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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
 þ
    
    Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 for the fiscal year ended September 30, 2007
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 for the transition period from       to
 Commission File Number 0-15318
 BALLISTIC RECOVERY SYSTEMS, INC.
  Minnesota
    
    41-1372079(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification No.)
 300 Airport Road, South St. Paul, Minnesota
    
    55075-3541(Address of Principal Executive Offices)
    
    (Zip Code)
 (651) 457-7491
 Securities registered pursuant to Section 12(b) of the Exchange Act:
 Securities registered pursuant to Section 12(g) of the Exchange Act:
  o
 þ o
 o þ
 o
    o þ




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##### 



TABLE OF CONTENTS
  
 PART IItem 1 Description of Business
    
    
    1Item 2 Description of Property
    
    
    12Item 3 Legal Proceedings
    
    
    12Item 4 Submission of Matters to a Vote of Security Holders
    
    
    13PART IIItem 5 Market for Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities
    
    
    13Item 6 Managements Discussion and Analysis or Plan of Operation
    
    
    14Item 7 Consolidated Financial Statements
    
    
    20Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    20Item 8A Controls and Procedures
    
    
    20Item 8B Other Information
    
    
    21PART IIIItem 9 Directors, Executive Officers, Promoters, Control Persons, and Corporate
Governance; Compliance with Section 16(a) of the Exchange Act
    
    
    21Item 10 Executive Compensation
    
    
    24Item 11 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    27Item 12 Certain Relationships and Related Transactions, and Director Independence
    
    
    29Item 13 Exhibits
    
    
    30Item 14 Principal Accountant Fees and Services
    
    
    31Index to Consolidated Financial Statements
    
    
    F-1Exhibit 21.1Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1
   i




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##### Table of Contents



REFERENCES
  FORWARD-LOOKING STATEMENTS
  
 PART I
 
 ITEM 1. BUSINESS
 Introduction
    
    
    General aviation aircraft as certified by the FAA. The general aviation market is
our largest consumer, comprising approximately 74.4 % of our revenue.
    
    Light Sport Aircraft (LSA) which are smaller two-seat aircraft. The FAA monitors
and regulates this segment under different regulations and restrictions than the
general aviation aircraft.
    
    Recreational/Sport aviation (commonly called ultralight aircraft). The recreational
aviation market is the oldest market segment that we service. Our first products were
developed for this segment over 27 years ago.
    
    Personal Protective Equipment.
  1




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
    
    Expansion of the general aviation market beyond Cirrus to other general aviation
manufacturers;
    
    Growth in the emerging Very Light Jet (VLJ) market;
    
    Development of products and successful contract awards for defense related products;
    
    Development of the repack market for general aviation aircraft;
    
    Utilization of our manufacturing expertise and excess capacity for aviation and
non-aviation cut and sew production in our Mexico production facility; and
    
    The manufacturing, marketing, and distribution of personal protective equipment.
      Our Business
 Principal Products
  General Aviation Market
   2




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Cirrus Design Corporation
 required
    Other General Aviation Products
 Government Regulation
   3




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Light Sport Aircraft (LSA) Market/Recreational Market
      Very Light Jet (VLJ) Market
   4




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Repack Market
  a)
    
    replacement of the extraction rocket;b)
    
    inspection of the parachute assembly including replacement of certain time
change items and other parts that have reached the end of their service life; andc)
    
    repacking of the parachute.
  Non-Aviation and Department of Defense Market
    5




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Manufacturing
 Parachute Manufacturing
  Other Components
   Patents and Intellectual Property
    Patents
    6




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Trademark Protection
 © © © TM © TM TM TM TM TM TM TM TM TM TM TM Whos who? & Whos where Take Effective Action and Lead © TM TM TM TM TM TM TM TM
 Government Regulation
      7




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
    
    they are not a critical component; or
    
    they have been produced under a licensing agreement; or
    
    they have received a specific EASA approval (minor change approval or STC)
  Seasonality
  Dealer/Distributor Network
  Backlog of Orders
  Research and Development
    8




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Competition
     Insurance and Product Liability
   Environmental Compliance
  Employees
     9




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Risk Factors
 You should carefully consider the information described in the following risk factors,
together with the other information appearing elsewhere in this report. If any of these risks
actually occur, our business, financial conditions, results of operation and future growth
prospects would likely be materially and adversely affected. In these circumstances, the market
price of our common stock could decline, and you may lose all or a part of your investment in our
common stock.
 Restatement of financial statements for the quarters ended March 31, 2007 and June 30, 2007
  Removal from OTCBB due to delay in filing annual report
  General economic conditions may adversely affect our sales and profitability.
  We rely on the knowledge and business and technical expertise of key executive officers and
directors, whose services would be difficult to replace .
  If we fail to comply with FAA standards, or if those standards change, our business may be
negatively impacted.
   10




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##### Table of Contents



Cirrus represents a substantial amount of our revenues.
  Cirrus owns a significant portion of our outstanding voting power and of our outstanding common
stock and has a director on our board of directors.
  The board of directors and management team own a significant amount of our common stock.
  The limited trading of our common stock may make it difficult to sell shares of our common stock.
  The resale of shares offered by our shareholders could adversely affect the market price of our
common stock in the public market, which result would in turn negatively affect our ability to
raise additional equity capital.
   11




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Our Articles of Incorporation grants our board of directors the power to designate and issue
additional shares of common and/or preferred stock.
  We are subject to Sarbanes-Oxley and the reporting requirements of federal securities laws, which
can be expensive.
  
