIQ) Military contract to provide up to $22.8 million of product over a five year period through our GSA Distributor, Aardvark Tactical, Inc.

Private Security

     We are still in the early stages of pursuing additional opportunities for sales of the TASER devices in private security markets, and have made only limited sales to date. Private security guards represent a broad range of individuals, including bodyguards, commercial and government building security guards, commercial money carrier employees and many others. In 2007, we began to amplify our focus of pursuing additional possibilities for sales of the TASER devices in private security markets. We hired a sales manager to develop new relationships and nurture existing relationships within the private security sector. Similar to our other emerging markets, we developed training programs and command staff demonstrations specific to the private security market. We met with several large corporate and private patrol security companies to discover the unique needs of security markets. We also attended several private security tradeshows and conferences to expand our reach into the market. As of December 31, 2007 we currently have 77 private security agencies deploying or testing our products. During 2007, we secured a large casino security account and made inroads in the aerospace security industry that we hope will lead to future orders.

Private Citizen / Personal Protection

     In July 2007, we introduced the TASER C2 personal protector, specifically designed for the private citizen market. This new consumer product contributed approximately 4% of our total net sales in 2007. We believe private citizen sales will continue to grow in 2008 as a result of various distribution relationships and marketing strategies we have put in place to promote the TASER C2 to the consumer market.

Sales and Marketing

     Law enforcement, military, corrections and security agencies represent our primary target markets. In each of these markets, the decision to purchase TASER devices is normally made by a group of people, including the agency head, the agency’s training staff, and weapons experts. Depending on the size and cost of the device deployment and local procurement rules and customs, the decision may involve political decision-makers such as city council members or the federal government. The decision-making process can take as little as a few weeks or as long as several years. Although we have focused on three primary markets, we have been able to expand our customer base to thousands of end users within these markets. We currently sell our products to over 12,400 law enforcement agencies.

     Since the introduction of the ADVANCED TASER device in 1999, we have used several types of media to communicate the benefits of acquiring and deploying our products. These campaigns have included the development of personalized CD/DVD packages geared toward law enforcement leaders in the community, advertisements in law enforcement publications, and the use of more than 1,600 training classes conducted around the world. We also target key regional and national law enforcement trade shows where we can demonstrate the TASER devices to leading departments. In 2007, we attended and exhibited at over 100 regional and national law enforcement trade shows. In 2007, we held our eighth annual U.S. Tactical Conference for the trained master instructors, and law enforcement training officers. In 2006,we conducted our fifth and largest European Tactical Conference to reach customers in more than 20 countries, including the United Kingdom, Germany, France, Spain, Austria, Switzerland, Czech Republic, and Finland, who have either expressed an interest in, or who are already in the process of testing or deploying TASER devices. The continued focus of these conferences was to train the officers in the use of the TASER X26.

     We plan to continue investment in the area of law enforcement trade shows and conferences in 2008, as it provides us the ability to market our products to our target audience. We believe these types of activities accelerate penetration of our TASER product lines in each market, which should lead to increased visibility in both the private security and private citizen markets and reinforce the value of non-lethal devices for self-defense.

United States Distribution

     With the exception of several accounts to which we sell directly, the vast majority of our law enforcement agency sales in the Unites States are made through our network of 28 law enforcement distributors. In addition, we have one military and government contracting distributor. These distributors were selected based upon their reputation within their respective industries, their contacts, and their distribution network. Our regional managers work closely with the distributors in their territory to inform and educate the law enforcement communities. We continue to monitor our law enforcement distributors closely to help ensure that our service standards are achieved. We also reserve the right to take any large agency order directly to secure the agency’s account balance with us.

     Sales in the private citizen market are made through our web site sales and through 20 commercial distributors. As of December 31, 2007, distributors have signed dealer agreements with approximately 2000 dealers who are purchasing and reselling the TASER C2 to citizens in the United States. We are also selling to 3 sporting goods retail chains that sell C2 units in 118 of their sporting goods retail stores. In 2007, we implemented a variety of marketing initiatives to support the launch of the TASER C2 personal protector. We hired a professional advertising and public relations company to assist us in media and press events, and editorial placements and attended 12 tradeshows specifically to target the consumer market. We held 8 press conferences and media events in targeted large cities to further educate the public of the availability for citizens to purchase TASER C2 products for private use. In addition we deployed our TASER Command Vehicle (TCV) to travel across the United States performing product demonstrations at dealer events such as retailer grand openings and were a sponsor in the Rolex Grand AM Race Series, attending 14 races to promote the TASER C2. We also contracted a third party company call center to assist with the large volume of citizen calls generated from our advertisements, trade shows and press/media conferences. We continued to sell all other TASER citizen devices and products through web sales and our established commercial distributors.

International Distribution

     We market and distribute our products to foreign markets through a network of distributors. For geographical and cultural reasons, our distributors usually have a territory defined by their country’s borders. These distributors market both our law enforcement, military, and corrections products, and our consumer products where allowed by law.

     Our distributors work with local police, military, and corrections agencies in the same manner as our domestic market distributors. For example, they perform demonstrations, attend industry tradeshows, maintain country specific web sites, engage in print advertising, and arrange training classes.

     In 2007, we concentrated our international marketing on the countries that were furthest along in the testing and purchasing process. These countries included the United Kingdom, France, Australia, Singapore, and South Korea. In 2008, we are planning to continue our focus on territories that are moving in the direction of non-lethal weaponry. We also plan to continue growing our international presence by expanding our marketing efforts to a larger number of countries.

     We shipped products to approximately 50 countries during fiscal 2007 compared to approximately 35 in 2006. As a percentage of total sales, sales outside the U.S. increased to approximately 15% in 2007 from 14% in 2006 and 13% in 2005. Reference is made to Note 1(o) in the accompanying financial statements in Part II, Item 8 of this Form 10-K for further information concerning our sales by geographic region.

Training Programs

     Most law enforcement, military, security and corrections agencies will not purchase new weapons until a training program is in place to instruct and certify personnel in their proper use. We offer a 16 hour class that certifies law enforcement, military, corrections and security agency trainers as instructors in the use of the TASER electronic control devices. As of December 31, 2007, approximately 33,000 law enforcement officers around the world have been trained and certified as instructors in the proper use of TASER brand devices. This includes approximately 29,335 officers in the United States and 3,690 in other countries.

     Currently, 650 of our certified instructors have undergone further training and became certified as master instructors. We authorize these individuals to train and certify other law enforcement and corrections agency trainers as TASER instructors, not just end-users within their own organization. The master instructors are independent professional trainers, serve as local area TASER experts, and assist in conducting TASER demonstrations at other police departments within their regions. In addition, 119 of our certified instructors have completed the same training and were certified as advanced instructors. Advanced instructors are authorized to certify others within their own agency as TASER instructors. Military personnel are trained by our Chief Instructor. Approximately 170 of our master instructors have agreed to conduct TASER device training classes on a regular basis. We provide logistical support for the training classes. We charge a fee of $275 for each training attendee. We pay master instructors a per-session training fee for each session they conduct. We conducted 381 training courses in 2007 and, as of December 31, 2007, we have conducted a cumulative 2,025 training courses during which we have trained more than 33,000 individuals in the use of TASER products. We have also designed a training course for private citizen customers. Customers who purchase an X26C device receive a certificate good for a one hour, one-on-one training session with an X26C certified instructor. We have 843 instructors certified to give the X26C training.

     In order to coordinate the growing demands of our training programs we created a Training Advisory Board. This board annually reviews the qualifications of the master instructors, and provides retraining or certification as required. In addition, the Training Advisory Board oversees the trainers and curriculum to ensure that new information is properly communicated and implemented. The Training Advisory Board also gives input into new product development. We also created the position of Senior Master Instructor. Eight experienced Master Instructors were promoted to this position based on their exemplary performance as Master Instructors. Their primary duties are to perform quality control checks on Master Instructors during an instructor course and to help instruct at the Master Instructor School. Additionally, we created the position of Staff Instructor who is a full time employee responsible for coordinating course delivery and development.

Manufacturing

     We perform light manufacturing and final assembly operations at our headquarters in Scottsdale, Arizona and we own substantially all of the equipment required to manufacture and assemble our finished products, as well as all critical injection molds, schematics, test equipment and prototypes utilized by our suppliers in the production of required raw materials and sub-assemblies. In late 2007, due to increased demand for our TASER products, we added production equipment and a second shift to our operations. This shift is not fully staffed, but utilized to boost capacity for existing products, as well as augment production of the newly released TASER C2. In the fourth quarter of 2007, the combined shifts produced more than 140,000 cartridges and 23,000 TASERs per month. We have since dropped our overflow production on the second shift back to forecasted levels for 2008 as our throughput has improved. However, this shift, as well as the addition of two additional shifts can be added within our facility should we experience burst capacity resulting from larger foreign orders.

     In 2004, we began investing in automated equipment for the improvement of product quality, and reduction in manufacturing costs. We have since implemented a number of equipment initiatives including the purchase and integration of robotic equipment, computerized laboratory and medical testing equipment, machining and tooling equipment, as well as sophisticated modeling equipment for our Research and Development Department. In 2007, we also contracted with a full scale automation facility to design and manufacture custom equipment which will be used to replace current hand assemblies on our Manufacturing floor. In total, we expect this project to cost the Company approximately $8.4 million dollars, but will significantly reduce our direct labor and improve our product consistency.

     Our supplier base has and will continue to be a focus for us. Currently, we purchase finished circuit boards and injection-molded plastic components from suppliers located in the United States. Although we currently obtain plastic components from a single supplier, we own the injection molded component tooling used in their production, and are developing a plan for redundant tooling to be built and available to run in other facilities. We also purchase small, machined parts from an overseas supplier, custom cartridge assemblies from a proprietary supplier in the United States, and electronic components from a variety of foreign and domestic distributors. We believe there are readily available alternative suppliers in most cases who can consistently meet our needs for these components. We acquire most of our components and sub assembly components on a purchase order basis and do not have many long-term contracts with suppliers. We believe that our relations with our supplier base are good.

Competition

Law Enforcement and Corrections Market

     The primary competitive factors in the law enforcement and corrections market include a weapon’s accuracy, effectiveness, safety, cost and ease of use. During 2004, two competitors announced that they planned to introduce products that directly compete with the products manufactured and sold by us. During 2007, a company introduced a new device to compete with the TASER X26. To date, we do not know of any significant sales of any competing electronic control device products. We believe that our strong relationship with customers, our large installed base of products, and the significant amount of medical and safety testing already performed on our products will provide us with a competitive advantage over these new competitors.

     We also believe the ADVANCED TASER device and TASER X26 device also compete indirectly with a variety of other non-lethal alternatives. These alternatives include, but are not limited to pepper spray and impact weapons sold by companies such as Armor Holdings, Inc., and Pepperball. We believe our TASER brand device’s advanced technology; versatility, effectiveness, and low injury rate enable it to compete effectively against other non-lethal alternatives.

Military Market

     In the military markets, both in the United States and abroad, a wide variety of weapon systems are utilized to accomplish the mission at hand. Conducted energy devices have gained increased acceptance as a result of the policing role of military personnel in the conflicts in both Iraq and Afghanistan. There has also been an increased awareness of the use of non-lethal weapons to preserve human intelligence. TASER devices give our armed forces one means to capture or immobilize targets without using lethal force. We are the only supplier providing electronic control devices to these military agencies. There is indirect competition from pepper spray and impact weapons sold by companies such as Armor Holdings, Inc., and Pepperball.

Private Citizen Market

     Electronic control devices have gained limited acceptance in the private citizen market for non-lethal weapons. These weapons compete with other non-lethal weapons such as batons, clubs, and chemical sprays. The primary competitive factors in the private citizen market include a weapon’s cost, effectiveness, safety and ease of use. The widespread adoption of our TASER devices by prominent law enforcement agencies may help us to further penetrate the private citizen market.

Regulation

United States Regulation

     The TASER X26, ADVANCED TASER, TASER C2 and AIR TASER devices, as well as the cartridges used by these devices, are subject to identical regulations. None of our devices are considered to be a “firearm” by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives. Therefore, no Federal firearms-related regulations apply to the sale and distribution of our devices within the United States. In the 1980’s however, many states introduced regulations restricting the sale and use of stun guns, inexpensive hand-held shock devices. We believe existing stun gun regulations also apply to our devices.

     In 2002 through 2004, we worked with several law enforcement agencies, government agencies and distributors to overturn prior legislation preventing the sale of TASER devices to law enforcement agencies in certain regions of the U.S. These combined efforts were successful in changing the legislation in the states of Hawaii, Massachusetts and Michigan. We considered this to be an important change in regulations. For example, prior to the amendment to the Michigan Penal Code, the possession of a TASER or electronic weapon of any kind in Michigan could result in a felony conviction. Currently, New Jersey is the only remaining state in the U.S. in which TASER technology is prohibited for law enforcement use.

     In many cases, the law enforcement and corrections market is subject to different regulations than the private citizen market. Where different regulations exist, we assume the regulations affecting the private citizen market also apply to the private security markets except as the applicable regulations otherwise specifically provide.

