AXON ENTERPRISE, INC. - Annual Report: 2009 (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

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

Commission File Number: 001-16391

TASER International, Inc.

(Exact name of registrant as specified in its charter)

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

(480) 991-0797
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, $0.00001		The Nasdaq Global Select Market
par value per share

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

Indicate by check mark 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. þ

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

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 30, 2009, which was the last business day of the registrant’s most recently completed second fiscal quarter, as reported by NASDAQ, was $268,141,201.

The number of shares of the registrant’s common stock outstanding as of March 10, 2010, was 62,455,900.

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, 2009 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, 2009
TABLE OF CONTENTS

		Page
PART I
Item 1. Business			3
Item 1A. Risk Factors			13
Item 1B. Unresolved Staff Comments			21
Item 2. Properties			21
Item 3. Legal Proceedings			21
Item 4. Reserved			21
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			21
Item 6. Selected Financial Data			23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			35
Item 8. Financial Statements and Supplementary Data			36
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			63
Item 9A. Controls and Procedures			63
Item 9B. Other Information			65
PART III
Item 10. Directors, Executive Officers and Corporate Governance			66
Item 11. Executive Compensation			66
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			66
Item 13. Certain Relationships and Related Transactions, and Director Independence			66
Item 14. Principal Accounting Fees and Services			66
PART IV
Item 15. Exhibits and Financial Statement Schedules			66
Signatures			68
Exhibit 10.19
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 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 continue to successfully penetrate the law enforcement market;

4.

growth expectations for existing accounts;

5.

our ability and strategies to expand product sales to the international, Federal, military, corrections, private security and private citizen self-defense markets;

6.

fluctuations in gross margins;

7.

expansion of product capability and the sufficiency of our manufacturing capacity;

8.

timing and expectations relating to new product and service introductions;

9.

product safety;

10.

our business model and strategy;

11.

the automation of our production process;

12.

plans to develop redundant tooling and capacity;

13.

our insulation from competition and our competitive advantage;

14.

the benefits and competitive advantages of our products and services;

15.

our litigation strategy and the importance of favorable verdicts;

16.

the outcome of legal proceedings we are involved in;

17.

our intention to continue to participate in law enforcement trade shows;

18.

our strategy to grow our international presence;

19.

that we have readily available alternative materials and components suppliers;

20.

the sufficiency and availability of our liquid assets and capital resources;

21.

our plans to invest in data centers and upgrades to our technology and network infrastructure to support our EVIDENCE.COM service;

22.

our intentions about future development efforts and activities, including that we anticipate a reduced level of investment in 2010 for our ECD hardware development, and increased level for our AXON and EVIDENCE.COM services;

23.

trends and expectations relating to certain balance sheet accounts and working capital items;

24.

our expectations, that we will renew our line of credit;

25.

plans relating to our training programs;

26.

the timing and resolution of, and trends relating to, unrecognized tax benefits and liabilities; and

27.

anticipated capital expenditures.

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 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: ADVANCED TASER ^®, CHECKLOK^®, TASER^®, XREP^®, and the bolt on West Hemisphere logo, all registered in the US. All other trademarks and service marks including M18, M26, X26, X26C, C2, AXON, Shockwave, the bolt within circle logo, and designs belong to TASER International, Inc., except as expressly indicated as belonging to another.

Item 1.		Business

Overview

TASER International, Inc.’s (the Company or TASER or we or our) core mission is to protect life by providing less dangerous, more effective force options and technologies. We are a market leader in the development, manufacture and sale of advanced Electronic Control Devices (ECDs) designed for use in the law enforcement, military, corrections, private security and personal defense markets. Since our inception 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.

Our mission to protect life has also been extended to protect truth. We have learned that bringing a subject into custody is not the end of the challenge for law enforcement. In fact, it is typically just the beginning since a significant number of incidents that start as a physical conflict, transition into a legal conflict. Whether it’s prosecuting and convicting the individual arrested, or responding to excessive use of force allegations, the post-incident legal process is a considerable part of the challenge law enforcement faces on a continual basis and can often take years and millions of litigation dollars to resolve in the courtroom. To help law enforcement address this challenge, we are developing a fully integrated hardware and software solution that will provide our law enforcement customers the capabilities to capture, store, manage and analyze video and other digital evidence.

Central to our strategy, we conduct research and develop advanced technologies for both the creation of new, and the enhancement of existing, hardware and software products and services. We believe that delivering breakthrough innovation and high-value solutions through our various product platforms is the key to delivering compelling value propositions to meet our customers’ needs, and to our future growth. We place the highest level of importance on the safety and appropriate use of our products and have established industry leading training services to provide our users a comprehensive overview of the legal and policy issues, medical information and risk mitigation relating to our ECDs and the use of force. Our products are sold through a network of distribution channels developed for selling and marketing our products and services to law enforcement agencies, primarily in North America with continuing focus and effort placed on expanding these programs in international, military and other markets.

Our operations are comprised of one segment — the sale of advanced ECDs and accessories. Information about sales by geographic region is included in footnote 1(p) of the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

Products

Electronic Control Devices (ECDs)

Our Technology

We make ECDs for two main types of market segments: (a) the law enforcement, military, corrections and professional security markets, and (b) the consumer market. Our products use a replaceable cartridge containing compressed nitrogen to deploy and propel 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 five 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 three hand-held ECD product lines and have also incorporated our technology into several other product line extensions.

Our most popular 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 digital power magazine (DPM), download software and equipment, extended warranties, and a number of holstering options and accessories. The TASER X26 product line (excluding sales of the consumer X26C product and individual cartridge sales) accounted for approximately $53.4 million, or 51% of our net sales, for the year ended December 31, 2009 and for approximately $51.2 million, or 55%, of our net sales, for the year ended December 31, 2008.

In the third quarter of 2009, we introduced the TASER X3, which we believe represents a significant advancement in capabilities and features over our existing devices. The X3 is a revolutionary new multi-shot ECD that can engage multiple targets, display Warning Arcs while loaded, and deliver a calibrated Neuro Muscular Incapacitation (NMI) pulse that results in improved safety characteristics. While the X3 offers enhanced firepower over existing ECDs, it also represents a significant leap in sensor and computation power — making it the most intelligent hand-held force option ever developed.

Our third 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 $3.3 million, or approximately 3%, of our net sales, for the year ended December 31, 2009 and for approximately $2.5 million, or 3%, of our net sales, for the year ended December 31, 2008.

ECD Product Line Extensions

Over the past several years, we have been developing more innovative ways to deploy our proprietary NMI technology, increasing the capabilities of our systems and extending the range at which they can be deployed. This resulted in two new products which were introduced to the market in 2009.

The TASER XREP is a self-contained, wireless ECD that deploys from a 12-gauge pump-action shotgun. It delivers a similar NMI bio-effect as our X26 handheld ECD, but can be delivered to a maximum effective range of 100 feet (30.48 meters). The battery supply is fully integrated into the chassis and provides the power to drive the XREP projectile engine. While the XREP can be fired from a regular shotgun, we also partnered with Mossberg to develop the TASER X12 Less Lethal Shotgun (LLS), which is a fully integrated less-lethal platform, utilizing a re-engineered Mossberg 500 pump-action shotgun that is optimized for the XREP. The TASER X12 includes Radial Ammunition Key technology to prevent the system from deploying lethal 12-gauge rounds in order to remove the possibility of end users accidentally firing a lethal round in a less-lethal system during high stress situations.

The TASER Shockwave system is the first generation of TASER Remote Area Denial (TRAD) technology allowing for both increased safety and stand-off capability during hostile situations through the use of our NMI technology. The Shockwave is designed as a fully modular system, allowing the end user complete flexibility to deploy as needed to achieve the desired objective. Multiple TASER Shockwave units can be stacked together either horizontally in order to extend area coverage, or vertically to allow multiple salvo engagements; or daisy chained together to maximize either area coverage or cartridge pattern density. These features provide the capability to project Area Denial from a secure location. The system minimizes risk as the system can be activated with the push of a button on the Control Box at a safe stand-off distance of up to 100 meters. The TASER Shockwave unit deploys its cartridges up to 25-feet, to instantaneously incapacitate multiple personnel within the field of deployment coverage.

Consumer Products

For the personal defense market our primary product is the TASER C2 consumer product, which we introduced in 2007. This device is a compact system that provides the same proven NMI effectiveness as our market leading TASER X26 but in a less intimidating, more compact form factor 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.

Our total consumer products accounted for approximately $5.9 million, or 6% of our net sales, for the year ended December 31, 2009 and for approximately $7.6 million, or 8% of our net sales for the year ended December 31, 2008.

Cartridges and Other Accessories

We manufacture multiple cartridge types: a 15’ cartridge, a 21’ cartridge, a 25’ XP cartridge, a 35’ cartridge, a 21’ training cartridge, a 15’ cartridge for the C2 and in 2009 we introduced the new range of Smart Cartridges for use with the X3. 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 markets. 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. The Smart Cartridges designed for the X3 come in a more compact form factor to accommodate the 3-in-1 multishot capability of the X3, with ranges of 15’, 25’ and 35’. The Smart Cartridge communicates with the Fire Control System within the X3, indicating the type of cartridge loaded in each bay and its deployment status. The new static resistant propulsion system allows the X3 to display NMI arcs without firing the cartridge — which also reduces the risk of accidental static discharge misfires.

