Good day ladies and gentlemen and welcome to the Fourth Quarter 2008 TASER International Earnings Conference Call. My name is Frances and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. [Operators Instructions]. As a reminder, this conference is being recorded for replay purposes. I'd like to turn the call over to Mr. Rick Smith, CEO of TASER International. Please proceed.

Thank you. Before we start this call this morning, I'd like start out by remembering TASER Investor Jack Cover who passed away this month after a long fight with Alzheimer's disease. Tom and I founded this company with Jack back in 1993 and I spent the first months learning inventorship in a garage in Tucson from a man who is at one point the chief scientist and the private subcontractor of the Apollo moon landing project. I'll never forget that incredible experience, or the amazing human being that Jack was. Unfortunately, it seems our society never recognized his greatness until he's gone. I know that future generations will look back to Jack Cover's invention as a turning point in history, when we stopped focusing on finding ever more deadly ways to kill each other and instead began a search for more humane ways to end our conflicts without taking human life in the process. I'm going to turn it over to Dan, to get the process started for our call this morning with our Safe Harbor statement.

Thanks Rick. Certain statements contained in this presentation may be deemed to be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and TASER International intends that such forward-looking statements be subject to the Safe Harbor created thereby. Such forward-looking statements relate to expected revenue and earnings growth, estimations regarding the size of our target markets, successful penetration of law enforcement market, expansion of the product sales into the private, security, military and consumer and self-defense markets, growth expectations for new and existing products and accounts expansion of production capabilities, new product introductions, product safety, and our business model. Be cautioned that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward-looking statements herein. Such factors include, but are not limited to market acceptance of our products, the establishment and expansion of our direct and indirect distribution channels, attract and retaining the endorsement to key opinion leaders and law enforcement community, the level of product technology and price competition for our products, the degree and rate of growth of the markets in which we compete, and accompanying demand for our products, potential delays in the international and domestic orders, implementation risks of manufacturing automation, risks associated with rapid technological change, execution and implementation risks of new technology, new product introduction risks, rapid manufacturing and production to meet demand, litigation resulting from alleged product-related injuries and deaths, media publicity concerning product uses and allegations of injury and deaths and the negative impact that could have on sales, product quality risks, potential fluctuations in quarterly operating results, competition, negative reports concerning TASER device uses, financial and budgetary constraints of prospects and customers, dependence upon sole and limited source suppliers, fluctuations in component pricing, risk of government investigation regulations, TASER product tests, and reports, dependent upon key employees, employee retention risks, and other factors detailed in the company's filings with the Securities and Exchange Commission. With that, I'll turn it back over to Rick Smith, our CEO.

Thanks, Dan. For the fourth quarter of 2008, revenues were $26.4 million, a $4.6 million or 15% decrease over the same quarter in the prior year. However, on a sequential basis, sales increased $3.5 million, driven primarily by huge incremental growth in international orders, despite a weakening global economy. Operations continued to demonstrate real improvement, as our gross margin increased to 63.4% in the fourth quarter compared to 55.2% in the fourth quarter of 2007. Consistent with our strategy announced last year, R&D increased by $3.2 million, or 268%, in the fourth quarter of 2008 compared to same period in 2007; reflecting our ongoing commitment to invest in new technology and product diversification. Net income for the quarter was $6.6 million compared to the $7.2 million for the same period a year ago; net income in diluted earnings per share for the fourth quarter was $3.6 million and $0.06 respectively. Revenue for the year was $92.8 million compared with revenue of a $100.7 million in 2007, a decrease of 8%. And despite the decline in revenues, gross margin for the year was 61.4% compared to the 57.1% driven by our focus on a lean operating environment. Net income and diluted earnings per share were $3.4 million and $0.05 respectively. The company generated $8.1 million in cash from operations during 2008, ending with cash and equivalents of $46.9 million and zero debt. The company also repurchased 1.8 million shares of our stock worth $12.5 million during the second quarter of 2008. Needless to say, it feels pretty good to be in the strong financial condition that we are, given what's happening in the global economy. A lot of companies are struggling for their survival and we are in a position to be able to execute on new opportunities in these times,…