     Based on a review of current regulations, we have determined the following states regulate the sale and use of our device systems:

		Law Enforcement
State		Use		Private citizen Use
Connecticut		Legal		Legal, subject to restrictions
District of Columbia		Legal		Prohibited
Florida		Legal		Legal, subject to restrictions
Hawaii		Legal		Prohibited
Illinois		Legal		Legal, subject to restrictions
Indiana		Legal		Legal, subject to restrictions
Massachusetts		Legal		Prohibited
Michigan		Legal		Prohibited
New Jersey		Prohibited		Prohibited
New York		Legal		Prohibited
North Carolina		Legal		Legal, subject to restrictions
North Dakota		Legal		Legal, subject to restrictions
Rhode Island		Legal		Prohibited
Washington		Legal		Legal, subject to restrictions
Wisconsin		Legal		Prohibited

United States Export Regulation

     Our devices are considered a crime control product by the U.S. Department of Commerce. Accordingly, the export of our devices is regulated under export administration regulations. As a result, we must obtain export licenses from the Department of Commerce for all shipments to foreign countries other than Canada. Most of our requests for export licenses have been granted, and the need to obtain these licenses has not caused a material delay in our shipments. The need to obtain licenses, however, has limited or impeded our ability to ship to certain foreign markets. Export regulations also prohibit the further shipment of our products from foreign markets in which we hold a valid export license to foreign markets in which we do not hold an export license for the products.

     In addition, in 2000, the Department of Commerce adopted regulations restricting the export of technology used in our devices. These regulations apply to both the technology incorporated in our device systems and in the processes used to produce them. The technology export regulations do not apply to production that takes place within the United States, but is applicable to all sub-assemblies and controlled items manufactured outside the United States.

Foreign Regulation

     Foreign regulations, which may affect our devices, are numerous and often unclear. We prefer to work with a distributor who is familiar with the applicable import regulations in each of our foreign markets. Experience with foreign distributors in the past indicates that restrictions may prohibit certain sales of our products in a number of countries. The vast majority of countries permit TASER devices to be sold and used by Law Enforcement. We rely on our distributors to inform us of those countries where the TASER device is prohibited or restricted.

     Previously, the United Kingdom was among the countries where TASER technologies were prohibited. However, in January 2003, the British Police announced that the national government would be backing a TASER pilot program for five police forces within the UK. This decision came after the completion of two years of testing by the Police Scientific Development Branch of the Home Office in England, during which the product was reviewed for operational effectiveness and medical safety. Following a detailed evaluation of a 12-month operational trial of the ADVANCED TASER device, which was carried out by the five police forces, the then Home Secretary David Blunkett agreed that firearms officers in forces nationwide could use the hand-held electrical device as of September 2004. Currently, all 43 police forces in England, Wales and Scotland deploy TASER technology within their firearms teams. During 2007, a further trial across 10 police forces was authorized where TASERs are being deployed by specially trained non-firearms officers. The protocol for deployment has also changed to allow officers to deploy a TASER in incidents involving serious violence that they consider cannot be contained by other means. Additionally, the Police Service of Northern Ireland has now deployed TASER to it’s Special Operations Branch — a highly trained firearms unit, for an initial trial period.

     There have now been almost 400 deployments in the United Kingdom, with many successful outcomes having been sustained as a result of TASER technology.

Intellectual Property

     We protect our intellectual property with U.S. and foreign patents and trademarks. Our patents and pending patent applications relate to technology used by us in connection with our products. We also rely on international treaties and organizations and foreign laws to protect our intellectual property. As of January 30, 2008, we hold 23 United States patents and 12 foreign patents and also have numerous patents and trademarks pending. Our patents expire at varying dates ranging between 2010 and 2025. Our earliest expiring United States patent generally covers projectile propellant devices having a container of compressed gas in place of gunpowder as a propellant. We use this technology in our cartridges. This patent expires in 2010. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as: the commercial significance of our operations and our competitors’ operations in particular countries and regions; our strategic technology or product directions in different countries; and the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions.

     Confidentiality agreements are used with employees, consultants and key suppliers to help ensure the confidentiality of our trade secrets.

     TASER has the exclusive rights to many internet domain names primarily including ‘taser.com’ and “taser.eu.”

Research and Development

     Our research and development initiatives are conducted in two separate categories. The first is internally funded research and development, and the second is research externally funded by customers having requirements for specific capabilities. Both categories focus on next generation technology, yet are differentiated by the anticipated breadth of market opportunity, the time to project completion and accounting treatment. Internally funded research has been primarily focused on improvements to existing TASER products, or the development of new applications for TASER technology that we believe generally will have broad market appeal. Externally funded work focuses on specific packaging or delivery requirements of existing TASER technology that is of high value to particular customers but may not be viable product solutions to other customers. These projects generally represent product developments which are long-term in nature and require outside resources, team member companies or expert consulting.

     Research and development initiatives include bio-medical research and electrical and mechanical engineering. We expect that future development projects will focus on extending the range, improving the functionality of our products and developing new delivery options.

     Our investment in internally funded research totaled approximately $4.4 million, $2.7 million and $1.6 million in 2007, 2006 and 2005, respectively. This allowed our R&D department to expand to 29 engineers, technicians and specialists at the end of 2007. Our investment in research and development staff and equipment continues to represent a significant increase from previous years and reflects our commitment to maintaining and extending our current technology. The return on that investment is intended to be realized over the long term, although new systems and technologies often have an immediate impact on our business.

     In 2007, the TASER C2 personal protector moved from development into full scale production and we began selling the device in the third quarter.

     Also in 2007, R&D was responsible for engineering many design changes to the TASER eXtended Range Electronic Projectile (XREP) that resulted in a more robust and manufactureable product that meets the requirements of our customers. In conjunction with the development of the XREP, we formed a strategic alliance with O.F. Mossberg & Sons, Inc. and we began co-development of the TASER X12 Dedicated Less-lethal Shotgun (LLS) that has been designed specifically for the XREP projectile. The X12 LLS is a TASER™ Yellow colored Mossberg 12-gauge shotgun that incorporates patent-pending features such as the Radial Ammunition Key System which prevents the shotgun from firing any lethal ammunition and allows it to fire only the Radial Ammunition Key Rounds. Pending the results of field trials to be conducted in the second quarter of 2008, we currently anticipate that we will be producing and selling the XREP cartridge along with the TASER X12 LLS by the fourth quarter of 2008.

     Late in 2006, we announced a new family of area-denial technology based on improved NMI delivery technology coupled with varying levels of advanced sensing, awareness, and networking capabilities called the TASER Remote Area Denial (T-RAD). With positive input from military as well as law enforcement customers, we committed to continued development of the first generation of T-RAD devices called Shockwave. Initial engineering prototypes of Shockwave were developed and tested in 2007. Advanced prototypes should be made available for customer test and evaluation in the second quarter of 2008. With favorable customer feedback, TASER intends to have production units available for sale late in 2008.

     Additionally, TASER entered into a strategic agreement with the iRobot Corporation in 2007. Through this agreement, both companies are working collaboratively to integrate TASER technologies onto iRobot robotic platforms providing an expanded remote capability to our military and law enforcement customers.

     As we progress with projects underway, we expect that our research and development expenditures will increase. This is due to the addition of personnel in our research and development department and the costs associated with conducting and preparing biomedical studies.

Employees

     As of December 31, 2007, we had 339 full-time employees and 179 temporary employees of which 165 are employed in direct manufacturing. The breakdown of our full time employees by department is as follows: 181 direct manufacturing employees and 158 administrative and manufacturing support employees. Of the 158 administrative and manufacturing support employees; 45 were involved in sales, marketing, communication and training; 42 were employed in research, development and engineering; 20 were employed in administrative functions inclusive of executive management, legal, finance and accounting; 10 were employed in information systems technologies; 18 were employed in quality control and 23 were employed in manufacturing support functions.

     Our employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage. We believe that our relations with our employees are good.

Available Information

     We were incorporated in Arizona in September 1993 as ICER Corporation. We changed our name to AIR TASER, Inc. in December 1993 and to TASER International, Incorporated in April 1998. In January 2001, we reincorporated in Delaware as TASER International, Inc. Our website is located at www.TASER.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on our website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. Other information that is not part of this Annual Report on Form 10-K can be accessed through our website at www.TASER.com .

Item 1A. Risk Factors

Because of the following factors, as well as other variables affecting our operating results, our past financial performance may not be a reliable indicator of our future performance and historical trends should not be used to anticipate our results or trends in future periods.

We are materially dependent on acceptance of our products by the law enforcement and corrections market, and if law enforcement and corrections agencies do not purchase our products, our revenues will be adversely affected and we may not be able to expand into other markets.

     A substantial number of law enforcement and corrections agencies may not purchase our electronic control devices. In addition, if our products are not widely accepted by the law enforcement and corrections market, we may not be able to expand sales of our products into other markets such as the military market. Law enforcement and corrections agencies may be influenced by claims or perceptions that conducted energy weapons such as our products are unsafe or may be used in an abusive manner. In addition, earlier generation conducted energy devices may have been perceived as ineffective. Sales of our products to these agencies may also be delayed or limited by these claims or perceptions.

We substantially depend on sales of our TASER X26 products, and if these products are not widely accepted, our growth prospects will be diminished.

     In the years ended December 31, 2007, 2006 and 2005, we derived our revenues predominantly from sales of the TASER X26 brand devices and related cartridges, and expect to depend on sales of these products for the foreseeable future. A decrease in the prices of or demand for these products, or their failure to achieve broad market acceptance, would significantly harm our growth prospects, operating results and financial condition.

If we are unable to manage the growth in our business, our prospects may be limited and our future profitability may be adversely affected.

     We intend to expand our sales and marketing programs and our manufacturing capacity as needed to meet future demand. Any significant expansion may strain our managerial, financial and other resources. If we are unable to manage our growth, our business, operating results and financial condition could be adversely affected. We will need to continually improve our operations, financial and other internal systems to manage our growth effectively, and any failure to do so may lead to inefficiencies and redundancies, and result in reduced growth prospects and profitability.

To the extent demand for our products increases, our future success will be dependent upon our ability to ramp manufacturing production capacity which will be accomplished by the implementation of customized manufacturing automation equipment.

     We experienced significant revenue growth in 2007 compared to 2006. To the extent demand for our products increases significantly in future periods, one of our key challenges will be to ramp our production capacity to meet sales demand, while maintaining product quality. Our primary strategies to accomplish this include increasing the physical size of our assembly facilities, the hiring of additional production staff, and the implementation of customized automation equipment. We have limited previous experience in implementing automation equipment, and the investments made on this equipment may not yield the anticipated labor and material efficiencies. Our inability to meet any future increase in sales demand or effectively manage our expansion could have a material adverse affect on our revenues, financial results and financial condition.

We may face personal injury, wrongful death and other liability claims that harm our reputation and adversely affect our sales and financial condition.

     Our products are often used in aggressive confrontations that may result in serious, permanent bodily injury or death to those involved. Our products may be associated with these injuries. A person injured in a confrontation or otherwise in connection with the use of our products may bring legal action against us to recover damages on the basis of theories including personal injury, wrongful death, negligent design, defective product or inadequate warning. We are currently subject to a number of such lawsuits. We may also be subject to lawsuits involving allegations of misuse of our products. If successful, personal injury, misuse and other claims could have a material adverse effect on our operating results and financial condition. Although we carry product liability insurance, we do incur large legal expenses within our self insured retention in defending these lawsuits and significant litigation could also result in a diversion of management’s attention and resources, negative publicity and a potential award of monetary damages in excess of our insurance coverage. The outcome of any litigation is inherently uncertain and there can be no assurance that our existing or any future litigation will not have a material adverse effect on our revenues, our financial condition or financial results.

Pending litigation may subject us to significant litigation costs, judgments, fines and penalties in excess of insurance coverage, and divert management attention from our business.

     We are involved in numerous litigation matters relating to our products or the use of such products, litigation against persons who we believe have defamed our products, litigation against medical examiners who made errors in their autopsy reports, litigation against a competitor and litigation against former employees. Such matters have resulted and are expected to continue to result in substantial costs to us and a likely diversion of our management’s attention, which could adversely affect our business, financial condition or operating results.

Our future success is dependent on our ability to expand sales through distributors and our inability to recruit new distributors would negatively affect our sales.

     Our distribution strategy is to pursue sales through multiple channels with an emphasis on independent distributors. Our inability to establish relationships with and retain police equipment distributors who can successfully sell our products would adversely affect our sales. In addition, our arrangements with our distributors are generally short-term. If we do not competitively price our products, meet the requirements of our distributors or end-users, provide adequate marketing support, or comply with the terms of our distribution arrangements, our distributors may fail to aggressively market our products or may terminate their relationships with us. These developments would likely have a material adverse effect on our sales. Our reliance on the sales of our products by others also makes it more difficult to predict our revenues, cash flow and operating results.

If we are unable to design, introduce and sell new products or new product features successfully, our business and financial results could be adversely affected.

     Our future success will depend on our ability to develop new products or new product features that achieve market acceptance in a timely and cost-effective manner. The development of new products and new product features is complex, and we may experience delays in completing the development and introduction of new products. We cannot provide any assurance that products that we may develop in the future will achieve market acceptance. If we fail to develop new products or new product features on a timely basis that achieve market acceptance, our business, financial results and competitive position could be adversely affected.