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.

Individual cartridge sales accounted for approximately $27.9 million, or approximately 27% of our net sales, for the year ended December 31, 2009 and for approximately $20.5 million, or approximately 22% of our net sales, for the year ended December 31, 2008.

In 2009, we introduced The TASER Controlled Digital Power Magazine (CDPM), a new accessory for the TASER X26 device. The CDPM has the same functionality as a regular DPM; however, the CDPM features a disabling safety key and wrist strap designed to secure the device to the officer. If a prisoner or suspect attempts to take the TASER X26 device away and breaks the safety key connection, the system is designed to instantly deactivate the TASER X26.

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 ECD 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.

AXON and EVIDENCE.COM

In 2009 we devoted significant resources to the design and development of our new end-to-end digital evidence collection and management solution — AXON and EVIDENCE.COM.

The AXON is a tactical networkable computer combining advanced audio-video record/capture capabilities worn by first responders. An audio-video earpiece, imager, speaker and microphone integrates into the communications loop between existing radios and the communications headset, recording video of critical incidents from the visual perspective of the officer. AXON significantly changes officer efficiency by reducing report documentation workload while increasing accuracy and accountability. EVIDENCE.COM is a virtual evidence warehouse, offering digital storage in a highly secure, easily accessible environment. From EVIDENCE.COM, both agencies and legal professionals may quickly access key evidence data without the difficult and sometimes-impossible inventory searches common to existing storage methods.

We launched initial field trials of the AXON and EVIDENCE.COM in the fourth quarter of 2009 and we anticipate an increasing volume of similar trial programs in 2010. We believe these trial programs are the best way for our customers to see the powerful capabilities and benefits of this technology for themselves, and will help drive revenue in 2010.

Product Warranties

We offer a one year limited warranty on all of the TASER X3, 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 X3 and 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 throughout the world currently represent the primary target market for our TASER X3, TASER X26 and ADVANCED TASER device products. In the law enforcement market, more than 15,000 law enforcement agencies in over 50 countries have made initial purchases of our TASER brand devices for testing or deployment. In addition, approximately 5,000 police departments have purchased or are in the process of purchasing TASER devices to issue to all of their on duty patrol officers. In 2009, 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 carry TASER X26 devices.

We continue to deploy resources for educating correctional facility personnel as well as parole and probation field officers in the benefits of using TASER brand products. We have developed training programs and command staff demonstrations specific to the Corrections market and we attended several Corrections tradeshows and conferences to expand our reach into the market. Our TASER devices are deployed in county correctional facilities such as those operated by the Los Angeles Custody Division and Maricopa County Sheriff (AZ). State correctional agencies deploying TASER devices include Arizona, Arkansas, Colorado, Kentucky, Louisiana, Montana, Nevada, North Dakota, Oregon, Tennessee, Utah, Washington and Wisconsin.

Military Forces, both United States and Foreign Allies

TASER devices continue to be deployed in support of key strategic military operations in locations around the world. 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 in 2007. Additionally, during 2008, 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 2008, we entered into a science and technology contract with the Joint Non-Lethal Weapons Directorate (JNLWD) of the U.S Department of Defense to develop a 40mm projectile, compatible with already fielded weapons, which allows for extension and improvement of the our existing eXtended Range Electronic Projectile (XREP) technology. The development contract comprises three phases. Phase one commenced in 2008 and was completed in early 2009. The second phase, contingent upon successful completion of the first, was started in 2009 and was substantially completed by December 31, 2009. The third phase is optional and contingent upon successful completion of phase two. 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.

Private Security

We still continue to pursue opportunities for sales of TASER devices in private security markets: however, we have made limited sales to date. Private security officers represent a broad range of individuals, including contract security patrol, healthcare, gaming, retail security employees and many others. Similar to our other emerging markets, we have developed training programs and demonstrations specific to the industry by meeting with several large corporate and private patrol security companies to discover their unique needs. We also attended several private security tradeshows, conferences and industry association meetings to generate a presence in this market space.

Private Citizen / Personal Protection

In July 2007, we introduced the TASER C2 personal protector, specifically designed for the private citizen market. This consumer product contributed approximately 5%, 7% and 4% of our total net sales in 2009, 2008 and 2007, respectively. While it has been a challenge trying to generate product traction in a difficult economic climate for consumers, we believe private citizen sales will continue to be a steady contributor to our business in 2010 as a result of various distribution relationships and marketing strategies we have put in place to continue to promote awareness of the TASER C2 in the consumer market.

Sales and Marketing

Law enforcement, federal / 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 more than 15,000 law enforcement agencies.

Since the introduction of the ADVANCED TASER device in 1999, we have used multiple 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 2,400 training classes conducted around the world, and more recently in the case of the TASER X3 an integrated online media launch including a dedicated website. We also target key regional and national law enforcement trade shows where we can demonstrate the TASER devices to leading departments. In 2009, we attended and exhibited at 75 regional, national and international law enforcement trade shows. We also held our annual U.S. Tactical Conference for the trained master instructors, and law enforcement training officers, the continued focus of which was to train the officers in the use of all of the latest ECD’s and other new products.

We plan to continue investment in the area of law enforcement trade shows and conferences in 2010, 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 United States are made through our network of law enforcement distributors. In addition, we have one military and federal 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 primarily made through our commercial distributors and our web site. We have also established relationships selling to retail chains. We have implemented a variety of marketing initiatives to support sales of the TASER C2 personal protector. We produced an infomercial which aired in multiple markets during 2008, hired a professional advertising and public relations company to assist us in media and press events, and editorial placements and attended numerous tradeshows specifically to target the consumer market. We continue 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 2009, we concentrated our international marketing on the countries that were furthest along in the testing and purchasing process. These countries included the United Kingdom, Australia, New Zealand and Brazil. 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 2009. As a percentage of total sales, sales outside the U.S. increased to approximately 22% in 2009 from 18% in 2008 and 15% in 2007. Reference is made to Note 1(p) in the accompanying consolidated 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 20 hour class that certifies law enforcement, military, corrections and security agency trainers as instructors in the use of TASER ECDs. In 2009, we partnered with the Northeast Wisconsin Technical College (NWTC) to provide an online learning opportunity for new and re-certifying TASER instructors. As of December 31, 2009, approximately 48,000 law enforcement officers around the world have been trained and certified as instructors in the proper use of TASER brand devices. This includes approximately 43,500 officers in the United States and 4,500 in other countries.

Currently, 1,362 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, military, corrections and professional security 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, 121 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. Since 2001, TASER has held one annual Master Instructor School per year. Due to increased demand, we conducted a second Master Instructor School in 2009, and are planning to continue hosting two Master Instructor Schools each year with events on both the East and West coast to accommodate customer requests. The fee for attending the Master Instructor school is $500. 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 $395 for each training attendee who is being certified for the first time and $195 for recertification. We pay master instructors a per-session training fee for each session they conduct. We conducted 362 training courses in 2009 and as of December 31, 2009, we have conducted a cumulative 2,840 training courses during which we have trained more than 48,000 individuals as instructors for TASER ECD’s.

In 2005, we started a TASER Technician course to train agencies on proper care and preventative maintenance of TASER devices. We charge a fee of $275 to each attendee. In 2009, we hosted 28 Technician courses, including 18 in the United States and 10 internationally; 234 students attended the Technician course in the United States and 179 attended in other countries. As of December 31, 2009, approximately 1,762 people have been trained and certified as TASER Technicians.

In 2008, we started offering a TASER Evidence Collection and Analysis (“ECA”) course to teach investigators how to collect and analyze TASER ECD related evidence at a crime scene. In 2009 we conducted seven such ECA courses in the United States and trained 54 people. As of December 31, 2009, 143 have completed the ECA course. The fee for the ECA course is $150 per student. 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 the first quarter of 2010 we plan to launch a new online training course for consumer instructors. This course focuses on non-law enforcement private self-defense training schools that have expressed a desire to include TAASER consumer products in their courses. The course fee will be $129.

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. Twenty four experienced Master Instructors have been 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 employee 3 staff Instructors who are full time employees responsible for coordinating course delivery and development. We also employ a Training Manager who oversees the law enforcement instructor course and supervises the clerical staff.

Manufacturing

We perform light manufacturing and final assembly operations at our headquarters in Scottsdale, Arizona and own substantially all of the equipment required to develop, prototype, manufacture and assemble our finished products. This includes critical injection molds, schematics, test equipment and prototypes utilized by our supply chain for the production of required raw materials and sub-assemblies. We have implemented lean/six sigma methodologies to optimize all direct and indirect resources within the organization which has helped to boost capacity for existing products, as well as accommodate production of the new TASER products that were introduced in 2009 and others scheduled for 2010 market release. We are currently operating a single production shift; however, other capacity options, including the use of a second shift, will be considered should we experience higher demand resulting from large orders of legacy or new product releases. We continue to maintain our ISO 9001 certification.