Thanks Rick. I'll go through the financial results a little bit more detail. As Rick indicated, sales for Q4 were 26.4 million, which are down 4.6 million from the prior year, but up sequentially 3.5 million from Q3, mostly driven by the increased international sales which contributed to 28% of our sales for the current quarter. And some of those large international sales that we shipped in Q4 were the UK, Brazil and South Korea. Gross margins of 16.7 million or 63.4% of sales were up 8.2% as percent of sales from the prior year. The increase in margin was caused by several factors, including elimination of most cash and distributor discounts, lower overtime and temporary labor expenses, better productivity, lower warranty expense and improvements in our scrap expense for the year. The $450,000 decrease in the indirect manufacturing expenses again was driven by the lower scrap and supply expenses partially offset by lower absorption of planned overhead due to lower manufacturing levels in the fourth quarter of 2008, versus the fourth quarter 2007. SG&A expenses of 10.9 million for the quarter versus 8.8 million in the prior year, the increase is driven by higher salaries and benefits of $594,000 due to higher head count. Consulting and lobby expenses are up $775,000 versus prior year due to additional marketing consulting to support C2 product line and some of the new products. We're going to be offering in 2009, as well as the IT consulting relating to the upgraded to our new version of the ERP system that we are going to put in place in the early 2009. Legal expenses increased $382,000 due to more outside legal and expert witness fees and the 123(R) expenses for the quarter increased by $355,000 due to the auctions granted in 2008, including auctions…

Thanks Dan. So as you all know we are investing heavily in research and development. We've invested an incremental $8 million over 2007. And again it's good to be in a position where we can make this kind of investment and we are funding it out of our existing profits in cash flow. We've not had to dig into the cash on our balance sheet. In fact this year we are able to return $12.5 million to our shareholders through a share repurchase. Now while we are making this investment in R&D, as you've seen, we've also seen some significantly improvements in operations. Last year we made the decision to invest into significant new hires. Steve Mercier has been nothing short of phenomenal in my opinion; our new Executive Vice President of Operations. Look what he has done in a very challenging economic environment. We saw the top line decrease, yet we've seen an almost 9 percentage point improvement in margins over the prior year. And at the same time look what's happened with our inventory. We've entered 2008, we certainly have high inventory levels as we are ramping for continued improvements in sales, and obviously the global economy took unexpected time as well as gas prices that are big issue for our customers. Steve's just done a fantastic job of working through those challenging environment and really improving our overall operations. We've talked little bit earlier about Nick Pappas who joined us as our Executive VP of Strategic Communications which includes marketing. And you have all seen his background; very strong in both e-commerce and consumer, as well as communications is general. We also hired Irene Blomgren as our Executive VP of Human Resources. Irene was key in finding the type of talent in Steve and Nick and then…

(Operator Instructions). And your first question is from the line of Paul Coster with JPMorgan. Please proceed.

Hi. Good morning. Rick that was a really interesting overview of what's to come. Unfortunately, I have to switch to the topic that what's here now briefly anyway. What are you seeing in this quarter to-date and as we think about '09, can you give us some sort of initial thoughts about the revenues and expenses as you see them?

Yeah. I mean obviously it was a tough decision as we don't guide. But, there is certainly the domestic municipal budgets are going to be challenging in '09. We certainly see some headwinds in the U.S. and really until the impact of the stimulus package starts taking effect, it's hard to see that changing dramatically. But internationally we're encouraged by the fact that we're seeing an uptick in international business at the end of the 2008 and certainly as we look at the ability to grow the international business where our penetration is significantly lower than what it is here domestically. We certainly think that puts us in a good position. I think, the other key driver in 2009 as we stated is the new products coming into the market. The second half of 2009 we'll see some of the new products like AXON hit and certainly to the extent that we get market acceptance of those products out of the gate, we would certainly expect to have the sales improve in the second part of the year.

Let me kind of... Paul this is Rick. That was Dan. I would say that there is a lot of uncertainty. Now uncertainties can be good or bad. This stimulus package, we're trying to get our hands around it. I've got summits coming up with our legal advisors, with our lobbying advisors to really try to understand what that opportunity is. How much of that $4 billion goes to basically law enforcement agencies backfilling their existing budgets or keeping manpower on the street, versus how much goes into equipment purchases. It's something we don't fully understand yet, but that could have a significant impact on the business in the short term. And one other thing I would point out. Part of our strategy is well by building out additional products and services is that the software components of this business will have much more significant recurring revenues than our current business model, which as we roll into the future should build more predictability into our revenue stream. Whereas to-date, we don't generally have much of a backlog. We book and ship our business every quarter. We sort of kill what we eat every quarter from a sales perspective. We believe that's what we're doing in the TASER's Virtual Systems will increase customer's stickiness and will increase software and service recurring revenues that should add a more predictable base line to our business.