We expend significant resources in anticipation of a sale due to our lengthy sales cycle and may receive no revenue in return.

     Generally, law enforcement and corrections agencies consider a wide range of issues before committing to purchase our products, including product benefits, training costs, the cost to use our products in addition to or in place of other non-lethal products, budget constraints and product reliability, safety and efficacy. The length of our sales cycle may range from a few weeks to as long as several years. Adverse publicity surrounding our products or the safety of such products has in the past and could in the future lengthen our sales cycle with customers. In the past, we believe we have experienced revenue decreases in part as the result of adverse effects on our customers and potential customers of negative publicity surrounding our products or use of our products. We may incur substantial selling costs and expend significant effort in connection with the evaluation of our products by potential customers before they place an order. If these potential customers do not purchase our products, we will have expended significant resources and received no revenue in return.

Most of our end-users are subject to budgetary and political constraints that may delay or prevent sales.

     Most of our end-user customers are government agencies. These agencies often do not set their own budgets and therefore have little control over the amount of money they can spend. In addition, these agencies experience political pressure that may dictate the manner in which they spend money. As a result, even if an agency wants to acquire our products, it may be unable to purchase them due to budgetary or political constraints. Some government agency orders may also be canceled or substantially delayed due to budgetary, political or other scheduling delays which frequently occur in connection with the acquisition of products by such agencies.

Government regulation of our products may adversely affect sales.

     Federal regulation of sales in the United States: Our devices are not firearms regulated by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, but are consumer products regulated by the U.S. Consumer Product Safety Commission. Although there are currently no federal laws restricting sales of our devices in the United States, future federal regulation could adversely affect sales of our products.

     Federal regulation of international sales: Our devices are controlled as a “crime control” product by the U.S. Department of Commerce, or DOC, for export directly from the United States. Consequently, we must obtain an export license from the DOC for the export of our devices from the United States other than to Canada. Our inability to obtain DOC export licenses on a timely basis for sales of our devices to our international customers could significantly and adversely affect our international sales.

     State and local regulation: Our devices are controlled, restricted or their use prohibited by a number of state and local governments. Our devices are banned from private citizen sale or use in seven states: New York, New Jersey, Rhode Island, Michigan, Wisconsin, Massachusetts and Hawaii. Law enforcement use of our products is also prohibited in New Jersey. Some municipalities, including Omaha, Nebraska and Washington, D.C., also prohibit private citizen use of our products. Other jurisdictions may ban or restrict the sale of our products and our product sales may be significantly affected by additional state, county and city governmental regulation.

     Foreign regulation: Certain foreign jurisdictions prohibit the sale of conducted energy devices such as our products, limiting our international sales opportunities.

Environmental laws and regulations subject us to a number of risks and could result in significant liabilities and costs.

     We may be subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in electronic products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of those products. Environmental legislation within the European Union (EU) may increase our cost of doing business internationally and impact our revenues from EU countries as we comply with and implement these requirements.

     The EU has published Directives on the restriction of certain hazardous substances in electronic and electrical equipment (the RoHS Directive) which became effective in July 2006, and on electronic and electrical waste management (the WEEE Directive). The RoHS Directive restricts the use of a number of substances, including lead. The Waste Electrical and Electronic Equipment Directive, or WEEE directs members of the European Union to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the market after August 15, 2005 and from products in use prior to that date that are being replaced. In addition, similar environmental legislation has been or may be enacted in other jurisdictions, including the U.S. (under federal and state laws) and other countries, the cumulative impact of which could be significant.

     We continue to monitor the impact of specific registration and compliance activities required by the RoHS and WEEE Directives. We endeavor to comply with applicable environmental laws, yet compliance with such laws could increase our operations and product costs; increase the complexities of product design, procurement, and manufacturing; limit our ability to manage excess and obsolete non-compliant inventory; limit our sales activities; and impact our future financial results. Any violation of these laws can subject us to significant liability, including fines, penalties, and prohibiting sales of our products into one or more states or countries, and result in a material adverse effect on our financial condition.

If we are unable to protect our intellectual property, we may lose a competitive advantage or incur substantial litigation costs to protect our rights.

     Our future success depends upon our proprietary technology. Our protective measures, including patents, trademarks and trade secret protection, may prove inadequate to protect our proprietary rights. The right to stop others from misusing our trademarks and service marks in commerce depends to some extent on our ability to show evidence of enforcement of our rights against such misuse in commerce. Our efforts to stop improper use, if insufficient, may lead to loss of brand loyalty and notoriety among our customers and prospective customers. Our earliest expiring United States patent generally covers projectile propellant devices having a container of compressed gas in place of gunpowder as a propellant. We use this technology in our cartridges. This patent expires in 2010. The scope of any patent to which we have or may obtain rights may not prevent others from developing and selling competing products. The validity and breadth of claims covered in technology patents involve complex legal and factual questions, and the resolution of such claims may be highly uncertain, lengthy and expensive. In addition, our patents may be held invalid upon challenge, or others may claim rights in or ownership of our patents.

     We have filed a lawsuit in Federal District Court against Stinger Systems that alleges infringement of three of our US patents: 6,999,295; 7,102,870; and 7,234,262. As a tactical move, Stinger Systems filed a motion to stay this case pending a request for ex-parte re-examination Stinger filed with the U.S. Patent and Trademark Office (USPTO) concerning only one of the patents in suit, 7,234,262. On February 21, 2008 the court denied Stinger Systems’ motion to stay this case. A decision by the USPTO as to whether the request states a substantial new question of patentability should be made by March 21, 2008. We have been advised that all issues raised in the request were already considered by the USPTO before original grant of the patent. However, there remains a possibility that the USPTO will grant the request, re-examine the patent, and conclude that some or all of the claims are unenforceable. If that happens, we may appeal that decision to the Court of Appeals for the Federal Circuit.

We may be subject to intellectual property infringement claims, which could cause us to incur litigation costs and divert management attention from our business.

     Any intellectual property infringement claims against us, with or without merit, could be costly and time-consuming to defend and divert our management’s attention from our business. If our products were found to infringe a third party’s proprietary rights, we could be required to enter into costly royalty or licensing agreements in order to be able to sell our products. Royalty and licensing agreements, if required, may not be available on terms acceptable to us or at all.

If we face competition in foreign countries, we can enforce patent rights only in the jurisdictions in which our patent applications have been granted.

     Our U.S. patents only protect us from imported infringing products coming into the U.S. from abroad. Applications for patents in a few foreign countries have been made; however, these may be inadequate to protect markets for our products in other foreign countries. Each foreign patent is examined and granted according to the law of the country where it was filed independent of whether a U.S. patent on similar technology was granted.

Government regulations applied to our products may affect our markets for these products.

     We rely on the opinions of The Bureau of Alcohol Tobacco and Firearms, including the determination that a device that has projectiles propelled by the release of compressed gas, in place of the expanding gases from ignited gunpowder, are not classified as firearms. Changes in statutes, regulations, and interpretation outside of our control may result in our products being classified or reclassified as firearms. Our market to civilians could be substantially reduced if consumers are required to obtain registration to own a firearm prior to purchasing our products.

Competition in the law enforcement and corrections market could reduce our sales and prevent us from achieving profitability.

     The law enforcement and corrections market is highly competitive. We face competition from numerous larger, better capitalized and more widely known companies that make other non-lethal devices and products. Increased competition may result in greater pricing pressure, lower gross margins and reduced sales. In this regard, two different competitors announced plans to introduce new products in 2005. During 2007, one of those companies introduced a new device to compete with the TASER X26. We are unable to predict the impact such products will have on our sales or our sales cycle, but existing or potential customers may choose to evaluate such products which could lengthen our sales cycle and potentially reduce our future sales.

Defects in our products could reduce demand for our products and result in a loss of sales, delay in market acceptance and injury to our reputation.

     Complex components and assemblies used in our products may contain undetected defects that are subsequently discovered at any point in the life of the product. Defects in our products may result in a loss of sales, delay in market acceptance and injury to our reputation and increased warranty costs.

Our dependence on third party suppliers for key components of our devices could delay shipment of our products and reduce our sales.

     We depend on certain domestic and foreign suppliers for the delivery of components used in the assembly of our products. Our reliance on third-party suppliers creates risks related to our potential inability to obtain an adequate supply of components or subassemblies and reduced control over pricing and timing of delivery of components and sub-assemblies. Specifically, we depend on suppliers of sub-assemblies, machined parts, injection molded plastic parts, printed circuit boards, custom wire fabrications and other miscellaneous customer parts for our products. We also do not have long-term agreements with any of our suppliers and there is no guarantee that supply will not be interrupted. Any interruption of supply for any material components of our products could significantly delay the shipment of our products and have a material adverse effect on our revenues, profitability and financial condition.

Component shortages could result in our inability to produce volume to adequately meet customer demand. This could result in a loss of sales, delay in deliveries and injury to our reputation.

     Single source components used in the manufacture of our products may become unavailable or discontinued. Delays caused by industry allocations, or obsolescence may take weeks or months to resolve. In some cases, part obsolescence may require a product re-design to ensure quality replacement circuits. These delays could cause significant delays in manufacturing and loss of sales, leading to adverse effects significantly impacting our financial condition or results of operations.

Our dependence on foreign suppliers for key components of our products could delay shipment of our finished products and reduce our sales.

     We depend on foreign suppliers for the delivery of certain components used in the assembly of our products. Due to changes imposed for imports of foreign products into the United States, as well as potential port closures and delays created by terrorist threats, public health issues or national disasters, we are exposed to risk of delays caused by freight carriers or customs clearance issues for our imported parts. Delays caused by our inability to obtain components for assembly could have a material adverse effect on our revenues, profitability and financial condition.

We may experience a decline in gross margins due to rising raw material and transportation costs associated with an increase in petroleum prices.

     A significant number of our raw materials are comprised of petroleum based products, or incur some form of landed cost associated with transporting the raw materials or components to our facility. Any significant rise in oil prices could adversely impact our ability to sustain current gross margins, by reducing our ability to control component pricing.

Our revenues and operating results may fluctuate unexpectedly from quarter to quarter, which may cause our stock price to decline.

     Our revenues and operating results have varied significantly in the past and may vary significantly in the future due to various factors, including, but not limited to:

	•		market acceptance of our products and services
	•		the outcome of any existing or future litigation
	•		adverse publicity surrounding our products, the safety of our products, or the use of our products
	•		changes in our sales mix
	•		new product introduction costs
	•		increased raw material expenses
	•		changes in our operating expenses
	•		regulatory changes that may affect the marketability of our products
	•		budgetary cycles of municipal, state and federal law enforcement and corrections agencies

     As a result of these and other factors, we believe that period- to-period comparisons of our operating results may not be meaningful in the short term, and our performance in a particular period may not be indicative of our performance in any future period.

We may experience difficulties in the future in complying with Sarbanes-Oxley Section 404.

     We are required to evaluate our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002. Beginning with our annual report on Form 10-K for the fiscal year ending December 31, 2005, we have been required to furnish a report by our management on our internal control over financial reporting. Such report contains among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. Such report also contains a statement that our independent registered public accounting firm has issued an attestation report on management’s assessment of such internal controls. In our Form 10-K for our 2005 fiscal year, because of our previously reported material weaknesses related to not having controls in place to record appropriate accruals related to professional fees in the appropriate accounting period and inadequate resources related to accounting and financial statement preparation particularly with respect to financial statement footnote preparation were not fully remediated and tested at December 31, 2005, our management assessment and the report of our Independent Registered Public Accounting Firm concluded that our internal controls were not effective at December 31, 2005.

     Because of our prior material weaknesses, there is heightened risk that a material misstatement of our annual or quarterly financial statements will not be prevented or detected. While we completed our remediation efforts to address these material weaknesses and while we did not identify any materials weaknesses at December 31, 2007 or 2006, we cannot assure you that material weaknesses will not occur in future periods. If we fail to maintain proper and effective internal controls in future periods, it could adversely affect our operating results, financial condition and our ability to run our business effectively and could cause investors to lose confidence in our financial reporting. We have incurred, and expect to continue to incur increased expense and to devote additional management resources to Section 404 compliance. In the event that our chief executive officer, chief financial officer or our independent registered public accounting firm determine that our internal control over financial reporting is not effective as defined under Section 404, investor confidence in us may be adversely affected and could cause a decline in the market price of our stock.

Foreign currency fluctuations may affect our competitiveness and sales in foreign markets.

     The relative change in currency values creates fluctuations in our product pricing for potential international customers. These changes in foreign end-user costs may result in lost orders and reduce the competitiveness of our products in certain foreign markets. These changes may also negatively affect the financial condition of some existing or potential foreign customers and reduce or eliminate their future orders of our products.

Use of estimates may cause our financial results to differ from expectations.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

We face risks associated with rapid technological change and new competing products.

     The technology associated with non-lethal devices is receiving significant attention and is rapidly evolving. While we have patent protection in key areas of electro-muscular disruption technology, it is possible that new non-lethal technology may result in competing products that operate outside our patents and could present significant competition for our products.

We depend on our ability to attract and retain our key management and technical personnel.