Our XREP product is considered a firearm due to the propellant used to launch it from a firearm. We have a Class 7 Federal Firearms license to manufacture, store and sell XREP and related products. We lease facilities from a local third party who specializes in defense products and provide facilities, ensuring compliance with required firearm and dangerous good standards.

We continuously seek opportunities to invest in automated equipment for the continuous improvement of product quality, and reduction of manufacturing costs. As a result, we have 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 the fourth quarter of 2009, we completed an ambitious undertaking with the final installation of our highly automated cartridge assembly line which we believe will significantly improve both our production capacity and yields, while significantly improving efficiency over what was previously a very labor intensive manufacturing process.

Our supplier base has and will continue to be a focus for us. We presently purchase finished circuit boards and components primarily from suppliers located in the United States, along with strategic relationships internationally. Although we currently obtain plastic components from an outside supplier base, we own all the designs and tooling, with plans to develop redundant tooling and capacity in other facilities. We believe there are readily available alternative suppliers in most cases who can consistently meet our needs for these components. We continue to develop and implement supply chain strategies to insure that both short and long term objectives are achieved, while maintaining efficiencies at all levels within the organization.

Competition

Law Enforcement, Corrections and Private Security Markets

The primary competitive factors in the law enforcement and corrections market include a weapon’s accuracy, effectiveness, safety, cost and ease of use. Stinger Systems, introduced an electronic device in 2007 to compete with the TASER X26; however, to date, they have had limited success with less than 1% market share. 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 our competition.

We also believe the ADVANCED TASER, TASER X26 and TASERX3 devices compete indirectly with a variety of 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 Technologies, Inc. We believe our TASER brand device’s advanced technology, versatility, effectiveness, and low injury rate enable it to compete effectively against these 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 ECDs to these military agencies. There is indirect competition from pepper spray and impact weapons sold by companies such as Armor Holdings, Inc. and Pepperball Technologies, Inc.

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. We believe the widespread adoption of our TASER devices by prominent law enforcement agencies will help us to further penetrate the private citizen market.

Video Evidence Market

As we move into the video evidence capture and storage market segment, we are directly competing in a highly fragmented and competitive market against companies with an established presence such as the in-car video market. We believe our AXON product, which places the camera directly on-officer, overcomes some of the inherent limitations that an in-car system brings. When combined with our EVIDENCE.COM service to store, manage and analyze video events, we believe our end-to-end solution is a compelling value proposition for law enforcement agencies to evaluate.

Regulation

United States Regulation

The TASER X26, TASER X3, ADVANCED TASER, TASER C2, SHOCKWAVE and AIR TASER devices, as well as the cartridges used by these devices, are subject to regulations; however, none are considered to be a “firearm” by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives. The TASER XREP, however, does use a propellant system which falls under the definition of a “firearm” and is, therefore, subject to Federal firearms-related regulations specifically applying to the sale and distribution of these devices within the United States. In the 1980s many states adopted regulations restricting the sale and use of stun guns, inexpensive hand-held shock devices and electronic weapons. We believe existing stun gun laws and regulations also apply to our devices.

In 2009, New Jersey’s Attorney General approved a supplemental use of force policy which allows law enforcement officers in New Jersey to use electronic stun devices in limited circumstances involving emotionally disturbed individuals. This policy also limits the number of patrol officer per agency who carry electronic control devices. Until now, New Jersey was the only state to prohibit the use of ECD’s and stun devices by law enforcement. 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.

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.

As of December 31, 2009, state and local codes prohibit the possession of stun guns, including TASER ECDs by the general public in Hawaii, Wisconsin, Michigan, Massachusetts, Rhode Island, New York, New Jersey and the District of Columbia as well as a number of counties, cities and towns.

We are also subject to environmental laws and regulations, including restrictions on the presence of certain substances in electronic products. Reference is made to Section 1A, Risk Factors under the heading “Environmental laws and regulations subject us to a number of risks and could result in significant liabilities and costs”.

United States Export Regulation

Our ECDs are considered a crime control product by the U.S. Government. 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 our 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. After a prolonged period of testing and review for operational effectiveness and medical safety, the British Home Office announced its intention to authorize the deployment of electronic control devices by all British police, including non-firearms officers, and in 2008 announced plans to fund 10,000 TASER ECD’s for police officers in England and Wales, followed by significant purchases of ECDs and cartridges in 2008 and 2009.

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, organizations and foreign laws to protect our intellectual property. As of December 31, 2009, we hold 39 United States patents and 51 foreign patents and also have numerous patents and trademarks pending. Our patents expire at varying dates ranging between 2010 and 2026. 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 ‘evidence.com’.

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 the 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 external resources or expert consulting.

Research and development initiatives include bio-medical research and electrical, mechanical and software engineering. We expect that future development projects will focus on extending the range, improving the functionality and developing new delivery options for our ECD products. In addition, during 2009 we devoted significant resources to the development of AXON and EVIDENCE.COM and have established a dedicated software development team in Carpenteria, CA to plan, develop, test and support the operation of our Software-as-a-Service (SaaS) product.

Our investment in internally funded research and development totaled approximately $20.0 million, $12.9 million and $4.4 million in 2009, 2008 and 2007, respectively. This funding allowed our R&D department to expand to 62 engineers, technicians and specialists at the end of 2009, 26 of whom form our software development team at TASER Virtual Systems. 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. Our return on that investment is intended to be realized over the long term, although new systems and technologies often have a more immediate impact on our business.

Employees

As of December 31, 2009, we had 358 full-time employees and 102 temporary employees. The breakdown of our full time employees by department is as follows: 146 direct manufacturing employees and 212 administrative and manufacturing support employees. Of the 212 administrative and manufacturing support employees; 56 were involved in sales, marketing, communications and training; 72 were employed in research, development, TASER Virtual Systems and engineering; 32 were employed in administrative functions inclusive of executive management, legal, finance and accounting; 11 were employed in information systems technologies; 10 were employed in quality control and 31 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 an 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, both domestic and international, and federal markets. If law enforcement agencies do not continue to purchase our products, our revenues will be adversely affected.

A substantial number of law enforcement and corrections agencies may not purchase our electronic control devices. 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.

Most of our end-user customers 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 limited 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. Currently, many governmental agencies are experiencing severe budgetary stresses as a result of the ongoing worldwide recession. There can be no assurance that the economic and budgeting issues will not worsen and adversely impact sales of our products. 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 and such cancellations may accelerate or be more severe than we have experienced historically as a result of the current economic environment.

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 and could result in negative publicity about our products. Although we carry product liability insurance, we do incur significant 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.

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, 2009, 2008 and 2007, 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 our growth, our prospects may be limited and our future profitability may be adversely affected.

We intend to expand our product and service lines 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.

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. The investments we made in 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.

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 some 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, time consuming and expensive, 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.

Delays in product development schedules may adversely affect our revenues.

The development of software products such as EVIDENCE.COM is a complex and time-consuming process. New products and enhancements to existing products can require long development and testing periods. Our increasing focus on our software-as-a-service platform also presents new and complex development issues. Significant delays in new product or service releases or significant problems in creating new products or services could adversely affect our revenue.

Acquisitions and joint ventures may have an adverse effect on our business.

We expect to make acquisitions or enter into joint ventures as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, that we don’t realize a satisfactory return on our investment, or that we experience difficulty in the integration of new employees, business systems, and technology, or diversion of management’s attention from our other businesses. These events could harm our operating results or financial condition.

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.

Government regulation of our products may adversely affect sales.

Federal regulation of sales in the United States: Most of 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 WEEE Directive 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 trademark and service mark rights, 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 a pending lawsuit in Federal District Court against Stinger Systems that alleges infringement of three of our U.S. patents: 6,999,295; 7,102,870; and 7,234,262. In an infringement case, the judge in a Markman hearing before trial begins can resolve disagreements on the meaning of some of the terminology of the patent claims. In the pending case, the holding from the Markman hearing largely adopted the meanings proposed by TASER. Nevertheless, Stinger Systems is expected to challenge the validity of the patents at trial. If at trial the patents are upheld, the extent of relief to TASER, including whether Stinger is enjoined and/or forced to pay damages, cannot be predicted.

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 forced to enter into costly royalty or licensing agreements in order to be able to sell our products or discontinue use of the protected technology. Such royalty and licensing agreements 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.

Our efforts to avoid the patent, trademark, and copyright rights of others may not provide notice to us of potential infringements in time to avoid investing in product development and promotion that must later be abandoned if suitable license terms cannot be reached.

There is no guarantee that our use of conventional technology searching and brand clearance searching will identify all potential rights holders. Rights holders may demand payment for past infringements and/or force us to accept costly license terms or discontinue use of protected technology and/or works of authorship that may include for example photos, videos, and software. Our current research and development focus on developing software-based products increases this risk.

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 private citizen market could be substantially reduced if consumers are required to obtain registration to own a firearm prior to purchasing our products.

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.