You talked about kind of keeping R&D expenses spending going. Does that mean an increase in '09, or you're talking about just keeping at the level you exited '08?

Yeah, I think certainly if you look at sort of the fourth quarter run rate on the R&D expenses, there is a 4.5 million. As we look to 2009, we expected that we'll certainly be able to stay within that range of the $4.5 million. It's really going to be some timing differences, but their investment in R&D in 2009 is going to be another heavy year, because of these products in the pipeline that we have and so we do expect that to continue.

Do you think the gross margins are sustainable of this level even with some slight movement up and down in the unit volumes?

Yeah, I think certainly our internal targets continue to be gross margins about 60%. Mix does drive that, but we've got lot of initiatives on the platform. We've got some training going on right now to train some greenbelts from a quality and lean manufacturing perspective. Steve Mercier has brought in some new supply chain management and Tom O'Hearn who is doing a good job, to drive the supplier cost. So we've got a lot of addition that's going on to make sure those gross margins stay at these higher levels. We certainly feel that the improvements we made in 2008 are sustainable.

Great. Last question Rick. The platform that CVS is developing. Will it embrace third party products, an video that's really installed for instance?

Yeah I will too much with you John (ph). Our whole goal here you've used the word platform is to build out a dedicated one-stop platform for law enforcements agencies that can assist them with the broader challenges of digital evidence, which can include third party guidance.

Excellent. Thank you. Operator: And the next question is from the line Eric Wold with Merriman Curhan & Ford. Please proceed. Eric Wold - Merriman Curhan Ford & Co.: Hey good morning. Couple of questions before I start. Can I get Dan the normal kind of quarterly your unit figures?

Yes, let's start at that. The cartridges for the quarter were 306,204 cartridges. So that's up a little bit from Q3. The handles of the X26 are 20,001 handles in the quarter. The M26 handles were at 22,409 handles and the T2 handles actually we just thought doubled our unit volume from last quarter at 7836 T2 handles in fourth quarter. So, we had lot of marketing initiatives in Q4 on the T2 and we're able to move a fair amount of product through those initiatives. Eric Wold - Merriman Curhan Ford & Co.: And the CAMS?

Yeah, TASER CAMS were 1825 cameras in Q4. Eric Wold - Merriman Curhan Ford & Co.: Okay. And then one follow-up question from the last gentleman on the R&D you talked about R&D this year, staying in kind of in a consistent level with, with where it was in Q4 as the new product come out. You're getting everything out of as a majority of new product of this year. What do you see it will get too early, but what do you see kind of in 2010, is this kind of new level of R&D setting we should expect kind of going forward as the company continues to innovate or will it start to drop off in 2010?

Yeah I think it's... a lot of its going to depend on what we see as we look forward as far as the economy and the ability to absorb new products. But certainly, some of the expenses are variable. There's a fair amount consulting that is in the numbers the higher spend rate on AXON some of the other products. So certainly after this products launch, there's opportunity someone have to pull back. But candidly we'll have to look at our position in a market and if we see we are still well positioned to drive new products into the market that's really expand our product offering and leverage our relationships with the customers will probably continue to invest. I think it's probably to your point earlier to project the $0.20 spend at this point a lot of it's going to be driven by what we see in the economy and our ability to grab that market share. Eric Wold - Merriman Curhan Ford & Co.: And then on the domestic front, obviously you did see international revenues that presented total pop up consecutive from Q3 to Q4 but that's going to back it out domestic dollars actually we are flat as Q3 and Q4 which is I guess a positive sign is to may be. What are you hearing kind of from the domestic guides. Is that really just dependant on how their budgets are in terms of if they want to go forth on project. Is the demand still very much there, they're kind of just in a little shaky spending environment and that kind of the outlook they improved you could do that ramp back up?

We are continuing to see significant demand for the product, I mean everybody is quite literally challenged and right now everybody has gotten their headcount to figure out the impact of this stimulus bill. One thing we are really focusing on, we do cost benefit analyses for law enforcement and when they start making decision about equipment purchases there are very few places where they can make an investment like they can in the pager devices where the reductions in police officer injuries and work for comp plans and reductions in legal force incidents and suspect injuries. So even though if there is talk about the TASER-related litigation, if you actually look at studies of agencies that deploy TASER like Michigan Municipal Risk Management Authority, based on the deployment of TASER's cut their total excessive force litigation by over 50%. So we are really focusing our message of or holding our messaging on these cost-saving attributes of TASER devices to try and make sure that when their spending scarce dollars that lot of it is coming our way. Eric Wold - Merriman Curhan Ford & Co.: And then last question on kind of looking the new parts coming on board this year. You are now looking for a dollar amount of the guidance. Can you give a sense of how significant contribution can new product have this year and then as they come into play kind of on the margins, should we expect kind of with other new product launches in recent years the initial revenues they have got, the new product should be low on margin ramp up or have you worked through the processes such that margins can tend at least comparable to where you're getting now?