     Our success depends upon the continued service of our key management personnel. Our success also depends on our ability to continue to attract, retain and motivate qualified technical personnel. Although we have employment agreements with certain of our officers, the employment of such persons is “at-will” and either we or the employee can terminate the employment relationship at any time, subject to the applicable terms of the employment agreements. The competition for our key employees is intense. The loss of the service of one or more of our key personnel could harm our business.

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

Our corporate headquarters and manufacturing facilities are based in a 100,000 square foot facility in Scottsdale, Arizona which we own. We believe our existing facilities are well maintained and in good operating condition. We also believe we have adequate manufacturing capacity for our existing product lines for the foreseeable future; however, we are likely to require additional warehouse space for inventory storage. Also, to the extent that we have new product introductions in the future, we will likely need to acquire additional facilities to locate the associated production lines. The Company continues to make investments in capital equipment as needed to meet anticipated demand for its products.

Item 3. Legal Proceedings

See discussion of Legal Proceedings in Note 7(c) to the financial statements included in Part II, Item 8 of this annual report.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of 2007.

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

     Our common stock is quoted under the symbol “TASR” on The NASDAQ Global Select Market. The closing price of our common stock on February 25, 2008 was $11.80.

     The following table sets forth the high and low closing sales prices per share for our common stock as reported by NASDAQ for each quarter of the last two fiscal years.

Common Stock “TASR”

Fiscal Quarters		High				Low
March 31, 2006		$	10.91			$	7.06
June 30, 2006		$	11.04			$	7.47
September 30, 2006		$	8.57			$	6.89
December 31, 2006		$	9.69			$	7.43
March 31, 2007		$	8.56			$	7.44
June 30, 2007		$	13.96			$	7.85
September 30, 2007		$	17.41			$	13.34
December 31, 2007		$	18.81			$	12.68

Holders

     As of February 25, 2008, there were approximately 348 holders of record of our Common Stock.

Dividends

     To date, we have not declared or paid cash dividends on our common stock. We do not intend to pay cash dividends in the foreseeable future. Our revolving line of credit prohibits the payment of cash dividends.

Issuer Purchases of Equity Securities

     We did not repurchase any shares of our common stock in the fourth quarter of 2007.

Recent Sales of Unregistered Securities

     No unregistered securities were sold by us in 2007.

Stock Performance Graph

     The following stock performance graph compares the performance of our common stock to the NASDAQ Stock Market (U.S.) and the Russell 3000 Index. The graph covers the period from December 31, 2002 to December 31, 2007. The graph assumes that the value of the investment in our stock and in each index was $100 at December 31, 2002 and that all dividends were reinvested. We do not pay dividends on our common stock.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among TASER International, Inc., The NASDAQ Composite Index
And The Russell 3000 Index

		12/02				12/03				12/04				12/05				12/06				12/07
TASER International, Inc.			100.00				2038.86				9400.98				2067.35				2260.39				4274.25
NASDAQ Composite			100.00				149.75				164.64				168.60				187.83				205.22
Russell 3000			100.00				131.06				146.71				155.69				180.16				189.42

Item 6. Selected Financial Data

     The following selected financial data should be read in conjunction with our financial statements and the notes thereto, and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The statement of operations data for the years ended December 31, 2007, 2006 and 2005 and the balance sheet data as of December 31, 2007 and 2006 have been derived from and should be read in conjunction with our audited financial statements and the notes thereto included herein. The statement of operations data for the years ended December 31, 2004 and 2003 and the balance sheet data as of December 31, 2005, 2004 and 2003 is derived from audited financial statements and the notes thereto which are not included in this Annual Report on Form 10-K.

		For the Years Ended December 31,
		2007				2006				2005				2004				2003
Statement of Operations Data
Net sales		$	100,727,191			$	67,717,851			$	47,694,181			$	67,639,879			$	24,455,506
Gross margin			57,609,768				43,179,061				29,597,895				45,184,383				15,052,890
Sales, general and administrative expenses			32,814,170				29,680,764				26,483,485				13,880,322				6,973,721
Research and development expenses			4,421,596				2,704,521				1,574,048				823,593				498,470
Shareholder litigation settlement expense (a)			—				17,650,000				—				—				—
Income (loss) from operations			20,374,002				(6,856,224	)			1,540,362				30,480,468				7,580,699
Net income (loss)			15,026,476				(4,087,679	)			1,056,516				18,881,742				4,453,690
Income (loss) per common and common equivalent shares
Basic		$	0.24			$	(0.07	)		$	0.02			$	0.33			$	0.12
Diluted		$	0.23			$	(0.07	)		$	0.02			$	0.30			$	0.10
Weighted average number of common and common equivalent shares outstanding
Basic			62,621,174				61,984,240				61,303,939				57,232,329				37,889,640
Diluted			65,685,667				61,984,240				63,556,246				62,319,590				46,598,312

		As of December 31,
		2007				2006				2005				2004				2003
Balance Sheet Data
Working capital		$	83,953,166			$	37,813,576			$	34,663,101			$	51,100,989			$	22,479,594
Total assets			137,603,456				119,837,689				112,241,247				109,452,578				31,444,690
Total current liabilities			12,473,616				18,302,688				7,586,701				8,933,939				3,895,371
Total long term obligations			11,695				230,973				76,188				—				3,655
Total stockholders equity		$	120,636,750			$	99,328,539			$	103,738,375			$	99,910,783			$	27,427,450

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in eight sections:

•		Executive Overview and Key Strategic Initiatives
•		2007 Overview
•		2008 Outlook
•		Results of Operations
•		Liquidity and Capital Resources
•		Off-Balance-Sheet Arrangements
•		Contractual Obligations
•		Critical Accounting Estimates

     Our MD&A should be read in conjunction with the other sections of this annual report on Form 10-K, including Part I, “Item 1A: Risk Factors” Part II, “Item 6: Selected Financial Data” and Part II, “Item 8: Financial Statements and Supplementary Data.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing.

Executive Overview and Key Strategic Initiatives

     We are a market leader in the development and manufacture of advanced electronic control devices designed for use in law enforcement, military, corrections, private security and personal defense. We have focused our efforts on the continuous development of our technology for both new and existing products as well as industry leading training services while building distribution channels for marketing our products and services to law enforcement agencies, primarily in North America with increasing efforts on expanding these programs in international markets. To date, over 12,400 law enforcement agencies in over 44 countries have made initial purchases of our TASER brand devices for testing or deployment. To date we do not know of any significant sales of any competing electronic control device products.

     Although a majority of sales occur in North American markets, we continue to focus our efforts on markets outside the U.S. and during 2007, our International sales continued to grow and accounted for approximately 15% of our total sales. In addition, the Company introduced three revolutionary new products in 2007. In January of 2007, the Company introduced the new TASER C2 Personal Protector and began shipments in July of 2007, reinvigorating our focus on the consumer personal safety market. In addition, the eXtended Range Electronic Projectile™ (XREP™) and the Shockwave area denial system were both debuted at the Company’s annual TASER Conference in August.

          Our key strategies include:

	•		Increase market penetration in both the United States and international law enforcement and corrections markets. We currently have a penetration rate of approximately 25% of the United States police and corrections market and approximately 1% of the worldwide police and corrections market. We believe that the large portion of these markets that do not currently use our products presents an opportunity for our future growth, particularly with respect to international law enforcement agencies.
	•		Grow our presence in the private citizen market. Having demonstrated the effectiveness of our technology in the professional law enforcement community we aim to leverage this experience to increase our presence in the private citizen market. At the forefront of this initiative is the TASER C2 personal protector, which we launched in the third quarter of 2007. As our flagship consumer product we intend to increase consumer awareness of the TASER C2 by expanding the marketing and distribution of this product in 2008.

	•		Further develop our presence in government and military markets. In 2006, we introduced a focus initiative to support our military customers and formed a Senior Executive Advisory Group (SEAG) comprised of a team of professionals with extensive military, homeland defense and law enforcement experience with the purpose of advising on business actions in support of military users. With this new focus, a new business group has been formed by us (Government and Military Programs) with the emphasis on supporting military use for our existing hardware as well as increasing technology development through contracted support. In 2007, these initiatives resulted in a five-year indefinite delivery, indefinite quantity contract with United States Military. We delivered an initial 2,400 TASER X26 units and accessories under this agreement with the possibility of future orders up to a maximum value of $22.8 million in total.
	•		Continual development of new innovative products, which both complement and add to our existing products. These development efforts include the following:

	1.		Our wireless eXtended Range Electromuscular Projectile (XREP) was developed in 2007 with a focus on design for manufacturability. A production projectile is expected to be available for sale in 2008 following extensive field trials in the first half of 2008.
	2.		Our TASER Shockwave is the first generation of products from the TASER Remote Area Denial (T-RAD) family. Shockwave is a command activated area denial system consisting of a modular 6-shot TASER ECD that covers a 22-degree arc area and a range of 25 feet. The modular design allows the end user flexibility to configure the units in numerous combinations to facilitate an optimized response for every deployment. Initial engineering prototypes of Shockwave were developed and tested in 2007. Advanced prototypes are expected to be made available for customer test and evaluation late in the second quarter of 2008 and, with favorable customer feedback; we expect to have production units available for sale late in 2008.

	•		Continued application for patents and intellectual property rights to protect key technology in our products and further attempt to protect our competitive position.
	•		Continued aggressive litigation defense to protect our brand equity. We have an assembled team of world class medical experts at our disposal and hired additional internal legal resources to provide an efficient means of defending us against numerous product liability claims. Through February 2008, we have had a total of 66 cases dismissed or defense judgments in our favor. We view a continued record of successful litigation defense as a key factor for our long term growth and success.

2007 Overview

     Management believes that its ability to achieve a balance between growing our core business and building the foundations for future growth is the key to increasing long-term shareholder value. Our 2007 performance and the initiatives we have put in place reflect our continuing commitment to achieving this balance.

Some 2007 highlights include:

	•		During 2007, our focus on continuing to build momentum in the law enforcement community and increasing domestic and international market penetration delivered a record level of annual sales. This resulted in a 49% sales increase in 2007, growing to a record $100.7 million compared to $67.7 million in 2006. This revenue growth in 2007 was almost completely driven by higher volume of product sales, achieved with the introduction of new TASER device deployments in approximately 1,500 law enforcement agencies, the expansion to full deployment of our devices by approximately 800 agencies and the repeat business that these activities generate. The supplemental orders we fulfilled during 2007 demonstrates the continuing trend of law enforcement agencies expanding the use of TASER ECDs to their first responders. We believe that the ongoing proven effectiveness of our products and their continued acceptance provides a platform from which to generate further growth.
	•		In 2007, we advanced our international presence with approximately 15%, or $15 million of our total sales derived from foreign customers compared to approximately 14%, or $9.3 million in 2006. We shipped our products to more than 50 countries during the year, the more significant of which included follow on orders to our French distributor under an initial purchase order placed by the French Government in 2006, and sales into Canada, the United Kingdom and Australia.
	•		In the third quarter of 2007, we began selling the TASER C2 personal protector and accessories, which contributed approximately $4.0 million, or 4% of our net sales, for the year.

•		We continue to remain focused on improving our operating margin. During 2007, our operating margin was 20.2%, which represents a significant increase compared to an operating margin of (10.1)% for 2006 due to the one time shareholder litigation expense of $17.65 million. (Excluding the impact of the one time shareholder litigation expense of $17.65 million our operating margin in 2006 was 15.9%). Our operating margin for 2005 was 3.2%. We will continue to focus on improving our operating margin during 2008.
•		Our strategy of vigorously defending against product liability lawsuits continues to be successful. We successfully dismissed 31 lawsuits in 2007. These dismissals serve to highlight the extensive medical and scientific evidence confirming the general safety of TASER technology.

2008 Outlook

          In 2008, we aim to build on the momentum generated in 2007 with a continued commitment to quality and our focus on innovation. We intend to pursue increased market penetration in our primary target markets with continued focus on increasing our international presence. Many of our prospective customers from our core business markets are continuing to move forward with evaluation and implementation of TASER programs. We believe that this, when combined with the planned new product introductions and other key initiatives identified above, should result in positive new revenue growth in 2008.