We face risks associated with medical safety concerns and media publicity concerning allegations of deaths and injuries occurring after use of the TASER ECD and the negative effect this publicity could have on our sales.

Law enforcement personnel are frequently called upon to deal with individuals in crisis who are psychologically compromised and are at a heightened risk of serious injury or death, regardless of actions taken by law enforcement. While the TASER ECD has been shown to be a safer than traditional uses of force, it is not risk free and medical concerns have been raised concerning its use. These concerns and the associated negative publicity could have a negative impact on our sales and customer relations.

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 sub-assemblies 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 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, which 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, parts obsolescence may require a product re-design to ensure quality replacement components. 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 a future 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. A significant rise in oil prices could adversely impact our ability to sustain current gross margins, by increasing component pricing.

Catastrophic events may disrupt our business.

A disruption or failure of our systems or operations in the event of a major earthquake, weather event, cyber-attack, terrorist attack, or other catastrophic event could cause delays in completing sales, providing services, or performing other mission-critical functions. Our software related research and development and primary EVIDENCE.COM data center are located in Southern California, located near major earthquake faults. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our operating results.

We may experience outages and disruptions of our EVIDENCE.COM service if we fail to maintain an adequate operations infrastructure.

We anticipate increasing user traffic related to the introduction of EVIDENCE.COM. The complexity of this Software-as-a-Service (SaaS) product will demand significant computing power. We have spent and expect to continue to spend substantial amounts to purchase or lease data centers and equipment and to upgrade our technology and network infrastructure to handle an anticipated increase in traffic. This expansion is expensive, complex, and could result in inefficiencies or operational failures, which could diminish the quality of our products, services, and user experience, resulting in damage to our reputation and loss of current and potential users, subscribers, and advertisers, harming our operating results and financial condition.

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:

	•		budgetary cycles of municipal, state and federal law enforcement and corrections agencies
	•		market acceptance of our products and services
	•		the timing of large orders
	•		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

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. 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 expect to continue to incur expense and to devote 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.

We maintain all of our cash, cash equivalent and short-term investment balances, some of which are not insured, at one depository institution.

We maintain the majority of our cash and cash equivalent accounts at one depository institution. As of December 31, 2009, our aggregate balances in such accounts were $45.2 million. Of such amount, $250,000 was covered by Federal Deposit Insurance Corporation (FDIC) insurance, while the remaining amounts were not insured as of the end of fiscal 2009.

Although we believe that the risk of loss associated with our uninsured deposit and investment accounts is low given the financial strength and reputation of our depository institution, we could suffer losses with respect to the uninsured balances if the depositary institution failed and the institution’s assets were insufficient to cover its deposits and/or the Federal government did not take actions to support deposits in excess of existing FDIC insurance limits. Any such losses could have a material adverse effect on our liquidity, financial condition and results of operations.

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 also lease premises in Carpenteria, California and Washington D.C. 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. To the extent that we introduce new products in the future, we will likely need to acquire additional facilities to locate the associated production lines. However, we believe we can acquire or lease such facilities on reasonable terms. 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 litigation in Note 7(c) to the consolidated financial statements included in Part II, Item 8 of this annual report.

Item 4.		Reserved

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 March 10, 2010 was $7.07 per share.

The following table sets forth the high and low 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 Ended		High				Low
March 31, 2008		$	14.06			$	8.90
June 30, 2008		$	10.27			$	4.99
September 30, 2008		$	7.48			$	5.01
December 31, 2008		$	6.94			$	2.68
March 31, 2009		$	5.74			$	3.12
June 30, 2009		$	5.40			$	4.05
September 30, 2009		$	5.58			$	4.21
December 31, 2009		$	4.67			$	3.97

Holders

As of March 10, 2010, there were approximately 360 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 and 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 2009.

Recent Sales of Unregistered Securities

No unregistered securities were sold by us in 2009. For more information about our stock repurchase program, refer to Note 10(b) in Part II, Item 8 of this Annual Report.

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, 2004 to December 31, 2009. The graph assumes that the value of the investment in our stock and in each index was $100 at December 31, 2004 and that all dividends were reinvested. We do not pay dividends on our common stock.

*   $100 invested on 12/31/04 in stock & index-including reinvestment of dividends.

Fiscal year ending December 31.

		12/04				12/05				12/06				12/07				12/08				12/09
TASER International, Inc.			100.00				21.99				24.04				45.47				16.68				13.84
NASDAQ Composite			100.00				101.33				114.01				123.71				73.11				105.61
Russell 3000			100.00				106.12				122.80				129.11				80.94				103.88

Item 6.		Selected Financial Data

The following selected financial data should be read in conjunction with our consolidated 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, 2009, 2008 and 2007 and the balance sheet data as of December 31, 2009 and 2008 have been derived from and should be read in conjunction with our audited consolidated financial statements and the notes thereto included herein. The statement of operations data for the years ended December 31, 2006 and 2005 and the balance sheet data as of December 31, 2007, 2006 and 2005 is derived from audited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K.

		For the Year Ended December 31,
		2009				2008				2007				2006				2005
Statement of Operations Data
Net sales		$	104,251,560			$	92,845,490			$	100,727,191			$	67,717,851			$	47,694,181
Gross margin			63,402,409				57,004,227				57,559,819				43,179,061				29,597,895
Sales, general and administrative expenses			43,479,232				38,860,729				32,814,170				29,680,764				26,483,485
Research and development expenses			20,002,351				12,918,161				4,421,596				2,704,521				1,574,048
Shareholder litigation settlement expense (a)			—				—				—				17,650,000				—
Income (loss) from operations			(79,174	)			5,225,337				20,324,053				(6,856,224	)			1,540,362
Net income (loss)			(1,106	)			3,637,041				15,026,476				(4,087,679	)			1,056,516
Income (loss) per common and common equivalent shares
Basic		$	(0.00	)		$	0.06			$	0.24			$	(0.07	)		$	0.02
Diluted		$	(0.00	)		$	0.06			$	0.23			$	(0.07	)		$	0.02
Weighted average number of common and common equivalent shares outstanding
Basic			61,920,094				62,371,004				62,621,174				61,984,240				61,303,939
Diluted			61,920,094				64,070,869				65,685,667				61,984,240				63,556,246

		As of December 31,
		2009				2008				2007				2006				2005
Balance Sheet Data
Working capital		$	72,100,393			$	80,642,516			$	83,953,166			$	37,813,576			$	34,663,101
Total assets			138,425,917				130,015,506				137,763,401				119,837,689				112,241,247
Total current liabilities			13,784,853				10,956,199				12,473,616				18,302,688				7,586,701
Total long term obligations			—				—				11,695				230,973				76,188
Total stockholders’ equity		$	117,701,196			$	112,526,262			$	120,636,750			$	99,328,539			$	103,738,375

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 consolidated 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 seven sections:

•

Executive Overview and Key Strategic Initiatives

•

2009 Overview

•

Results of Operations

•

Liquidity and Capital Resources

•

Contractual Obligations

•

Off Balance Sheet Arrangements

•

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

Our mission is to protect life by providing less dangerous, more effective use of 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.

Our mission to protect life has also been extended to protect truth. We have learned that bringing a subject into custody is not the end of the challenge for law enforcement. In fact, it is typically just the beginning since a significant number of incidents that start as a physical conflict, transition into a legal conflict. Whether it’s prosecuting and convicting the individual arrested, or responding to excessive use of force allegations, the post incident legal process is a considerable part of the challenge law enforcement faces on a continual basis and can often take years and millions of litigation dollars to resolve in the courtroom. To help law enforcement address these challenges, in AXON and EVIDENCE.Com, we have developed a fully integrated hardware and software solution that will provide our law enforcement customers the capabilities to capture, store, manage and analyze video and other digital evidence. This provides the Company entry into a potentially significant new market space and the opportunity to diversify its sources of revenue.

Technological innovation is the foundation for our long term growth and we intend to maintain our commitment to the research and development of our technology for both new and existing products that further our mission. At the same time we have established industry leading training services to provide our users a comprehensive overview of legal and policy issues, medical information and risk mitigation relating to our ECDs and the use of force. We have built a network of distribution channels for selling and marketing our products and services to law enforcement agencies, primarily in North America, with ongoing focus and effort placed on expanding these programs in international, military and other markets. Over 15,000 law enforcement agencies in over 50 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 ECD products.

Our key strategies include:

•

Increase market penetration in both the United States and international law enforcement markets. We believe that a large portion of these markets that do not currently use our products continue to present an opportunity for future growth, particularly with respect to international law enforcement agencies where there remains a significant opportunity for more widespread adoption. In recent years we have seen the international business become increasingly significant and we seek to maintain that trend as we can demonstrate the benefits of large scale adoptions of our ECDs, using countries such as the U.K and Australia as benchmarks of successful large scale programs.

•

Further develop our presence in federal government and military markets. We intend to continue to place a strong emphasis on supporting our military customers through our Government and Military Programs business group and 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 development in support of military users. The primary focus of these groups is placed on supporting military use for our existing hardware as well as increasing technology development through contracted support.