Yeah, that's a really good question. This is Dan. I think we see our ability to sort of grow the business and maintain our current business is really going to be highly dependant on these products. Certainly there is a large market out there for our existing products, but I think in this environment really our ability to go back to especially existing customers that are say fully deployed with the X26 and now have a new product to sell them with the AXON or the Shockwave will certainly I think is going to be a real positive things from a sales perspective. On the margins, we've really done a lot of work on the operations side. We've talk about the good work we've done there. And lot of its also on the new product introduction process. The amount of validation and testing and design attach ability of these new products is much enhanced from what we had, say year and half ago when we launched the C2. I think we made great strides there as a result. I think that the impact on margins out of the gate for these products which is going to be have less than an impact than what we saw in some of the introductions in the past because of the discipline we put in these new this product introduction process now. Eric Wold - Merriman Curhan Ford & Co.: Perfect. Thank you, guys.

Thanks Eric. Operator: (Operator Instructions). The next question is from the line Greg McKinley from Dougherty and Company. Please proceed.

Yeah, good morning. Guys, could you talk a little bit about, I know Dan you spent sometime on the call taking about your stock comp expense. But I'm wondering if you can just put that in the broader context of your SG&A and how do you generally expect that to behave during the course of the years as the Q4 number, a decent run-rate or I know you've added a few more people in leadership positions, how do you... how should we look at that in 2009?

Yeah, sure. The 123, this is a Dan, and 123(R) charges in Q4 were just a little over $1 million; 620,000 that was in the SG&A line. And as you saw from the force, we did have a annual grant. We tied at this year to floor reviews instead of doing annual grants in May. Like we've done in prior years we did it in December in order that closely, more closely tied of stock compensations to performance. So I do expect that $1 million of 123(R) charges to go up and 2009 mostly because the grants we made in December we didn't see a lot of that expense in the fourth quarter. So I do expect that go up. But, yeah, of the 10.9 million of SG&A, about 620,000 of that was the stock compensation.

Okay. And then, so maybe that component of the 10.9 goes up a little bit due to some of these grand flight in the quarter. But is the 10.9 excluding that stock comp, is that a reasonable sort of base level type of operating expense or is there, as you guys add some leadership positions into some these new initiatives, should we look for that to grow a little bit or how should we think about that?

Yeah, I mean I wouldn't expect it to grow more than just sort of inflationary growth over that sort of run rate at this point. Obviously, we're going to have to make some investments on the SG&A side for these new products in the pipeline. Certainly product like AXON that are high-tech products may requires sales engineering talents that we don't have onboard today. But I think a lot of the more significant adds have been made in our run rate. It's really more now trying to leverage expenses we have and make sure that we could be sufficient as possible, but at the same time we want to make sure that we made a heavy investment R&D, want to make sure that we are making the right investments in SG&A that position the company well for the opportunity in front of us.

Yeah. And then can you just talk a little bit again about your new product additions that are likely to come on this year, the timing of those? I think AXON you said is the second half launch to XREP. It looks like a late Q2 launch. What other products are should we be expecting to be introduced or are those are the two primary ones for '09?

Well, this is Rick Smith. XREP, we're looking late in the second quarter. That's currently slated come to market. There is still some uncertainty in that by the way. I mean we are tweaking the aerodynamic performance of the round that could come in a little sooner. If we weren't in this, probably could take a little longer. It's just the nature of research and development. But we expect that by the end of the Q2, XREP should be online. The Shockwave which is the area denial system that should be ready to go here a couple of weeks or early in the second quarter. I wouldn't count on a lot of revenue from Shockwave. Shockwave, I don't care try this more of a concept, proof of concept product. I mean the areas of Nile, there is not a big meet for that in law enforcement although we did recently just have a SWAT team utilize it's barricade situation very successfully. But in law enforcement Shockwave, we will be little bit of a niche but for corrections. We see an opportunity for Shockwave to be a significant product. And in the military, it was the primary focus where we felt that it was worthy investment. We needed to get these non-lethal area denial systems off of PowerPoint page in the reality so the people can start to see these but military customers you know takes a long time to digest new concepts and operationalize them. The CDPM which is the Controlled Digital Power Magazine which is basically a controlled lanyard for the X26 that enabled this to be disabled if it's taken away from an officer. And you have to have a code to be able to reactivate the weapon. We see that was very significant with some state correctional agencies that were looking at deploying pages but they are worried about the risk of the weapon being taken away in a correctional environment. Should we believe the CDPM, which is now shipping will open up some corrections market for us.