Results of Operations

     The following table presents data from our statements of operations as well as the percentage relationship to total net revenues of items included in our statements of operations (dollars in thousands):

		Year ended December 31,
		2007								2006								2005
Net sales		$	100,727				100	%		$	67,718				100	%		$	47,694				100	%
Cost of products sold			43,117				43	%			24,539				36	%			18,096				38	%
Gross margin			57,610				57	%			43,179				64	%			29,598				62	%
Sales, general and administrative expenses			32,814				33	%			29,681				44	%			26,483				56	%
Research and development expenses			4,422				4	%			2,705				4	%			1,574				3	%
Shareholder litigation settlement expense			—				0	%			17,650				26	%			—				0	%
Income (loss) from operations			20,374				20	%			(6,857	)			-10	%			1,541				3	%
Interest and other income, net			2,152				2	%			1,873				3	%			1,165				2	%
Income (loss) before income taxes			22,526				22	%			(4,984	)			-7	%			2,706				6	%
Provision (benefit) for income taxes			7,500				7	%			(896	)			-1	%			1,649				3	%
Net income (loss)		$	15,026				15	%		$	(4,088	)			-6	%		$	1,057				2	%

Net Sales

     For the years ended December 31, 2007, 2006 and 2005, sales by product line and by geography were as follows (dollars in thousands):

		2007								2006								2005
Sales by Product Line
TASER X26		$	61,638				61	%		$	45,241				67	%		$	31,313				66	%
TASER C2			3,983				4	%			—				—				—				—
TASER Cam			4,012				4	%			2,289				3	%			—				—
ADVANCED TASER			2,412				2	%			2,578				4	%			2,635				6	%
Single Cartridges			25,250				25	%			15,269				23	%			12,468				26	%
Other			3,432				4	%			2,341				3	%			1,278				2	%
Total		$	100,727				100	%		$	67,718				100	%		$	47,694				100	%
Sales by Geographic Area			2007								2006								2005
United States			85	%							86	%							87	%
Other Countries			15	%							14	%							13	%
Total			100	%							100	%							100	%

     Net sales increased $33.0 million, or 49%, to $100.7 million for the year ended December 31, 2007 compared to $67.7 million for the same period in 2006. The growth in 2007 was primarily the result of increased sales to our core law enforcement market with new agencies deploying TASER technology following test and evaluation periods and from agencies continuing to expand the use of TASER devices. This resulted in higher sales of the TASER X26 product line which increased $16.4 million, or 36%, to $61.6 million for the year ended December 31, 2007 compared to $45.2 million in 2006. Single cartridge sales increased $10.0 million, or 65%, to $25.3 million for the year ended December 31, 2007 compared to $15.3 million for the same period in 2006 which is a function of the growing installed base of units in the field. We began shipping our TASER C2 Personal Protector product in July 2007 which contributed $4.0 million of sales in 2007. Also contributing to the growth in net sales for the year ended December 31, 2007 was a full year’s sales of the TASER Cam product which did not go on sale until the end of the second quarter of 2006. Sales of the TASER Cam were $4.0 million for the year ended December 31, 2007, an increase of $1.7 million, or 75%, over 2006. Other sales include extended warranty, out of warranty replacements, training, shipping and research funding revenues net of cash and distributor discounts.

     Net sales for the year ended December 31, 2006 were $67.7 million, an increase of $20.0 million, or 42%, compared to $47.7 million in 2005. We believe the principal reasons for the increase in net sales was related to us overcoming the various types of negative publicity we experienced during the course of 2005. Specifically, as a result of a formal investigation by the Securities Exchange Commission (SEC), ongoing negative press coverage and increased amounts of litigation concerning our products and their use, many prospective customers, particularly law enforcement agencies, frequently postponed implementation decisions. With the favorable resolution of key portions of the SEC investigation in December 2005, we noted that many of the agencies that were postponing decisions began moving forward with their evaluation and implementation programs and decisions to purchase our products, which had a positive impact on our sales during 2006. Specifically, sales of our predominant TASER X26 product line and the related increase in single cartridge sales demonstrate the increased market penetration and continued use of TASER devices by law enforcement. TASER X26 product line sales increased $13.9 million, or 44%, to $45.2 million for 2006 compared to $31.3 million for 2005 and represented 67% and 66% of our total net sales in 2006 and 2005, respectively. Single cartridge sales increased $2.8 million, or 22%, to $15.3 million in 2006 compared to $12.5 million in 2005. In addition, the introduction of the TASER Cam device in 2006 contributed $2.3 million to 2006 net sales. Other sales include extended warranty, out of warranty replacements, research funding, training and shipping revenues net of cash and distributor discounts.

     International sales for the 2007 and 2006 represented approximately $15.0 million, or 15%, and $9.3 million or 14% of total net sales, respectively. International sales represented approximately 13% or $6.2 million of total net sales in 2005. The growth in international sales in both 2007 and 2006 reflects our continued commitment to marketing efforts in countries outside the United States.

Cost of Products Sold

        Cost of products sold increased by $18.6 million, or 75.7%, to $43.1 million for the year ended December 31, 2007 compared to $24.5 million for the year ended December 31, 2006. As a percentage of net sales, cost of products sold increased to 42.8% in 2007 compared to 36.2% in 2006. The increase in cost of products sold as a percentage of net sales for 2007 compared to 2006 was driven by the following combination of factors. We experienced a change in sales mix with growth as percentage of net sales in lower margin cartridge sales and TASER Cam’s and the introduction of our lower margin C2 product line. We also experienced a rise in raw material costs due to higher price for plastics and printed circuit board assemblies. In combination, these factors contributed to a 2.2% increase in the cost of products sold in 2007 compared to 2006. Also in the second half of 2007, production of our new TASER C2 created a number of production challenges related to the integration of new production lines and personnel which, in combination, initially generated significant line inefficiencies and product scrap. To address the initial low production yield issues, some engineering modifications were made to the injection molding tooling and printed circuit board design to establish a more efficient assembly process. These modifications added significant incremental time to the assembly of each C2 produced and also resulted in inventory rework. The related increases in direct labor, scrap expense and engineering supplies contributed 2.0%, 1.5% and 0.4% toward the 6.6% increase in cost of product sold as a percentage of net sales for the year ended December 31, 2007 compared to 2006. An increase in warranty and obsolescence reserves contributed 0.5% to the increase in cost of product sold as a percentage of net sales. The increase in warranty reserves was primarily driven by higher sales of the X26 and the introduction of the C2, while reserves for excess and obsolete inventory increased related to some slow moving parts. These increases were partially offset by improved leverage of our indirect labor and other manufacturing expenses over larger product volumes.   

        For the year ended December 31, 2006, cost of products sold were $24.5 million, an increase of $6.4 million, or 36%, over the year ended December 31, 2005. However, as a percentage of net sales, cost of products sold decreased to 36% for 2006 compared to 38% in 2005. The decrease in cost of products sold as a percentage of sales for 2006 is primarily attributable to the increased volume of device and ancillary product sales in 2006 providing a larger number of units over which to apply relatively fixed indirect manufacturing expenses, resulting in lower per unit costs. In addition, improved production throughput and lower scrap expense were partially offset by increases in the cost of petroleum-based raw materials. Indirect expenses primarily include indirect salaries for manufacturing support personnel including manufacturing engineering, quality and materials management, scrapped materials, freight, supplies and depreciation.

Gross Margin

          Gross margin increased $14.4 million, or 33.4%, to $57.6 million for the year ended December 31, 2007 compared to $ 43.2 million for the year ended December 31, 2006. As a percentage of net sales, gross margins decreased to 57.2% in 2007 compared to 63.8% for 2006. The decrease in gross margin as a percentage of net sales in 2007 was attributable to the increased percentage of direct and indirect costs as a percentage of net sales for the reasons noted above under the discussion of cost of products sold.

          Gross margin increased $13.6 million, or 46%, to $43.2 million for the year ended December 31, 2006 compared to $29.6 million for the year ended December 31, 2005. As a percentage of net sales, gross margin increased to 64% for the year ended December 31, 2006 compared to 62% for the year ended December 31, 2005. The increase in gross margin was due to the lower cost of sales per unit from the improved leverage of indirect manufacturing expenses and improved production yields as discussed above.

Sales, General and Administrative Expenses

          For the years ended December 31, 2007, 2006 and 2005, sales, general and administrative expenses were comprised as follows (dollars in thousands):

		Year Ended December 31,																Year Ended December 31,
										$				%												$				%
		2007				2006				Change				Change				2006				2005				Change				Change
Salaries and benefits		$	6,876			$	5,480			$	1,396				25.5	%		$	5,480			$	4,771			$	709				14.9	%
Bonuses			1,136				545				591				108.4	%			545				—				545				100.0	%
Legal, professional and accounting			5,805				7,024				(1,219	)			-17.4	%			7,024				6,860				164				2.4	%
Consulting and lobbying services			2,455				2,278				177				7.8	%			2,278				2,080				198				9.5	%
Travel and meals			3,762				3,293				469				14.2	%			3,293				2,960				333				11.2	%
D&O and liability insurance			2,027				2,121				(94	)			-4.4	%			2,121				1,827				294				16.1	%
Depreciation and amortization			1,778				1,563				215				13.8	%			1,563				1,297				266				20.5	%
Stock-based compensation			987				808				179				22.2	%			808				—				808				100.0	%
Advertising			931				437				494				113.0	%			437				888				(451	)			-50.8	%
Commissions			562				192				370				192.7	%			192				316				(124	)			-39.2	%
Other			6,495				5,940				555				9.4	%			5,940				5,484				456				8.3	%
Total		$	32,814			$	29,681			$	3,133				10.6	%		$	29,681			$	26,483			$	3,198				12.1	%
Sales, general and administrative as percentage of net sales			32.6	%			43.8	%											43.8	%			55.5	%

          Sales, general and administrative expenses were $32.8 million and $29.7 million for the years ended December 31, 2007 and 2006, respectively, an increase of $3.1 million, or 10.6% in 2007 compared to 2006. As a percentage of total net sales, sales, general and administrative expenses decreased to 32.6% in 2007 compared to 43.8% in 2006. The dollar increase in 2007 over 2006 is substantially attributable to $1.4 million of growth in salaries and benefits related to an increase in support personnel, annual salary adjustments and higher benefit costs. Bonuses increased $591,000 due to the improved operating results in 2007, travel and meals increased $469,000 mainly as a result of the higher sales related activity, depreciation and amortization increased $215,000 related to acquisitions of computer and office equipment, stock based compensation increased $179,000 associated with stock options granted in 2007 and consulting and lobbying costs increased $177,000 primarily due to higher expert witness fees. Advertising expense increased $494,000 primarily related to the TASER C2 launch and sales commissions increased in line with the increase in total sales. Offsetting these increases was a $1.2 million decrease in legal, professional and accounting costs primarily due to a reduction in legal fees attributable to the timing of proceedings of our outstanding litigation as well as four cases where we exceeded our insurance deductible, subsequent to which we are reimbursed for expenses incurred.

          Sales, general and administrative expenses were $29.7 million and $26.5 million for the years ended December 31, 2006 and 2005, respectively, representing an increase of $3.2 million, or 12% in 2006 compared to 2005. As a percentage of total net sales, sales, general and administrative expenses decreased to 43.8% for 2006 compared to 55.5% for same 2005, representing the improved leverage of the relatively fixed costs to our increase in net sales. The dollar increase for 2006 compared 2005 is primarily due to a $709,000 increase in salaries and benefits related to an increased headcount, employee bonuses of $545,000 and a $362,000 increase in legal, professional, consulting and lobbying fees associated with the continuing costs of defending against numerous litigation matters and our ongoing public relations and lobbying efforts to educate the public in regard to the safety and benefits of our products. In addition, we incurred $808,000 of stock-based compensation costs associated with our adoption of SFAS No. 123(R), effective January 1, 2006, D&O and liability insurance costs increased by $294,000 as a result of higher premiums due to increased coverage and depreciation and amortization expense increased $266,000 relating to our new facility and related equipment which were not placed into service until April 2005.

Research and Development Expenses

     Research and development expenses for the year ended December 31, 2007 were $4.4 million, an increase of $1.7 million, or 63% compared to 2006. The increase is predominantly related to salary related costs and production materials in the development of new products such as the TASER C2, XREP and Shockwave.

     Research and development expenses increased $1.1 million, or 72%, to $2.7 million, for the year ended December 31, 2006 compared to $1.6 million for the year ended December 31, 2005. The increase was predominantly related to growth in salary, supplies and consulting costs to support our continuing efforts to develop new products such as the TASER C2, the TASER Cam and the XREP. Additionally, we recorded $199,000 in research and development expenses related to stock-based compensation costs associated with our adoption of SFAS No. 123(R) in 2006.

    Shareholder Litigation Settlement Expense

     Litigation settlement expenses for the year ended December 31, 2006 represent $17.65 million recorded in the second quarter of 2006 as a result of the settlement of our shareholder class action litigation and derivative lawsuits.

Interest and Other Income, Net

     Interest and other income increased $280,000, or 15%, to $2.2 million for the year ended December 31, 2007 compared to $1.9 million for 2006. The increase is mainly attributable to the increase in average cash and investment balances on hand as well as higher average yields on our cash and investments, 4.2% in 2007 compared to 3.9% in 2006. Our average outstanding cash, cash equivalent and investment balance was approximately $49.4 million in 2007 compared to $47.3 million in 2006.

     Interest and other income increased $708,000, or 61%, to $1.9 million for the year ended December 31, 2006 compared to $1.2 million for 2005. The year over year increase is a function of the growth in our cash and investment balances and higher average yields on our investments. Our cash and investment accounts earned interest at an approximate average rate of 3.9% during the year ended December 31, 2006 compared to 2.7% during the year ended December 31, 2005, reflecting a more favorable interest rate environment. Our average outstanding cash, cash equivalent and investment balance was approximately $47.3 million in 2006 compared to $45.5 million in 2005.