 ITEM 2. DESCRIPTION OF PROPERTY
      
 ITEM 3. LEGAL PROCEEDINGS
 Aerospace Marketing/Parsons
 Aerospace Marketing, Inc. and Charles Parsons v. Ballistic Recovery
Systems, Inc.
  12




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McGrath
 Sue Jean McGrath, individually and as successor in interest to Charles W.
McGrath, deceased, Charles W. McGrath III, Tanya Sue McGrath, Janny Sue McGrath, individually v.
Cirrus Design Corporation, Ballistic Recovery Systems, Inc., and Aerospace Systems and
Technologies, Inc.
 Rayner
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 PART II
 
 ITEM 5.
    
    MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES
OF EQUITY SECURITIES
 Market for Common Stock
   13




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Price RangeQuarter Ended
    
    High
    
    
    LowDecember 31, 2007
    
    $
    2.19
    
    
    $
    1.51September 30, 2007
    
    $
    1.80
    
    
    $
    1.60June 30, 2007
    
    
    1.95
    
    
    
    1.69March 31, 2007
    
    
    1.90
    
    
    
    1.38December 31, 2006
    
    
    1.55
    
    
    
    1.33September 30, 2006
    
    $
    2.20
    
    
    $
    1.50June 30, 2006
    
    
    2.24
    
    
    
    1.39March 31, 2006
    
    
    1.82
    
    
    
    1.45December 31, 2005
    
    
    2.20
    
    
    
    1.51
  Record Holders
  Dividends
  Equity Compensation Plan Information
  Number of securities
    
    
    
    
    
    Number of securitiesto be issued upon
    
    
    Weighted average
    
    
    remaining availableexercise of
    
    
    exercise price of
    
    
    for future issuanceoutstanding options,
    
    
    outstanding options,
    
    
    (excluding securitieswarrants and rights
    
    
    warrants and rights
    
    
    reflected in column (a))Plan category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation plans approved by stockholders(1)
    
    
    0
    
    
    
    N/A
    
    
    
    600,000Equity compensation plans not approved by stockholders(2)
    
    
    45,000
    
    
    $
    1.05
    
    
    
    0
 
 (1)
    
    Represents shares of common stock authorized for issuance under the 2004 Stock Option Plan.(2)
    
    Represents stock options granted to employees and directors at then current market prices. 
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
  Introduction
   14




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Results of Operations
 Fiscal year ended September 30, 2007 compared to fiscal year ended September 30, 2006
 Sales
         15




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Gross Margin
     Selling, General and Administrative
  Research and Development
   Payroll and Employee Benefit Expenses
   16




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Depreciation
  Amortization
  Interest Expense
  Net Income (Loss) and Earnings (Loss) per Share
  Liquidity and Capital Resources
  
    
    Reduction of operating expenses by reductions in personnel made principally at our
Mexico plant since year-end
    
    Renew our line of credit  bank agreement (see Note 7 to our financial statements
found elsewhere in this Annual Report) which expires on April 30, 2008 and/or explore
other financing alternatives including possible long-term debt financing
    
    If necessary, reduce reseach and development expenses
    
    Other alternatives as deemed necessary
     17




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Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
   Revenue Recognition
  Allowance for Doubtful Accounts
  Valuation of Inventories
   18




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Impairment of Long-Lived Assets
   Income Taxes
  Contingencies
  Recently Issued Accounting Standards
   19




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purchase
method
 
 ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
  
 ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 8A. CONTROLS AND PROCEDURES
    20




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ITEM 8B. OTHER INFORMATION
  
 PART III
 
 ITEM 9.
    
    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(A) OF THE EXCHANGE ACT
  Name
    
    Age
    
    PositionsLarry E. Williams
    
    
    50
    
    
    Director, President, Chief Executive
Officer, and Chief Operating OfficerRobert L. Nelson
    
    
    64
    
    
    Chairman of the Board, Director and SecretaryBoris Popov
    
    
    62
    
    
    DirectorThomas H. Adams, Jr.
    