Okay.

The AXON is second half of the year as well as to support software and service product that wrap around AXON in the second half of this year. And then we do have some other unannounced products that we have not made final determinations on when to make launch announcements, but there is more in the pipeline than what we've probably announced.

Yeah. Thank you.

Thank you.

Thanks Greg.

Your next question is the follow-up from the line of Paul Coster with JPMorgan. Please proceed.

Great, thank you. I'm wondering if you would be kind enough to comment on specifics of what you're seeing in the UK, France, and Canada at the moment. In UK, when is the next 5,000 order coming through? France, what's the latest thinking on the national police, and Canada I understand there is some news coming out from Canada today on police chief support of TASER's. What does that mean for you?

Okay, this is Rick. Well, certainly let's start with the UK. We understand that there is an order for potentially another 5,000 units although we've heard some round news is that they may split back between some units in cartridges. Unfortunately with these things in order as we don't, they're not in the bag until they're done. And so we get the PL. And then you'll, once we get the PL we can generally ship pretty quickly. So I wouldn't want to go out a on a lim and try to predict governmental purchase process will come to conclusion on those. But we're certainly hopeful that that will be sometime in the first half of this year. On France, my brother Tom has been very actively involved in meeting with the senior officials in the French National Police. Again, we don't have anything specific to report. As soon as we will, we'll report it. So we're continuing with very good things from their TASER experience. They have seen dramatic improvements in their operations. Unfortunately I can't quote the statistics of the top of my head, but from the limited case to (inaudible) so far, they have seen really pretty dramatic operational results. Coming to Canada, Canada has been a very challenging environment for us. The Canadian media has really been actively engaged in the discussion of our TASER devices. There has been frankly a lot of negativity around the issue ever since the incident in the Vancouver, Airport last year. Even though the autopsies have come back and the independent medical examiners who ruled that they don't believe that TASER played a significant role in that unfortunate and tragic incident. And what we're seeing now is that expert number of governmental studies in Canada which we are fully supportive of…

Dan what tax rate should we plan for '09 please?

I think that RD&E sort of the take a look at for next year I would say we're going to be probably about 44% rate for next year.

44%. What point is that?

Just because we've got the things like the ISO 123(R) charges and have being get added to the booking income lobbying. So the sort of permanent items will drive after-tax rate above just sort of the statutory 39%, so it will be in that sort of 42 to 44% range for next year.

Okay, and then it just looks one last question Rick, it seems like you're already sort of building a pipeline for AXON. You believe that will see sales immediately this product launch?

That's a real tough question. I tend to think that we are doing all the right things to position it. A more lot of our meeting is really on has been with the larger police agencies, so we can start the process. They tend to take a very long to purchase. The real success with AXON that could impact in the short term would be the small to mid size agencies. They contain to turn more quickly so my personal opinion is I think once we roll the product out that we'll start to see some orders in fairly short order. But we'll be careful about how we do this, so the field trial process we'll go through to make sure we've really validated the hardware and the software solutions. But the other thing that's kind of interesting is the cross marketing opportunity with AXON. I've been in to see some police chiefs, frankly at agencies that don't have significant TASER programs and have not expressed a lot of interest in TASER programs. And once we've given the presentations on our vision of how all these devices and technologies work together from again engaging subjects in the field all the way through documenting agencies and taking them through the legal process, we've had at least one major agency come back and is now looking at starting a TASER program whereas they had rally not had interest before. So we are seeing cross-marketing opportunities where these products will build off of each other, so that the AXON lines could potentially help our long-term TASER sale and vice versa.

Excellent. Thank you very much.

Thanks Paul.

Thank you. With that we're going to go and wrap up the call. I appreciate everybody's time this morning. You've been with us little over an hour and we'll be back with you in April. And we look forward to what for us is a very exciting time in the company's history. Thanks a lot.

Thank you for the participation in today's conference call. This concludes the presentation. And you may now disconnect.