Income Taxes
     

     The provision for income taxes increased by $8.4 million to a provision of $7.5 million for the year ended December 31, 2007 compared to a benefit for income taxes of $0.9 million for the year ended December 31, 2006. The change in tax position is due to the net income before taxes of $22.5 million in 2007 compared to the net loss before income taxes of $5.0 million in 2006, which was substantially generated by the shareholder litigation expense of $17.65 million recorded in the second quarter of 2006. The effective income tax rate for the year ended December 31, 2007 was 33.3% compared to (18.0) % for the year ended December 31, 2006. The effective rate in 2007 reflects the benefit of a research and development tax credit study completed during 2007 which resulted in a $2.0 million reduction in the provision for income taxes. The effective rate in 2006 reflects the recording of non tax deductible items such as lobbying expenses and an impairment of the Arizona State NOL carryforward of $250,000 in the second quarter of 2006, which reduced our effective tax benefit rate by 13.9% and 5.0%, respectively.

     The provision for income taxes decreased by $2.5 million from a $1.6 million expense for year ended December 31, 2005 to a benefit of $0.9 million for the year ended December 31, 2006. This change can be attributed to the loss before provision for income taxes of $5.0 million for the year ended December 31, 2006, which was generated by the shareholder litigation expense of $17.65 million recorded in the second quarter of 2006, compared to a pretax income of $2.7 million in 2005. Our effective income tax rate for the year ended December 31, 2006 was (18.0)% compared to 60.9% for the year ended December 31, 2005. The change in the effective tax rate is because, as a result of the net loss before income taxes in 2006, we receive an income tax benefit compared to the provision for income taxes in 2005. Additionally, the non tax deductible items such as lobbying expenses reduced our effective tax benefit rate by 13.9% in 2006 whereas in 2005 they had the inverse effect, increasing our effective tax rate by 19.5%.

          During 2007 and 2006, we did not tax effect the stock based compensation expense for tax purposes related to the exercise of stock options as a result of the adoption of SFAS No. 123(R). The benefit will be recorded when we are in a position to realize the benefit with an offset to our taxes payable in future periods. The total unrecognized tax benefit related to the non-qualified disposition of stock options in 2007 and 2006 was approximately $3.0 million and $617,000, respectively. We received tax benefits of $2.1 million from the exercise of stock options and subsequent sale of the underlying stock in 2005. The net deferred tax asset as of December 31, 2007 was $22.3 million compared to $28.2 million at December 31, 2006.

Net Income (Loss)

          Net income increased by $19.1 million to $15.0 million for the year ended December 31, 2007 compared to a net loss of $4.1 million for the same period in 2006. Income per basic and diluted share was $0.24 and $0.23, respectively, for the year ended December 31, 2007. This compares to a loss per basic and diluted share of $0.07 for the year ended December 31, 2006.

          For the year ended December 31, 2006, we reported a net loss of $4.1 million compared to net income of $1.1 million for the year ended December 31, 2005, a negative change of $5.2 million. The decrease is a function of the increased gross margins derived from the growth in sales in 2006 offset by $17.65 million of shareholder litigation settlement expenses and the increases in sales, general and administrative and research and development expenses previously discussed. As a result, income per basic and diluted share decreased from $0.02 for the year ended December 31, 2005 to a loss of $0.07 for the year ended December 31, 2006.

Liquidity and Capital Resources

The following table presents selected financial information at the end of the last three fiscal years (dollars in thousands):

		2007				2006				2005
Cash, cash equivalents and short term investments		$	51,301			$	22,331			$	16,352
Accounts receivable, net			11,692				10,068				5,422
Inventory			13,507				9,258				10,105
Working capital			83,953				37,814				34,663
Net cash provided by operating activities			13,923				7,482				1,068
Net cash provided by (used in) investing activities			13,005				(3,556	)			(191	)
Net cash provided by (used in) financing activities		$	3,099			$	(1,504	)		$	718

Liquidity

          As of December 31, 2007, we had $51.3 million in cash, cash equivalents and short term investments, an increase of $29.0 million from the end of fiscal 2006. The increase is primarily attributable to cash generated from operations of $13.9 million, $7.5 million from the maturity of some long term investments and $8.5 million from our change in investment classification policy with all investments at December 31, 2007 being classified based on their contractual maturity date versus on our intent to reinvest in securities with similar original maturities. As of December 31, 2006, we had $22.3 million in cash, cash equivalents and short term investments, a increase of $6.0 million from the end of fiscal 2005.

          Net cash provided by operating activities for the year ended December 31, 2007 of $13.9 million was mainly attributable to our net income for the period of $15.0 million, the $6.9 million utilization of deferred tax assets and total other non cash adjustments to net income of $5.2 million including depreciation and amortization expense of $2.5 million, stock-based compensation expense of $1.4 million and provision for warranty expense of $1.0 million. In addition, deferred revenue related to the growth in sales of extended warranties increased by $2.2 million. These cash sources were partially offset by the final $8.0 million payment for the shareholder litigation settlement, a $4.4 million increase in inventory primarily related to our building of TASER C2 and X26 inventory to satisfy anticipated demand, and a $1.6 million increase in accounts receivable due to the higher sales levels in December of 2007 compared to December of 2006. While the accounts receivable balance has increased, our days sales outstanding ratio decreased; a function of both improved collections and more customers taking advantage of cash discount offerings. In addition, prepaid and other assets increased $2.5 million related to insurance reimbursement receivables for four legal cases where we have incurred costs in excess of our deductible, deferred infomercial production costs and increased deferred liability insurance premiums.

     Net cash provided by operating activities in 2006 of $7.5 million was mainly attributable to our net loss of $4.1 million adjusted for the add back of certain non cash expense items including $9.75 million for the remaining unpaid net shareholder litigation settlement (total net settlement expenses of $17.65 million less the $7.9 million of our cash we paid for the first installment of the settlement in December 2006), depreciation and amortization expense of $2.1 million and stock based compensation expense of $1.1 million. Additionally, our deferred revenue balance increased by $1.6 million created by growth in sales of extended warranties, our inventory decreased by $0.8 million attributable to increased sales of finished goods and our ongoing efforts to reduce our investment in inventory on hand and our insurance proceeds receivable decreased by $0.6 million related to the receipt of insurance proceeds from early settlement with our insurance provider related to the Powers litigation. These increases to our net cash provided by operating activities were partially offset by an increase in accounts receivable of $4.6 million attributable to the increased sales levels in the fourth quarter of 2006 compared to 2005 and a net increase in deferred income taxes of $1.2 million substantially due to the additional net operating loss carryforwards generated in 2006.

     Our investing activities provided $13.0 million for the year ended December 31, 2007 which was comprised of a $17.5 million net decrease in our total investments caused by the maturity of some long term investments partially offset by $4.1 million in acquisitions of property and equipment, which mainly related to new automation equipment, production equipment for the TASER C2 manufacturing line and capitalized website development costs. In addition, we invested $454,000 in intangible assets, primarily consisting of patent applications.

     Net cash used in investing activities for the year ended December 31, 2006 was comprised of net increases in our investments of $1.5 million combined with $1.8 million in acquisitions of property and equipment, which mainly related to building improvements and production and office equipment.

     During the year ended December 31, 2007, we generated $3.1 million from financing activities attributable to stock options exercised in the year.

     The $1.5 million of cash used by financing activities in 2006 was mainly comprised of the repurchase of 300,000 shares of our common stock for $2.2 million associated with our share repurchase program, partially offset by proceeds from stock options exercised of $0.7 million.

Capital Resources

     On December 31, 2007, we had total cash, cash equivalents and short term investments of $51.3 million.

     We negotiated a revolving line of credit on July 13, 2004, through a domestic bank. The total availability on the line is $10 million. The line is secured by substantially all of our assets, other than intellectual property, and bears interest at varying rates, ranging from LIBOR plus 1.5% to prime. The line of credit matures on June 30, 2008 and requires monthly payments of interest only. At December 31, 2007, there was a calculated availability of $10.0 million based on the defined borrowing base, which is based on our eligible accounts receivable and inventory. There was no outstanding balance under the line of credit at December 31, 2007, and no borrowings under the line as of the date of this filing. Our agreement with the bank requires us to comply with certain financial and other covenants including maintenance of minimum tangible net worth and fixed charge coverage. At December 31, 2007, we were in compliance with all covenants.

     We expect our investment in accounts receivable, inventory and accounts payable to increase in 2008 in line with the anticipated growth in sales levels arising primarily from organic growth. Additionally, we expect to invest approximately $5.7 million in manufacturing automation equipment in 2008.

     We believe that our balance of total cash and short term investments of $51.3 million as of December 31, 2007, together with cash expected to be generated from operations, will be adequate to fund our operations for at least the next 12 months. We may require additional resources to expedite manufacturing of new and existing technologies in order to meet possible demand for our products. Based on our strong balance sheet and the fact we currently have no outstanding debt at December 31, 2007 we believe financing will be available at terms favorable to us, both through our existing credit lines and possible additional equity financing. However, there is no assurance that such funding will be available, or on terms acceptable to us.

     On July 2, 2007, we entered into a contract with ATS Automation Tooling Systems Inc. for the purchase of equipment at a cost of approximately $8.4 million including $0.7 million of change orders made in the first quarter of 2008 for additional equipment. The equipment is expected to be delivered to and installed at the Company’s facility in 2008. Payments will be made in installments, with an initial $1.5 million deposit paid in 2007, $1.2 million was accrued at December 31, 2007 due to contractual requirements and paid in January 2008, and the balance of $5.7 million will be paid in 2008 from existing cash balances.

Contractual Obligations

     The following table outlines our future contractual financial obligations by period in which payment is expected, in thousands, as of December 31, 2007:

						Less than												After
		Total				1 year				1-3 years				4-5 years				5 years
Capital leases		$	36			$	22			$	14			$	—			$	—
Purchase obligations(1)		$	9,789				9,789				—				—				—
Total contractual cash obligations		$	9,825			$	9,811			$	14			$	—			$	—

(1)  Purchase obligations consist of $5.7 million of payments for the installation and delivery of equipment as well as fixed purchase orders totaling approximately $4.1 million for various inventory components.

We are subject to U.S. federal income tax as well as income tax of multiple-state jurisdictions. As of December 31, 2007, we had $1.1 million of gross unrecognized tax benefits. The settlement period for our income tax liabilities cannot be determined, however, the liabilities are not expected to become due within the next twelve months.

Off Balance Sheet Arrangements

     We had no off balance sheet arrangements as of December 31, 2007.

Critical Accounting Estimates

     We have identified the following accounting estimates as critical to our business operations and the understanding of our results of operations. The preparation of this annual report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. The effect of these policies on our business operations is discussed below.

Standard Product Warranty Reserves

     We warrant our law enforcement products from manufacturing defects on a limited basis for a period of one year after purchase, and thereafter will replace any defective TASER unit for a fee. We warrant our new TASER C2 product for 90 days. We track historical data related to returns and warranty costs on a quarterly basis, and estimate future warranty claims by applying our four quarter average return rate to our product sales for the period. In the fourth quarter of 2007, we made a revision to our basis of calculating our four quarter return rate as the result of being able to more accurately capture data relating to the number of units we replaced under our standard warranty versus our extended warranty terms. In addition, given the trend of sales growth we experienced in 2007 , particularly in the second half of the year, we weighted our estimated four quarter return rate to account for the higher return rate experienced in those periods. The net impact of these changes in estimates was a $238,000 net reduction in our warranty reserve, recorded as a credit to cost of goods sold in the fourth quarter of 2007. Had we used the previously existing basis of estimate, our warranty reserve at December 31, 2007 would have been approximately $1.4 million. We have also historically increased our reserve amount if we become aware of a component failure that could result in larger than anticipated returns from our customers. As of December 31, 2007, our reserve for warranty returns was $919,000 compared to a $713,000 reserve at December 31, 2006. Our reserve for warranty returns generally increased in 2007 as the result of the sales growth from established and new products in 2007. In the event that product returns under warranty differ from our estimates, changes to warranty reserves might become necessary.

Inventory

     Inventories are stated at the lower of cost or market, with cost determined using the weighted average cost, which approximates the first-in, first-out (FIFO) method. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories to their net realizable value. These provisions are based on our best estimates after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions and other factors. Our reserve for excess and obsolete inventory was $321,000 at December 31, 2007 compared to $223,000 at December 31, 2006. In the event that actual excess, obsolete or slow-moving inventories differ from these estimates, changes to inventory reserves might become necessary.

Accounts Receivable

     Sales are typically made on credit and we generally do not require collateral. We perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for estimated potential losses. Uncollectible accounts are written off when deemed uncollectible, and accounts receivable are presented net of an allowance for doubtful accounts. These allowances represent our best estimates and are based on our judgment after considering a number of factors including third-party credit reports, actual payment history, customer-specific financial information and broader market and economic trends and conditions. Our allowance for doubtful accounts was $190,000 at December 31, 2007 compared to $110,000 at December 31, 2006. In the event that actual uncollectible amounts differ from these estimates, changes in allowances for doubtful accounts might become necessary.

Valuation of Long-lived Assets

     We review long-lived assets, such as property and equipment and intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We utilize a two-step approach to testing long-lived assets for impairment. The first step tests for possible impairment indicators. If an impairment indicator is present, the second step measures whether the asset is recoverable based on a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Our review requires the use of judgment and estimates. Management believes that no such impairments have occurred to date. However, future events or circumstances may result in a charge to earnings if we determine that the carrying value of a long-lived asset is not recoverable.