•

Continued investment in development of innovative new products, which both complement and add to our existing platforms. These development efforts yielded multiple products such as X3, XREP and SHOCKWAVE in 2009. While we anticipate the level of new ECD hardware development to be at a reduced level in 2010, we are continuing to devote significant resources to bring AXON and EVIDENCE.COM to market. We launched initial field trials of the AXON and EVIDENCE.COM in the fourth quarter of 2009 and we anticipate an increasing volume of similar trial programs in 2010. We believe these trial programs are the best way for our customers to see the powerful capabilities and benefits of this technology for themselves, and will help drive revenue in 2010.

•

Operational excellence — leverage existing cost structure and human capital to move the Company towards the next phase of revenue growth and enhanced profitability.

•

Continued application for patents and intellectual property rights, both in the U.S and internationally, 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 assembled a team of world class medical experts and hired additional internal legal resources to provide an efficient means of defending the Company against product liability claims. Through March 12 2010, we have had a total of 106 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.

2009 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 2009 performance and the initiatives we have put in place reflect our continuing commitment to achieving this balance. While domestic municipal spending was still negatively impacted during 2009 as a result of the economic downturn, we were encouraged by the increasing momentum in international adoption of our products and we experienced a breakthrough year in terms of sales to our federal and military customers. In 2009, we remained focused on sustaining an efficient operating environment to sustain gross margin levels and made significant investments in our future by expanding our research and development programs for both hardware and software.

Some 2009 highlights include the following:

•

We achieved a record $104.3 million in sales, an increase of $11.4 million or 12.3% over 2008, driven primarily by growth in international and federal law enforcement and military markets.

•

We continued to focus our efforts on markets outside the U.S. and during 2009, our international sales continued to grow in significance, accounting for approximately 22% of our total sales compared to 18% in 2008 and 15% in 2007. In particular, 2009 international sales included significant follow-on orders from customers in the United Kingdom, Australia, New Zealand and Brazil.

•

Our strategy of developing a presence in federal law enforcement and military markets paid dividends with some significant orders including initial shipments under IDIQ contracts from the United States Army Garrison Rock Island Arsenal and U.S. Customs and Border Protection as well as other orders from the United States Marshals Service. Our federal and military business represented approximately 13% of net sales in 2009 compared to 5% in 2008.

•

We invested $20.0 million in research and development programs during 2009 with a concerted effort made to bring multiple new ECD products including the next generation X3, XREP and Shockwave products to market in 2009. This also included significant investment in the development of both hardware and software for our end-to-end digital evidence collection and management solution — AXON and EVIDENCE.COM, which commenced field trials in the fourth quarter of 2009.

•

Our strategy of vigorously defending against product liability lawsuits continues to be successful. Courts dismissed 23 lawsuits against us in 2009. We believe these dismissals serve to highlight the extensive medical and scientific evidence confirming the general safety of TASER technology.

•

We generated $10.1 million in cash from operations in 2009 and ended the year with $45.5 million in cash and cash equivalents with zero debt. In times of economic uncertainty, we feel our strong balance sheet allows us the flexibility to invest in our key strategic and growth initiatives, evidenced by the fact that our significant capital investments in 2009 were almost fully self funded from working capital resources.

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,
		2009								2008								2007
Net sales		$	104,252				100	%		$	92,845				100	%		$	100,727				100	%
Cost of products sold			40,850				39	%			35,841				39	%			43,167				43	%
Gross margin			63,402				61	%			57,004				61	%			57,560				57	%
Sales, general and administrative expenses			43,479				42	%			38,861				42	%			32,814				33	%
Research and development expenses			20,002				19	%			12,918				14	%			4,422				4	%
Income (loss) from operations			(79	)			*				5,225				6	%			20,324				20	%
Interest and other income, net			170				*				1,718				2	%			2,202				2	%
Income before income taxes			91				*				6,943				7	%			22,526				22	%
Provision (benefit) for income taxes			92				*				3,306				4	%			7,500				7	%
Net income		$	(1	)			*			$	3,637				4	%		$	15,026				15	%

Net Sales

For the years ended December 31, 2009, 2008 and 2007, sales by product line and by geography were as follows (dollars in thousands):

		2009								2008								2007
Sales by Product Line
TASER X26		$	53,996				52	%		$	51,733				56	%		$	61,638				61	%
Single Cartridges			27,908				27	%			20,526				22	%			25,250				25	%
TASER C2			4,929				5	%			6,127				7	%			3,983				4	%
TASER Cam			3,087				3	%			3,304				4	%			4,012				4	%
ADVANCED TASER M26 & M18			3,693				4	%			3,422				4	%			2,412				2	%
TASER X3			746				*				—				—				—				—
TASER XREP			549				*				—				—				—				—
Shockwave			51				*				—				—				—				—
Other			9,293				9	%			7,733				8	%			3,432				3	%
Total		$	104,252				100	%		$	92,845				100	%		$	100,727				100	%

		2009				2008				2007
Sales by Geographic Area
United States			78	%			82	%			85	%
Other Countries			22	%			18	%			15	%
Total			100	%			100	%			100	%

Net sales increased $11.4 million, or 12%, to $104.3 million in 2009 compared to $92.8 million in 2008. The growth in 2009 was primarily driven by significant international shipments during the year and sales to federal law enforcement / military customers, including a contract from the U.S. Customs and Border Patrol, the U.S Army and The United States Marshals Service. The growth in international and Federal business offset a decline in domestic sales, which we believe reflects lower municipal spending in the U.S. as agencies reassigned budget dollars due to ongoing economic constraints. This increase in Federal and international business resulted in higher sales of the TASER X26 product line which increased $2.3 million, or 4%, to $54.0 million in 2009 compared to $51.7 million in 2008, and a $7.4 million, or 36%, increase in single cartridge sales which grew to $27.9 million in 2009 compared to $20.5 million in 2008. Sales of the ADVANCED TASER increased by $0.3 million, while the introduction of three new product lines, TASER X3, TASER XREP and Shockwave contributed $1.3 million in 2009. Offsetting these increases, sales of the TASER C2 consumer product declined $1.2 million, attributable to the adverse impact of the economic downturn on consumer spending. The increase in other sales is primarily driven by growth in extended warranty revenues, out of warranty repairs and the elimination of distributor discounts during 2008. Other sales also include government grants, training and shipping revenues.

Net sales for the year ended December 31, 2008 were $92.8 million, a decrease of $7.9 million, or 8%, compared to $100.7 million in 2007. The decrease in 2008 was primarily driven by a decline in sales of our core X26 product line and single cartridges which we believe reflected lower municipal spending in the U.S. as agencies experienced constrained budgets due to prevailing adverse economic conditions in 2008. This resulted in reduced sales of the TASER X26 product line which decreased by $9.9 million, or 16%, to $51.7 million in 2008 compared to $61.6 million in 2007. Single cartridge sales also decreased by $4.7 million, or 19% to $20.5 million in 2008 compared to $25.2 million in 2007. Partially offsetting these decreases was a full year’s sales in 2008 of the TASER C2 product which began shipping in July 2007. Sales of the TASER C2 were $6.1 million in 2008, an increase of $2.1 million over the same period in 2007. Additionally, sales of the ADVANCED TASER increased by $1.0 million mainly due to a large purchase made by an international customer in the first quarter of 2008 and other sales grew $4.3 million due to a $2.0 million increase in out of warranty replacement and extended warranty sales as well as $2.1 million reduction of cash and distributor discounts in 2008.

International sales for 2009 and 2008 represented approximately $22.7 million, or 22% of total net sales, and $17.0 million or 18% of total net sales, respectively. International sales represented approximately $15.1 million or 15% of total net sales in 2007. The growth in international sales in both 2009 and 2008 reflects our continued commitment to marketing efforts in countries outside the United States. In particular, 2009 international sales included significant orders from the United Kingdom, Australia, New Zealand and Brazil.

Cost of Products Sold

Cost of products sold increased by $5.0 million, or 14%, to $40.8 million in 2009 compared to $35.8 million in 2008. As a percentage of net sales, cost of products sold remained flat at 39% in both 2009 and 2008. Direct manufacturing costs decreased slightly as a percentage of sales primarily driven by negotiated supplier price reductions in certain raw material components being partially offset by a less favorable sales mix weighted towards lower margin products. Direct labor also decreased as a percentage of net sales due to the initial impact of automated cartridge production in the fourth quarter of 2009. Offsetting the decrease in direct manufacturing costs, indirect manufacturing expenses increased attributable to a lower absorption of indirect manufacturing costs to inventory resulting from a decline in the overall number of production hours in 2009 compared to 2008. Additionally, depreciation expense related to new automation equipment, and freight costs increased. These increases in indirect manufacturing costs were offset by a reduction in scrap, count discrepancies and engineering supplies.

Cost of products sold decreased by $7.3 million, or 17%, to $35.8 million in 2008 compared to $43.1 million in 2007. As a percentage of net sales, cost of products sold decreased to 39% in 2008 compared to 43% in 2007. The improvement in 2008 compared to 2007 was the result of a combination of factors. The $2.1 million reduction in our cash and distributor sales discounts and the $2.0 million growth in extended warranty and out of warranty replacement revenue contributed to the reduction in cost of products sold as a percentage of net sales. Total direct manufacturing costs in 2008 decreased primarily as the result of a $2.5 million reduction in temporary labor and overtime costs while product materials costs decreased due to improved supplier pricing negotiated on various raw material components. Indirect manufacturing costs declined as a percentage of net sales resulting from lower variable manufacturing costs including scrap expense, freight and engineering supplies, a function of improved product quality and operating efficiencies as well as reduced levels of production. In addition, our allocation of manufacturing overhead to inventory increased due to a reduction in direct production hours during 2008 combined with an increase in labor hours in finished goods inventory at December 31, 2008 compared to December 31, 2007.

Gross Margin

Gross margin increased $6.4 million, or 11%, to $63.4 million in 2009 compared to $57.0 million in 2008. As a percentage of net sales, gross margin remained flat at 61% for both 2009 and 2008.

Gross margin decreased $0.6 million to $57.0 million in 2008 compared to $57.6 million in 2007. As a percentage of net sales, gross margins increased to 61% in 2008 compared to 57% in 2007. The improvement in gross margin in 2008 was attributable to the decrease in direct and indirect manufacturing costs as a percentage of net sales for the reasons noted above under the discussion of Cost of Products Sold.

Sales, General and Administrative Expenses

For the years ended December 31, 2009, 2008 and 2007, sales, general and administrative expenses were comprised as follows (dollars in thousands):

		Year Ended December 31,																Year Ended December 31,
										$				%												$				%
		2009				2008				Change				Change				2008				2007				Change				Change
Salaries, benefits, and bonus		$	11,335			$	9,349			$	1,986				21	%		$	9,349			$	8,148			$	1,201				15	%
Stock based compensation			3,219				1,552				1,667				107	%			1,552				987				565				57	%
Legal, professional and accounting			6,081				5,899				182				3	%			5,899				5,813				86				1	%
Sales and Marketing			5,356				5,071				285				6	%			5,071				3,214				1,857				58	%
Consulting and lobbying services			3,863				3,478				385				11	%			3,478				2,455				1,023				42	%
Travel and meals			3,308				3,739				(431	)			-12	%			3,739				3,762				(23	)			-1	%
Depreciation and amortization			1,896				1,635				261				16	%			1,635				1,557				78				5	%
D&O and liability insurance			1,812				2,191				(379	)			-17	%			2,191				2,027				164				8	%
Other			6,609				5,947				662				11	%			5,947				4,851				1,096				23	%
Total		$	43,479			$	38,861			$	4,618				12	%		$	38,861			$	32,814			$	6,047				18	%
Sales, general and administrative as percentage of net sales			42	%			42	%											42	%			33	%

Sales, general and administrative expenses were $43.5 million and $38.9 million in 2009 and 2008, respectively, an increase of $4.6 million, or 12%. As a percentage of total net sales, sales, general and administrative expenses remained flat at 42% for both 2009 and 2008. The dollar increase during 2009 over the same period in 2008 is attributable to a $2.0 million growth in salaries, benefits and bonus; related to an increase in personnel to support the expansion of our business infrastructure as we introduce new products and enter new markets. Stock based-compensation expense also increased $1.7 million related to a full year’s expense for some large stock option grants during the third and fourth quarters of 2008 as well as new employee stock option grants in 2009. Consulting and lobbying services increased $0.4 million primarily related to strategic selling and marketing, advertising and IT process improvement related efforts while legal, professional and accounting fees remained flat as lower legal fees driven by the timing of outstanding ligation in progress were offset by higher accounting fees. Sales and marketing expenses also increased by a net amount of $0.3 million as increases in our tradeshow costs and our selling costs in support of new product introductions were partially offset by a $1.3 million decrease in general media advertising spend primarily due to $0.6 million of infomercial production costs expensed in the first quarter of 2008 as well as reduced emphasis placed on consumer marketing programs. The $0.7 million increase in other costs was primarily driven by a $0.4 million settlement expense paid to a Board member in 2009 (see “Settlement agreement” in Note 11) as well as increased computer licensing and maintenance costs.

Sales, general and administrative expenses were $38.9 million and $32.8 million in 2008 and 2007, respectively, an increase of $6.0 million, or 18%. As a percentage of total net sales, sales, general and administrative expenses increased to 42% during 2008 compared to 33% in 2007. The dollar increase during 2008 over 2007 is attributable to a combination of factors. Specifically, salaries, benefits and bonus grew $1.2 million related to the addition of personnel to support the expansion of our business infrastructure combined with an annual salary increase effective January 1, 2008 as well as higher cost of benefits. These increases were partially offset by a $0.8 million decrease in bonuses due to the lower pre-tax income in 2008 as well as a program which allowed employees to opt out of the cash based bonus program for two years in exchange for additional stock options. Sales and marketing expense increased $1.9 million primarily due to expensing of $0.6 million in production costs of the TASER C2 infomercial as well as ongoing promotion and infomercial airing costs and a $0.4 million increase in trade show expenses. Consulting and lobbying services increased $1.0 million primarily attributable to strategic selling and marketing, advertising and process improvement related efforts. In addition, stock based compensation increased $0.6 million related to stock options granted in 2008 and D&O and liability insurance costs were up $0.2 million from increased annual premiums. The $1.1 million increase in other expense is primarily attributable to a $0.5 million increase in recruiting and relocation expenses driven by hiring of new vice presidents of sales, marketing, IT and HR and a $0.3 million increase in computer licensing and maintenance fees.

Research and Development Expenses

Research and development expenses increased $7.1 million, or 55%, to $20.0 million in 2009 compared to $12.9 million in 2008. The increase is driven by a $3.6 million increase in salary and benefits as we have expanded our research and development headcount to support new product development, including a dedicated SaaS development team. Stock-based compensation expenses increased $0.8 million for stock options granted in the second half of 2008 and in 2009. Indirect supplies and tooling costs increased $2.9 million primarily associated with the development of the TASER X3, AXON and EVIDENCE.com. In particular, during the third quarter of 2009, we expedited the build of AXON and X3 prototype display units for the TASER Tactical conference and the International Association of Chiefs of Police. These increases are offset by the capitalization of $2.3 million of internal salary and external consulting costs specifically related to the development of EVIDENCE.com in 2009. We anticipate the level of new ECD hardware development costs will be at a reduced level in 2010, however, we will continue to devote the necessary resources to bring AXON and EVIDENCE.com to market.

Research and development expenses increased $8.5 million, or 192%, to $12.9 million in 2008 compared to $4.4 million in 2007. The increase is driven by a $4.2 million increase in third party consulting costs primarily associated with the development of AXON. In addition, there was $1.4 million growth in salary and benefit costs attributable to increased headcount combined with an annual salary increase effective January 1, 2008, and a $1.3 million increase in indirect supplies to support our continuing efforts to develop new products including AXON, XREP and Shockwave.

Interest and Other Income, Net

Interest and other income decreased by $1.5 million, or 90%, to $0.2 million in 2009 compared to $1.7 million in 2008. The decrease is attributable to a significantly lower average yield on our cash and investments as well as a lower average cash and investment balance in 2009. Our cash and investment accounts earned interest at an approximate rate of 0.30% during 2009, down from 2.5% in 2008. Additionally, other income in 2008 included $0.4 million related to unused deferred insurance settlement proceeds recognized upon the dismissal of all final appeals in a personal injury case.

Interest and other income decreased by $0.5 million, or 22%, to $1.7 million in 2008 compared to $2.2 million in 2007. This was attributable to a $0.7 million decrease in interest income due to lower average yields on our investments, partially offset by an increase in total average funds invested during 2008 compared to 2007. Our cash and investment accounts earned interest at an average rate of approximately 2.5% during 2008 compared to 4.2% in 2007. The decrease in interest income was partially offset by other income of $0.4 million related to the unused deferred insurance settlement proceeds recognized in the second quarter of 2008 upon the dismissal of all final appeals in a personal injury case.

Provision for Income Taxes

The provision for income taxes decreased by $3.2 million to $0.1 million in 2009 compared to $3.3 million in 2008. The effective income tax rate for 2009 was 101% compared to 48% for 2008. The 2009 effective tax rate is driven by the impact of non-deductible expenses for items such as incentive stock option expense, meals and entertainment and lobbying expenses, making the income for tax purposes higher than book pre-tax income which was close to break even for 2009.

The provision for income taxes decreased by $4.2 million to $3.3 million in 2008 compared to $7.5 million in 2007. The effective income tax rate for 2008 was 48% compared to 33% for 2007. Contributing to the increase in effective tax rate is the higher impact of certain non-deductible items such as lobbying expenses against a lower taxable income for the year ended December 31, 2008. In addition, the 2008 effective tax rate is reduced by a reduced amount of research and development tax credits ($608,000 in 2008 vs. $2.0 million in 2007), which was partially offset by an increase in the liability for unrecognized tax benefits.