Income Taxes

     Statement of Financial Accounting Standards No. 109, or SFAS No. 109, Accounting for Income Taxes, establishes financial accounting and reporting standards for the effect of income taxes. In accordance with SFAS No. 109, we recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carryforwards.

     In July 2006, the FASB issued Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which became effective for us beginning in 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Under FIN 48, management must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties. We adopted the provisions of FIN 48 effective January 1, 2007. The impact on our reassessment of our pre existing tax positions in accordance with FIN 48 did not have a material impact on the results of operations, financial condition or liquidity. In 2007, we completed a research and development tax credit study which identified $3.1 million in tax credits for Federal and Arizona income tax purposes related to the 2003 through 2007 tax years, and as a result, we recognized $2.0 million in 2007 as a reduction in income tax expense. We made the determination that it was not more likely than not that the full benefit of the research and development tax credit would be sustained on examination and have recorded a liability for unrecognized tax benefits which was $1.1 million as of December 31, 2007. Our estimates are based on the information available to us at the time we prepare the income tax provisions. Our income tax returns are subject to audit by federal, state, and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.

     Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting or tax laws in the United States, or changes in other facts or circumstances. In addition, we recognize liabilities for potential United States tax contingencies based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financial statements.

     In preparing our financial statements, we assess the likelihood that our deferred tax assets will be realized from future taxable income. In evaluating our ability to recover our deferred income tax assets we consider all available positive and negative evidence, including our operating results, ongoing tax planning and forecasts of future taxable income. We establish a valuation allowance if we determine that it is more likely than not that some portion or all of the net deferred tax assets will not be realized. We exercise significant judgment in determining our provisions for income taxes, our deferred tax assets and liabilities and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred tax assets. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As a result of the shareholder litigation settlement expense recorded in the second quarter of 2006, we recorded a valuation allowance of $250,000 in 2006 against our deferred tax assets for Arizona Net Operating Losses (“NOL’s”). We believe that, other than as previously described, as of December 31, 2007, based on our evaluation, no additional valuation allowance was deemed necessary as it is more likely than not that our net deferred tax assets will be realized. However, the deferred tax asset could be reduced in the near term if estimates of taxable income during the carryforward period are reduced.

Stock Based Compensation

     We account for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123R. We use the Black-Scholes-Merton option pricing model which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their stock options before exercising them (“expected term”), the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). Changes in the subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized on our statements of operations. Refer to Note 1(p) to our financial statements for further discussion of how we determined our valuation assumptions.

Contingencies

     We are subject to the possibility of various loss contingencies including product related litigation, arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

     We invest in a limited number of financial instruments, consisting principally of investments in high credit quality debt securities, denominated in United States dollars.

     We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” (SFAS No. 115). All of the cash equivalents and marketable securities are treated as “held-to-maturity” under SFAS No. 115. Investments in fixed rate interest earning instruments carry a degree of interest rate risk as their market value may be adversely impacted due to a rise in interest rates. As a result we may suffer losses in principal if forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our debt securities as “held-to-maturity,” no gains or losses are recognized due to changes in interest rates. These securities are reported at amortized cost, which approximates fair value. As of December 31, 2007, we performed a sensitivity analysis on our fixed rate financial investments. According to our analysis, an increase in interest rates of 50 basis points would result in a decrease in the fair market values for these investments of approximately $91,000 and a decrease in interest rates of 50 basis points would result in an approximately $87,000 increase in fair market value.

     Additionally, we have access to a line of credit borrowing facility which bears interest at varying rates, ranging from LIBOR plus 1.5% to prime. At December 31, 2007, the available borrowing under the line of credit was $10.0 million, and there was no amount outstanding under the line of credit. We have not borrowed any funds under the line of credit since its inception, however, should we need to do so in the future, such borrowings could be subject to adverse or favorable changes in the underlying interest rate.

Exchange Rate Risk

     We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, sales to customers provide for pricing and payment in United States dollars, and therefore are not subject to exchange rate fluctuations. To date, we have not engaged in any currency hedging activities, although we may do so in the future. Fluctuations in currency exchange rates could harm our business in the future.

Item 8. Financial Statements and Supplementary Data

TASER INTERNATIONAL, INC.

BALANCE SHEETS
December 31,

		2007				2006
Assets
Current assets:
Cash and cash equivalents		$	48,800,287			$	18,773,685
Short-term investments			2,501,152				3,557,289
Accounts receivable, net of allowance of $190,000 and $110,000 in 2007 and 2006, respectively			11,691,553				10,068,049
Inventory			13,506,804				9,257,746
Prepaids and other assets			4,318,661				2,164,002
Deferred income tax assets, net			15,608,325				12,295,493
Total current assets			96,426,782				56,116,264
Long-term investments			9,006,493				25,477,574
Property and equipment, net			23,599,680				20,842,632
Deferred income tax assets, net			6,724,104				15,868,719
Intangible assets			1,925,139				1,532,500
Other long-term assets			81,203				—
Total assets		$	137,763,401			$	119,837,689
Liabilities and stockholders’ equity
Current liabilities:
Current portion of capital lease obligations		$	19,257			$	45,214
Accounts payable and accrued liabilities			10,088,139				6,789,474
Current portion of deferred revenue			1,694,644				1,037,441
Deferred insurance settlement proceeds			404,848				509,067
Customer deposits			266,728				171,492
Litigation settlement liabilities			—				9,750,000
Total current liabilities			12,473,616				18,302,688
Capital lease obligations, net of current portion			11,695				30,974
Deferred revenue, net of current portion			3,541,267				1,975,489
Liability for unrecorded tax benefits			1,100,073				—
Other liabilities			—				199,999
Total liabilities			17,126,651				20,509,150
Commitments and contingencies
Stockholders’ equity
Preferred stock, $0.00001 par value per share; 25 million shares authorized; 0 shares issued and outstanding at December 31, 2007 and 2006			—				—
Common stock, $0.00001 par value per share; 200 million shares 63,263,903 and 61,939,974 shares authorized; issued and outstanding at December 31, 2007 and 2006, respectively			635				622
Additional paid-in capital			86,911,381				80,629,659
Treasury stock, 300,000 shares at December 31, 2007 and 2006			(2,208,957	)			(2,208,957	)
Retained earnings			35,933,691				20,907,215
Total stockholders’ equity			120,636,750				99,328,539
Total liabilities and stockholders’ equity		$	137,763,401			$	119,837,689

The accompanying notes are an integral part of these financial statements.

TASER INTERNATIONAL, INC.

STATEMENTS OF OPERATIONS For The
Years Ended December 31,

		2007				2006				2005
Net sales		$	100,727,191			$	67,717,851			$	47,694,181
Cost of products sold:
Direct manufacturing expense			31,507,727				18,296,039				12,843,816
Indirect manufacturing expense (1)			11,609,696				6,242,751				5,252,470
Total cost of products sold			43,117,423				24,538,790				18,096,286
Gross margin			57,609,768				43,179,061				29,597,895
Sales, general and administrative expenses (1)			32,814,170				29,680,764				26,483,485
Research and development expenses (1)			4,421,596				2,704,521				1,574,048
Shareholder litigation settlement expense			—				17,650,000				—
Income (loss) from operations			20,374,002				(6,856,224	)			1,540,362
Interest and other income, net			2,152,238				1,872,645				1,165,064
Income (loss) before provision (benefit) for income taxes			22,526,240				(4,983,579	)			2,705,426
Provision (benefit) for income taxes			7,499,764				(895,900	)			1,648,910
Net income (loss)		$	15,026,476			$	(4,087,679	)		$	1,056,516
Income (loss) per common and common equivalent shares
Basic		$	0.24			$	(0.07	)		$	0.02
Diluted		$	0.23			$	(0.07	)		$	0.02
Weighted average number of common and common equivalent shares outstanding
Basic			62,621,174				61,984,240				61,303,939
Diluted			65,685,667				61,984,240				63,556,246

Indirect manufacturing expense		$	187,585			$	131,086			$	—
Sales, general and administrative expenses			986,616				808,341				—
Research and development expenses			213,765				199,418				—
		$	1,387,966			$	1,138,845			$	—

The accompanying notes are an integral part of these financial statements.

TASER INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2007, 2006 and 2005

										Additional																Total
		Common Stock								Paid-in				Treasury Stock								Retained				Stockholders’
		Shares				Amount				Capital				Shares				Amount				Earnings				Equity
Balance, December 31, 2004			60,992,156			$	609			$	75,850,810				—			$	—			$	23,938,378			$	99,789,797
Exercise of stock options			946,498				10				749,493				—				—				—				749,503
Income tax benefit of stock options exercised			—				—				2,142,559				—				—				—				2,142,559
Net income			—				—				—				—				—				1,056,516				1,056,516
Balance, December 31, 2005			61,938,654				619				78,742,862				—				—				24,994,894				103,738,375
Exercise of stock options			301,320				3				747,952				—				—				—				747,955
Stock-based compensation expense			—				—				1,138,845				—				—				—				1,138,845
Purchase of treasury stock			(300,000	)			—				—				300,000				(2,208,957	)			—				(2,208,957	)
Net loss			—				—				—				—				—				(4,087,679	)			(4,087,679	)
Balance, December 31, 2006			61,939,974				622				80,629,659				300,000				(2,208,957	)			20,907,215				99,328,539
Exercise of stock options			1,107,574				11				3,143,758				—				—				—				3,143,769
Shareholder derivate settlement			216,355				2				1,749,998				—				—				—				1,750,000
Stock-based compensation expense			—				—				1,387,966				—				—				—				1,387,966
Net income			—				—				—				—				—				15,026,476				15,026,476
Balance, December 31, 2007			63,263,903			$	635			$	86,911,381				300,000			$	(2,208,957	)		$	35,933,691			$	120,636,750

The accompanying notes are an integral part of these financial statements.

TASER INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,

		2007				2006				2005
Cash Flows from Operating Activities:
Net income (loss)		$	15,026,476			$	(4,087,679	)		$	1,056,516
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on disposal of assets			49,949				—				56,872
Depreciation and amortization			2,521,237				2,096,595				1,712,738
Provision for doubtful accounts			80,835				(830	)			26,620
Provision for excess and obsolete inventory			206,335				85,329				117,000
Provision for warranty			1,030,291				442,195				1,293,657
Stock compensation expense			1,387,966				1,138,845				—
Deferred insurance settlement proceeds			(104,219	)			(192,448	)			(98,485	)
Deferred income taxes			6,931,856				(1,167,924	)			(525,503	)
Stock option tax benefit			—				—				2,142,559
Change in assets and liabilities:
Accounts receivable			(1,704,339	)			(4,645,192	)			3,011,465
Inventory			(4,455,393	)			762,261				(3,459,333	)
Prepaids and other assets			(2,235,862	)			676,028				(1,147,323	)
Insurance settlement proceeds receivable			—				575,000				—
Accounts payable and accrued liabilities			1,069,483				256,625				(3,601,040	)
Deferred revenue			2,222,981				1,611,782				393,871
Accrued litigation settlement			(8,000,000	)			9,750,000				—
Other liabilities			(199,999	)			199,999				—
Customer deposits			95,236				(18,764	)			88,090
Net cash provided by operating activities			13,922,833				7,481,822				1,067,704
Cash Flows from Investing Activities:
Purchases of investments			(138,203,034	)			(82,610,518	)			(87,829,476	)
Proceeds from investments			155,730,252				81,123,775				95,554,648
Purchases of property and equipment			(4,067,579	)			(1,839,815	)			(7,812,220	)
Purchases of intangible assets			(454,403	)			(229,375	)			(104,066	)
Net cash provided (used) by investing activities			13,005,236				(3,555,933	)			(191,114	)
Cash Flows from Financing Activities:
Proceeds from options exercised			3,143,769				747,955				749,503
Payments under capital leases			(45,236	)			(43,111	)			(31,343	)
Repurchase of common stock			—				(2,208,957	)			—
Net cash provided (used) by financing activities			3,098,533				(1,504,113	)			718,160
Net increase in cash and cash equivalents			30,026,602				2,421,776				1,594,750
Cash and cash equivalents, beginning of period			18,773,685				16,351,909				14,757,159
Cash and cash equivalents, end of period		$	48,800,287			$	18,773,685			$	16,351,909
Supplemental Disclosure:
Cash paid for interest		$	5,186			$	7,281			$	103
Cash paid (refunded) for income taxes — net		$	475,000			$	229,424			$	(19,267	)
Non Cash Transactions-
Common stock issued for shareholder derivative lawsuit settlement		$	1,750,000			$	—			$	—
Property and equipment purchases in accounts payable		$	1,198,891			$	—			$	74,233
Insurance settlement proceeds receivable		$	—			$	—			$	575,000
Property and equipment acquired under capital lease		$	—			$	—			$	146,000

The accompanying notes are an integral part of these financial statements.

TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

     TASER International, Inc. (“TASER” or the “Company”) is a developer and manufacturer of advanced electronic control devices (“ECDs”) designed for use in law enforcement, military, corrections, private security and personal defense. The Company sells its products worldwide through its direct sales force, distribution partners, online store and third party resellers. We were incorporated in Arizona in September 1993 and reincorporated in Delaware in January 2001. Our headquarter facilities are in Scottsdale, Arizona.

a. Basis of Presentation and Use of Estimates

     The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements include allowances for doubtful accounts receivable, inventory valuation reserves, product warranty reserves and valuation of long lived assets, deferred income taxes, stock based compensation and contingencies. Actual results could differ from those estimates.

b. Cash, Cash Equivalents and Investments

     Cash and cash equivalents include funds on hand and short-term investments with maturities of three months or less. Short-term investments include securities generally having maturities of 90 days to one year. Long-term investments include securities having maturities of more than one year. At December 31, 2007 all investments are classified based on their remaining contractual maturity date. At December 31, 2006 such classification was based on the original contractual maturity date in conjunction with management’s intent to reinvest maturing investments into securities with similar long-term maturities. The Company’s long-term investments are invested in government sponsored mortgage-backed securities and are classified as held to maturity. These investments are recorded at amortized cost. See Note 2. The Company intends to hold these securities until maturity.

     The Company’s cash and investment accounts earned interest at an approximate rate of 4.2% during 2007 and 3.9% in 2006. Included in the Company’s cash balances are deposits with its bank of $29.5 million which is in excess of the FDIC insurance coverage limit of $100,000. Management believes the risk of financial loss on the uninsured deposits is limited due to the quality of the financial institution.

c. Inventory

     Inventories are stated at the lower of cost or market; cost is determined using the weighted average cost of raw materials which approximates the first-in, first-out (FIFO) method and allocations of manufacturing labor and overhead. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories to their net realizable value. These provisions are based on management’s best estimate after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions and other factors.

d. Property and Equipment

     Property and equipment are stated at cost net of accumulated depreciation. Additions and improvements are capitalized while ordinary maintenance and repair expenditures are charged to expense as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets.

e. Impairment of Long-Lived Assets

     The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and identifiable intangible assets may warrant revision or that the remaining balance of these assets may not be recoverable. In performing the review for recoverability, management estimates the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, would be calculated based on the excess of the carrying amounts of the assets over their estimated fair value. No impairment losses were recorded in 2007, 2006 or 2005.

NOTES TO FINANCIAL STATEMENTS — (Continued)

f. Customer Deposits

     The Company requires certain deposits in advance of shipment for certain customer sales orders. Customer deposits are recorded as a current liability on the accompanying balance sheets.

g. Revenue Recognition and Accounts Receivable

     The Company recognizes revenues when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, title has transferred, the price is fixed and collectability is reasonably assured. All of the Company’s sales are final and its customers do not have a right to return the product. Certain of the Company’s customers are charged shipping fees, which are recorded as a component of net sales. Sales taxes collected on sales is netted against government remittances and thus recorded on a net basis. Training revenue is recorded as the service is provided.

     The Company offers customers the right to purchase extended warranties which include additional services and coverage beyond the limited warranty on the TASER X26 and ADVANCED TASER products. Revenue for extended warranty purchases is deferred at the time of sale, and recognized over the warranty period commencing at the date of sale. The extended warranties range from one to four years. At December 31, 2007 and 2006, $5,217,000 and $2,933,000 was deferred under this program, respectively. In 2004, the Company began selling a private citizen version of its TASER X26 device, the X26C. This product comes with a certificate for a free training session. The Company is deferring the revenue associated with these training sessions until such time as either the training has occurred or the certificate expires, which is 90 days after purchase by the end user. The Company has valued these one-on-one training sessions at their estimated fair value, which is the amount that the Company will pay the independent third party conducting the training. The Company also defers the recognition of revenue associated with background checks (at the cost of doing the background checks) that are done as part of the private citizen sales process until the background check is done and the private citizen purchases the product. The Company has also deferred recognizing revenue associated with the training for Federal Firearms Licensed dealers which will be trained as part of a distribution agreement signed in 2004. The Company will recognize this revenue as the training is provided. At December 31, 2007 and 2006, $19,000 and $80,000 was deferred under the X26C program, respectively.

     Sales are typically made on credit and the Company generally does not require collateral. We perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for estimated potential losses. Uncollectible accounts are written off when deemed uncollectible, and accounts receivable are presented net of an allowance for doubtful accounts. These allowances represent our best estimates and are based on our judgment after considering a number of factors including third-party credit reports, actual payment history, cash discounts, customer-specific financial information and broader market and economic trends and conditions.

     Also included as a component of revenue is development funding provided by the Office of Naval Research (ONR), under a cost-plus fixed fee contract. Periodically, an invoice summarizing the reimbursable expenses is submitted to the ONR for payment. For contracts that are billed at completion, we record revenue on a percentage of completion basis. The payment request submitted by the Company to the ONR details the costs expensed in the period and adds a nominal contracted profit margin. The work under this contract was completed in 2006, therefore there were no amounts were recognized in 2007. The total amount recognized for this work in the years ended December 31, 2006 and 2005 was $146,000, and $435,000, respectively. The Company recognizes grant revenue when the performance milestones have been completed.

h. Cost of Products Sold

     Cost of products sold represents manufacturing costs, consisting of materials, labor and overhead related to finished goods and components. Shipping costs incurred related to product delivery are also included in cost of products sold.

i. Advertising Costs

     The Company expenses advertising costs in the period in which they are incurred with the exception of commercial advertising production costs which are expensed at the time the first commercial is shown on television. The Company incurred advertising costs of $931,000, $437,000 and $888,000 in 2007, 2006 and 2005, respectively. At December 31, 2007, the Company had $523,000 of deferred advertising costs related to the production costs of an infomercial for the TASER C2. These deferred advertising costs are included in prepaid and other assets on the accompanying balance sheets and are expected to be expensed in the first quarter of 2008 when the infomercial first airs. Advertising costs are included in sales, general and administrative expenses in the accompanying statements of operations.

NOTES TO FINANCIAL STATEMENTS — (Continued)

j. Warranty Costs

     The Company warrants its X26 products from manufacturing defects on a limited basis for a period of one year after purchase, and thereafter will replace any defective unit for a fee. The C2 product is warranted for a period of 90 days after purchase. The Company also sells extended warranties for periods of up to four years after the expiration of the limited one year warranty. Management tracks historical data related to returns and warranty costs on a quarterly basis, and estimates future warranty claims by applying the estimated average return rate to the product sales for the period. In the fourth quarter of 2007, a revision was made to the basis of calculating the four quarter return rate as the result of being able to more accurately capture data relating to the number of units replaced under standard warranty versus extended warranty terms. In addition, given the trend of sales growth the Company experienced particularly in the second half of 2007, the estimated four quarter return rate was weighted to reflect the higher return rate experienced in those periods. The net impact of these changes in estimates was a $238,000 reduction in the warranty reserve, recorded as a credit to cost of goods sold in the fourth quarter of 2007. Had management used the previously existing basis of estimate, the warranty reserve at December 31, 2007 would have been approximately $1.4 million. If management becomes aware of a component failure that could result in larger than anticipated returns from its customers, the reserve would be increased. After the one year warranty expires, if the device fails to operate properly for any reason, the Company will replace the TASER X26 for a prorated discounted price depending on when the product was placed into service and replace the ADVANCED TASER device for a fee of $75. These fees are intended to cover the handling and repair costs and include a profit. The following table summarizes the changes in the estimated product warranty liabilities for the years ended December 31, 2007, 2006 and 2005:

		2007				2006				2005
Balance at Beginning of Period		$	713,135			$	851,920			$	457,914
Utilization of Accrual			(824,172	)			(580,980	)			(899,651	)
Warranty Expense			1,030,291				442,195				1,293,657
Balance at End of the Period		$	919,254			$	713,135			$	851,920

k. Research and Development Expenses

     The Company expenses research and development costs as incurred. The Company incurred product development expense of approximately $4,422,000, $2,705,000 and $1,574,000 in 2007, 2006 and 2005, respectively.

l. Income Taxes

     Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced through the establishment of a valuation allowance at the time, based upon available evidence, if it is more likely than not that the deferred tax assets will not be realized. Income tax-related interest and penalties are recorded as a component of the provision for income taxes.

     In July 2006, the FASB issued Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which became effective for the Company beginning in 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Under FIN 48, management must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties. The Company’s policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company adopted the provisions of FIN 48. effective January 1, 2007. Refer to Note 8 for discussion of the cumulative effect of adoption of FIN 48.

m. Concentration of Credit Risk and Major Customers

     Financial instruments that potentially subject the Company to concentrations of credit risk consist of accounts receivable. Sales are typically made on credit and the Company generally does not require collateral. The Company performs ongoing credit evaluations of its customers’ financial condition and maintains an allowance for estimated losses. Uncollectible accounts are written off when deemed uncollectible, and accounts receivable are presented net of an allowance for doubtful accounts. The allowance for bad debts totaled $190,000, $110,000 and $111,000 as of December 31, 2007, 2006 and 2005, respectively. Historically, the Company has experienced a very low level of write offs related to doubtful accounts.

NOTES TO FINANCIAL STATEMENTS — (Continued)

     The Company sells primarily through a network of unaffiliated distributors. The Company also reserves the right to sell directly to the end user to secure the customer’s account balance. In 2007, one distributor represented approximately 16% of total sales. No other customer exceeded 10% of total sales in 2007. In 2006, one distributor represented 12% of total sales. No other customer exceeded 10% of total sales in 2006. There were no customers that exceeded 10% of total sales in 2005.

     At December 31, 2007, the Company had receivables from two customers comprising 20% and 10% of the aggregate accounts receivable balance. These customers are unaffiliated distributors of the Company’s products. At December 31, 2006, the Company had receivables from three customers comprising 17%, 11% and 10% of the aggregate accounts receivable balance. These customers are unaffiliated distributors of the Company’s products.

     The Company currently purchases finished circuit boards and injection-molded plastic components from suppliers located in the United States. Although the Company currently obtains many of these components from single source suppliers, the Company owns the injection molded component tooling used in their production. As a result, management believes it could obtain alternative suppliers in most cases without incurring significant production delays. The Company also purchases small, machined parts from a vendor in Taiwan, custom cartridge assemblies from a proprietary vendor in the United States, and electronic components from a variety of foreign and domestic distributors. Management believes that there are readily available alternative suppliers in most cases who can consistently meet its needs for these components. The Company acquires most of its components on a purchase order basis and does not have long-term contracts with suppliers.

n. Financial Instruments

     The Company’s financial instruments include cash, investments, accounts receivable and accounts payable. The Company's investments are held to maturity and stated at amortized cost which approximates fair value. Information about the fair value of the Company’s investments is included in Note 2. Due to the short-term nature of the other instruments, the fair value of these instruments approximates their recorded value.

o. Segment Information

     Management has determined that its operations are comprised of one reportable segment — the sale of advanced electronic control devices and accessories. For the years ended December 31, 2007, 2006 and 2005, sales by geographic area were as follows:

Sales by Geographic Area		2007				2006				2005
United States			85	%			86	%			87	%
Other Countries			15	%			14	%			13	%
Total			100	%			100	%			100	%

Sales to customers outside of the United States are denominated in U.S. dollars and are attributed to each country based on the billing address of the distributor or customer. To date no individual country outside the U.S. has represented a material amount of total net revenue. Substantially all assets of the Company are located in the United States.

p. Stock-Based Compensation

     Prior to January 1, 2006, the Company accounted for its stock-based compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”) and related interpretations, as permitted by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). No stock-based compensation expense was recognized in the statement of operations for the year ended December 31, 2005 as all options granted under the Company’s stock-based employee compensation plans had an exercise price equal to the market value of the underlying common stock on the date of grant. As permitted by SFAS No. 123, stock-based compensation was included as a pro forma disclosure in the notes to the Company’s financial statements for the year ended December 31, 2005.

     Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), “Share Based Payment” (“SFAS No. 123(R)”) using the modified prospective transition method. Under this transition method, compensation cost recognized includes: (a) compensation cost for all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value calculated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant date fair value calculated in accordance with the provisions of SFAS No. 123(R). Results for prior periods were not restated, as provided for under the modified-prospective method.

     Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options (“excess benefits”) as operating cash flows in the consolidated statements of cash flows. SFAS No. 123(R) requires these tax benefits to be classified and reported as both an operating cash outflow and a financing cash inflow.

NOTES TO FINANCIAL STATEMENTS — (Continued)

     The following table shows the effect on net income and basic and diluted earnings per share for the year ended December 31, 2005 had compensation cost been recognized based upon the estimated fair value on the grant date of stock options in accordance with SFAS No. 123, as amended by SFAS No. 148 “Accounting for Stock-Based Compensation — Transition and Disclosure.”

		2005
		(In thousands)
Net income, as reported		$	1,057
Add: Total stock-based compensation included in net income as reported			—
Deduct: Total stock-based employee compensation determined under fair value based method for all awards, net of related tax effects			(5,880	)
Pro forma net loss		$	(4,823	)
Net income (loss) per common share:
Basic, as reported		$	0.02
Basic, pro forma		$	(0.08	)
Diluted, as reported		$	0.02
Diluted, pro forma		$	(0.08	)
Basic			61,303,939
Diluted			63,556,246