Net Income (Loss)

Net income decreased by $3.6 million to break even (net loss of $0.001 million) in 2009 compared to net income of $3.6 million in 2008. Loss per basic and diluted share rounds to $0.00 for 2009 compared to income per basic and diluted share of $0.06 in 2008.

Net income decreased by $11.4 million to $3.6 million in 2008 compared to $15.0 million in 2007. Income per basic and diluted share was $0.06 for 2008. This compares to income per basic and diluted share of $0.24 and $0.23, respectively, in 2007.

Liquidity and Capital Resources

Summary

As of December 31, 2009, we had $45.5 million in cash and cash equivalents, a decrease of $1.4 million from the end of 2008 which is a function of cash generated from operations, offset by investments in property and equipment. Specifically, we made some significant capital expenditures for the purchase of our automated cartridge production equipment as well as server and networking equipment to establish a data center for EVIDENCE.COM hosting, storage and network monitoring operations.

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for each of the past three years ($ in thousands):

		Year ended December 31,
		2009				2008				2007
Total cash provided by (used in):
Operating activities		$	10,117			$	8,118			$	13,923
Investing activities			(11,679	)			8,117				7,006
Financing activities			187				(12,156	)			3,099
(Decrease) increase in cash and cash equivalents		$	(1,375	)		$	4,079			$	24,028

Operating activities

Net cash provided by operating activities was $10.1 million in 2009, compared with $8.1 million in 2008 and $13.9 million in 2007.

Net cash provided by operating activities in 2009 of $10.1 million was driven by the net loss for the period adjusted for the add back of non-cash expenses including stock-based compensation expense of $5.0 million; depreciation and amortization expense of $3.6 million partially offset by a $0.6 million net increase in deferred tax assets and provision for unrecognized tax benefits. Changes in working capital include a $1.3 million decrease in accounts receivable, a function of the timing of billing and collections; a $1.0 million decrease in prepaid and other assets due to a difference in the timing of funding of our annual liability insurance premium; a $1.0 million increase in accounts payable and accrued liabilities due to timing of year end check runs and a $2.4 million increase in inventory, primarily driven by raw materials acquired for production of new products.

Net cash provided by operating activities during 2008 reflects non-cash changes to net income including, depreciation and amortization expense of $2.6 million, stock-based compensation expense of $2.4 million, provision for warranty expense and excess and obsolete inventory of $1.0 million and the $2.1 million utilization of deferred tax assets. In addition, prepaid and other assets decreased $1.9 million due to i) the net receipt of insurance reimbursements of legal fees incurred in excess of policy retention limits; ii) a decrease in prepaid advertising due to the expensing of TASER C2 infomercial production costs and iii) amortization of prepaid liability and D&O insurance premiums. Deferred revenue also increased $2.1 million driven by extended warranty sales in 2008. Offsetting these items was a $5.2 million increase in accounts receivable due to timing of billing and collections as well as a decrease in accounts payable and accrued liabilities of $2.3 million, which reflects timing differences combined with a reduced rate of material purchasing as well as the payment in January 2008 of $1.2 million for the second installment for automation equipment which was accrued at December 31, 2007.

Investing activities

We used $11.7 million for investing activities in 2009 comprised of $13.7 million in acquisitions of property and equipment related to new automated cartridge production equipment, production equipment for new product lines, computer equipment to establish the first EVIDENCE.COM data center and capitalized software development costs. In addition, we invested $0.5 million in intangible assets, primarily consisting of patent applications. These net uses were partially offset by $2.5 million in net proceeds from short term investments.

Net cash provided by investing activities was $8.1 million during 2008 which was comprised of $15.0 million in net proceeds from maturing investments over investment purchases partially offset by the use of $6.1 million to purchase property and equipment mainly related to new automation equipment and computer storage solutions. In addition, we invested $0.7 million in intangible assets, primarily consisting of patent application costs.

Financing activities

During 2009, net cash provided by financing activities was $0.2 million, attributable to proceeds from stock options exercised during the period.

During 2008, we utilized $12.2 million in financing activities, a function of the $12.5 million to repurchase 1.8 million shares of our common stock partially offset by $0.3 million of proceeds attributable to stock options exercised in the year.

Liquidity

Our most significant sources of liquidity continue to be funds generated by operating activities and available cash and cash equivalents. We believe funds generated from our expected results of operation as well as available cash and cash equivalents will be sufficient to finance our operations and strategic initiatives for 2010. We expect our investment in capital expenditures in 2010 will be at a reduced level compared to 2009. In addition, our revolving credit facility is available for additional working capital needs or investment opportunities. There can be no assurance, however, that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our revolving credit facility.

Capital Resources

We have a revolving line of credit with a domestic bank with a total availability of $10.0 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, 2010, and requires monthly payments of interest only. We expect to renew the line of credit on similar terms upon its maturity. At December 31, 2009, there were no borrowings under the line and the entire $10.0 million line was available based on the defined borrowing base, which is calculated based on our eligible accounts receivable and inventory. 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 ratios. The ratio of total liabilities to tangible net worth can be no greater than 1:1, and the fixed coverage charge ratio can be no less than 1.25:1, based upon a trailing twelve month period. At December 31, 2009, the Company’s tangible net worth ratio was 18:1 and its fixed charge coverage ratio was 3.96:1. At December 31, 2009, we were in compliance with those covenants.

Based on our strong balance sheet and the fact that we had no outstanding debt at December 31, 2009, we believe financing will be available, both through our existing credit line and possible additional financing. However, there is no assurance that such funding will be available on terms acceptable to us, or at all. Capital markets in the United States and throughout the world remain disrupted and under stress. This disruption and stress is evidenced by a lack of liquidity in the debt capital markets, the re-pricing of credit risk in the syndicated credit market, and the failure of certain major financial institutions. This stress is compounded by the ongoing worldwide recession. Reflecting this situation, many lenders and capital providers have reduced, and in some cases ceased to provide, debt funding to borrowers. The resulting lack of available credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely affect our ability to obtain additional or alternative financing should the need arise for us to access the debt markets.

Contractual Obligations

The following table outlines our future contractual financial obligations by period in which payment is expected, in thousands, as of December 31, 2009 (in thousands):

						Less than												More than
		Total				1 year				1-3 years				4-5 years				5 years
Non-cancelable operating leases		$	4,076			$	1,237			$	2,001			$	838			$	—
Joint venture development funding a)		$	1,425			$	1,425			$	—			$	—			$	—
Total contractual cash obligations		$	5,501			$	2,662			$	2,001			$	838			$	—

We are subject to U.S. federal income tax as well as income tax of multiple-state jurisdictions. As of December 31, 2009, we had $2.3 million of gross unrecognized tax benefits related to uncertain tax positions. The settlement period for our long-term 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, 2009.

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 consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that our 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 ECDs 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 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 based upon our historical experience. 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, 2009, our reserve for warranty returns was $369,000 compared to a $615,000 reserve at December 31, 2008. Our reserve for warranty returns has decreased, as the result of an improved product returns experience, particularly in our X26 product line which we believe is a function of continuing improvements made in the manufacturing and quality processes. 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 of raw materials, which approximates the first-in, first-out (FIFO) method, and an allocation of manufacturing labor and overhead costs. The allocation of manufacturing labor and overhead costs includes management judgments of what constitutes normal capacity of our production facilities, and a determination of what costs are considered to be abnormal fixed production costs which are expensed as current period charges. 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 increased to $474,000 at December 31, 2009, compared to $130,000 at December 31, 2008. The increase was driven by some outdated C2 boards and excess parts resulting from the introduction of the cartridge automation equipment. 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. This allowance represents our best estimate and is 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 $200,000 at December 31, 2009 and December 31, 2008. In the event that actual uncollectible amounts differ from these estimates, changes in the allowance 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. 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

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.

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 consolidated 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. Management must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties if any. We have completed research and development tax credit studies which identified approximately $5.9 million in tax credits for Federal and Arizona income tax purposes related to the 2003 through 2009 tax years, net of the federal benefit on the Arizona research and development tax credits. Management made the determination that it was more likely than not that the full benefit of the research and development tax credit would not be sustained on examination and recorded a liability for unrecognized tax benefits of $2.2 million as of December 31, 2009. Also included as part of the $2.3 million liability for unrecognized tax benefits is a management estimate of $106,000 related to uncertain tax positions for certain state income tax liabilities. As of December 31, 2009, management does not expect the amount of the unrecognized tax benefit liability to increase or decrease significantly within the next 12 months. Should the unrecognized tax benefit of $2.3 million be recognized, the Company’s effective tax rate would be favorably impacted. 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 consolidated financial statements.

In preparing the Company’s consolidated financial statements, management assesses the likelihood that its deferred tax assets will be realized from future taxable income. In evaluating the Company’s ability to recover its deferred income tax assets, management considers all available positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Management exercises significant judgment in determining its provisions for income taxes, its deferred tax assets and liabilities and its future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred tax assets.

Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgment that could become subject to audit by tax authorities in the ordinary course of business, as well as the generation of sufficient future taxable income. During 2009, management determined that it was more likely than not that its net operating loss carryforwards for the state of Arizona, which would have expired in 2009, would be fully realized. Accordingly, the valuation allowance of $200,000 the Company carried against its deferred tax assets as of December 31, 2008, was reversed with the benefit recognized during 2009 as a reduction of the current-year effective tax rate. Management believes that, as of December 31, 2009, based on an evaluation and projections of future sales and profitability, no other valuation allowance was deemed necessary. However, such deferred tax assets could be reduced in the future if projections of future taxable income during the carryforward period are reduced.

Stock Based Compensation

We estimate the fair value of our stock based compensation by using 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 vest (forfeitures). We granted 825,800 performance-based stock options in 2008 and the first quarter of 2009, the vesting of which is contingent upon the achievement of certain performance criteria including the successful development and market acceptance of future product introductions as well as our future operating performance. These options are vested and compensation expense is recognized based on management’s best estimate of the probability of the performance criteria being satisfied using the most currently available projections of future product adoption and operating performance, adjusted at each balance sheet date. During 2009, 106,700 of these options were forfeited. Of the remaining 719,100 outstanding options, 286,708 are exercisable, and 432,392 are unvested. Changes in the subjective and probability based 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 10 to our consolidated 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. As of December 31, 2009 we have not recorded any accruals for outstanding litigation.

Item 7A.		Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We invest in a limited number of financial instruments, which at December 31, 2009 consisted entirely of investments in money market accounts, denominated in United States dollars. At December 31, 2009, we did not hold any investments in fixed rate interest earning investments which would be subject to market value adjustments resulting from fluctuations in interest rates.

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, 2009, there was no amount outstanding under the line of credit and the available borrowing under the line of credit was $10.0 million. 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.
CONSOLIDATED BALANCE SHEETS
December 31,

		2009				2008
Assets
Current assets:
Cash and cash equivalents		$	45,505,049			$	46,880,435
Short-term investments			—				2,498,998
Accounts receivable, net of allowance of $200,000 in 2009 and 2008, respectively			15,384,993				16,793,553
Inventory			15,085,750				13,467,117
Prepaid expenses and other assets			1,461,539				2,528,539
Deferred income tax assets, net			8,447,915				9,430,073
Total current assets			85,885,246				91,598,715
Property and equipment, net			38,673,065				27,128,032
Deferred income tax assets, net			10,997,093				8,826,778
Intangible assets			2,765,701				2,447,011
Other long-term assets			104,812				14,970
Total assets		$	138,425,917			$	130,015,506
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	6,357,195			$	3,856,961
Accrued liabilities			4,252,577				4,275,907
Current portion of deferred revenue			2,819,155				2,510,645
Customer deposits			355,926				312,686
Total current liabilities			13,784,853				10,956,199
Deferred revenue, net of current portion			4,675,089				4,840,965
Liability for unrecognized tax benefits			2,264,779				1,692,080
Total liabilities			20,724,721				17,489,244
Commitments and contingencies
Stockholders’ equity
Preferred stock, $0.00001 par value per share; 25 million shares authorized; no shares issued and outstanding at December 31, 2009 and 2008			—				—
Common stock, $0.00001 par value per share; 200 million shares authorized; 62,119,063 and 61,795,712 shares issued and outstanding at December 31, 2009 and 2008, respectively			642				638
Additional paid-in capital			92,839,165				87,663,129
Treasury stock, 2,091,600 shares at December 31, 2009 and 2008			(14,708,237	)			(14,708,237	)
Retained earnings			39,569,626				39,570,732
Total stockholders’ equity			117,701,196				112,526,262
Total liabilities and stockholders’ equity		$	138,425,917			$	130,015,506

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

TASER INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31,

		2009				2008				2007
Net sales		$	104,251,560			$	92,845,490			$	100,727,191
Cost of products sold:
Direct manufacturing expense			29,578,304				26,756,080				31,507,727
Indirect manufacturing expense			11,270,847				9,085,183				11,659,645
Total cost of products sold			40,849,151				35,841,263				43,167,372
Gross margin			63,402,409				57,004,227				57,559,819
Sales, general and administrative expenses			43,479,232				38,860,729				32,814,170
Research and development expenses			20,002,351				12,918,161				4,421,596
Income (loss) from operations			(79,174	)			5,225,337				20,324,053
Interest and other income, net			170,547				1,717,967				2,202,187
Income before provision for income taxes			91,373				6,943,304				22,526,240
Provision for income taxes			92,479				3,306,263				7,499,764
Net income (loss)		$	(1,106	)		$	3,637,041			$	15,026,476
Income (loss) per common and common equivalent shares
Basic		$	(0.00	)		$	0.06			$	0.24
Diluted		$	(0.00	)		$	0.06			$	0.23
Weighted average number of common and common equivalent shares outstanding
Basic			61,920,094				62,371,004				62,621,174
Diluted			61,920,094				64,070,869				65,685,667

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

TASER INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2009, 2008 and 2007

										Additional																Total
		Common Stock								Paid-in				Treasury Stock								Retained				Stockholders’
		Shares				Amount				Capital				Shares				Amount				Earnings				Equity
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
Exercise of stock options			323,409				3				342,818				—				—				—				342,821
Deferred tax asset correction (see footnote 8)			—				—				(2,014,955	)			—				—				—				(2,014,955	)
Stock-based compensation expense			—				—				2,423,885				—				—				—				2,423,885
Purchase of treasury stock			(1,791,600	)			—				—				1,791,600				(12,499,280	)			—				(12,499,280	)
Net income			—				—				—				—				—				3,637,041				3,637,041
Balance, December 31, 2008			61,795,712				638				87,663,129				2,091,600				(14,708,237	)			39,570,732				112,526,262
Exercise of stock options			323,351				4				155,540				—				—				—				155,544
Stock-based compensation expense			—				—				4,988,837				—				—				—				4,988,837
Tax benefit from stock options exercised			—				—				31,659				—				—				—				31,659
Net loss			—				—				—				—				—				(1,106	)			(1,106	)
Balance, December 31, 2009			62,119,063			$	642			$	92,839,165				2,091,600			$	(14,708,237	)		$	39,569,626			$	117,701,196

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

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

		2009				2008				2007
Cash Flows from Operating Activities:
Net income (loss)		$	(1,106	)		$	3,637,041			$	15,026,476
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			3,634,412				2,637,773				2,521,237
Loss on disposal of assets			66,829				171,098				49,949
Provision for doubtful accounts			82,251				78,010				80,835
Provision for excess and obsolete inventory			821,983				640,655				206,335
Provision for warranty			92,278				368,521				1,030,291
Stock-based compensation expense			4,988,837				2,423,885				1,387,966
Deferred insurance settlement proceeds			—				(404,848	)			(104,219	)
Deferred income taxes			(1,188,157	)			2,060,623				5,831,783
Provision for unrecognized tax benefits			572,699				592,007				1,100,073
Tax benefit from stock-based compensation, net			(31,659	)			—				—
Change in assets and liabilities:
Accounts receivable			1,326,309				(5,180,010	)			(1,704,339	)
Inventory			(2,440,616	)			(600,968	)			(4,455,393	)
Prepaids and other assets			976,156				1,856,355				(2,235,862	)
Accounts payable and accrued liabilities			1,031,196				(2,323,792	)			1,069,483
Deferred revenue			142,634				2,115,699				2,222,981
Accrued litigation settlement			—				—				(8,000,000	)
Other liabilities			—				—				(199,999	)
Customer deposits			43,240				45,958				95,236
Net cash provided by operating activities			10,117,286				8,118,007				13,922,833
Cash Flows from Investing Activities:
Purchases of investments			—				(43,887,640	)			(138,203,034	)
Proceeds from investments			2,500,000				58,895,113				149,731,426
Purchases of property and equipment			(13,708,177	)			(6,144,425	)			(4,067,579	)
Purchases of intangible assets			(471,698	)			(745,622	)			(454,403	)
Net cash (used in) provided by investing activities			(11,679,875	)			8,117,426				7,006,410
Cash Flows from Financing Activities:
Proceeds from options exercised			155,544				342,821				3,143,769
Tax benefit from stock-based compensation, net			31,659				—				—
Repurchase of common stock			—				(12,499,280	)			—
Payments under capital leases			—				—				(45,236	)
Net cash provided by (used in) financing activities			187,203				(12,156,459	)			3,098,533
Net (decrease) increase in cash and cash equivalents			(1,375,386	)			4,078,974				24,027,776
Cash and cash equivalents, beginning of period			46,880,435				42,801,461				18,773,685
Cash and cash equivalents, end of period		$	45,505,049			$	46,880,435			$	42,801,461
Supplemental Disclosure:
Cash paid for income taxes — net		$	894,563			$	523,950			$	475,000
Cash paid for interest		$	—			$	—			$	5,186
Non Cash Transactions-
Property and equipment purchases in accounts payable		$	1,385,089			$	—			$	1,198,891
Deferred tax asset correction (see footnote 8)		$	—			$	2,014,955			$	—
Common stock issued for shareholder derivative lawsuit settlement		$	—			$	—			$	1,750,000