    
    71
    
    
    DirectorDarrel D. Brandt
    
    
    65
    
    
    DirectorEdward L. Underwood
    
    
    60
    
    
    DirectorFernando Caralt
    
    
    44
    
    
    DirectorCarl D. Langr
    
    
    38
    
    
    Chief Financial Officer
 Larry Williams
  21




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Robert L. Nelson
 Boris Popov
 Thomas H. Adams, Jr.
 Darrel D. Brandt
 Edward L. Underwood
 Fernando Caralt
 Carl D. Langr
  22




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Significant Employees
 Gary Moore
 John M. Gilmore
 Frank Hoffmann
 Section 16 (a) Beneficial Ownership Reporting Compliance
            23




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Code of Ethics
  Audit Committee
   
 ITEM 10. EXECUTIVE COMPENSATION
 Summary Compensation Table
  NonqualifiedNon-Equity
    
    
    DeferredStock Awards
    
    
    Incentive Plan
    
    
    Compensation
    
    
    All OtherName and Principal Positions
    
    Year
    
    
    Salary
    
    
    Bonus
    
    
    (1)
    
    
    Compensation
    
    
    Earnings
    
    
    Compensation
    
    
    TotalLarry E. Williams
    
    
    2007
    
    
    $
    194,000
    
    
    $
    48,500
    (2)
    
    
    0
    (3)
    
    $
    50,760
    (4)
    
    
    0
    
    
    
    0
    
    
    $
    293,260Chief Executive Officer
and PresidentGary Moore
    
    
    2007
    
    
    $
    103,333
    
    
    $
    2,500
    (5)
    
    $
    1,031
    (5)
    
    
    0
    
    
    
    0
    
    
    $
    682
    (6)
    
    $
    107,546Vice President of Sales &
MarketingJohn Gilmore
    
    
    2007
    
    
    $
    103,333
    
    
    $
    1,570
    (7)
    
    $
    743
    (8)
    
    $
    22,063
    (9)
    
    
    0
    
    
    $
    298
    (6)
    
    $
    125,694Director, Cessna Customer
SupportDon Hedquist  (10)
    
    
    2007
    
    
    $
    98,500
    
    
    
    0
    (11)
    
    
    0
    (12)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    98,500Chief Financial OfficerFrank Hoffmann
    
    
    2007
    
    
    $
    97,000
    
    
    $
    2,500
    (13)
    
    $
    1,031
    (14)
    
    
    0
    
    
    
    0
    
    
    $
    682
    (6)
    
    $
    101,213Vice President of Engineering
 (1)
    
    Amounts listed reflect the dollar amount recognized for financial statement reporting
purposes for the fiscal year ended September 30, 2007, in accordance with SFAS 123(R), of the
stock award based on the fair market value of the stock award on the date of grant.
Assumptions used in the calculation of this amount for employees are identified in Note 2 to
our financial statements for the year ended September 30, 2007 included elsewhere in this
Annual Report. There were no options that were issued or vested in the year ended September
30, 2007.
  24




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(2)
    
    Constitutes a discretionary cash bonus approved by our compensation committee pursuant to the
terms of Mr. Williams employment agreement based on his job performance during the fiscal
year ended September 30, 2007. The cash bonus was paid in November 2007. Total does not
include a discretionary cash bonus of $116,400 which was approved by our compensation
committee pursuant to the terms of his then-current employment agreement based on his job
performance during the fiscal year ended September 30, 2006 and paid to Mr. Williams in
November 2006.(3)
    
    Does not include 17,767 shares of our common stock issued to Mr. Williams on January 16, 2007
based upon his job performance during the fiscal year ended September 30, 2006, which were
accrued at September 30, 2006.(4)
    
    Constitutes a non-discretionary bonus paid to Mr. Williams in November 2007 pursuant to the
terms of his employment agreement.(5)
    
    Constitutes a discretionary bonus paid to Mr. Moore in November 2007 in the form of cash and
625 shares of restricted stock based on our performance during the fiscal year ended September
30, 2007. The shares of restricted stock were approved and declared as of November 28, 2007,
when our common stock had a fair market value of $1.65.(6)
    
    Constitutes a cash payment to gross up the executive for the executives tax obligations
relating to the issuance of restricted stock as a discretionary bonus to the executive.(7)
    
    Constitutes a discretionary bonus paid to Mr. Gilmore in November 2007 in cash based on our
performance during the fiscal year ended September 30, 2007. Does not include a discretionary
cash bonus of $700 paid to Mr. Gilmore in November 2006 based on our performance during the
fiscal year ended September 30, 2006.(8)
    
    Consists of 450 shares of restricted stock issued to Mr. Gilmore as a discretionary bonus
based on our performance during the fiscal year ended September 30, 2007. The shares of
restricted stock were approved and declared as of November 28, 2007, when our common stock had
a fair market value of $1.65. Does not include 1,100 shares of restricted stock issued to Mr.
Gilmore on January 16, 2007 based upon our performance during the fiscal year ended September
30, 2006.(9)
    
    Constitutes a commission paid to Mr. Gilmore on sales of our products sold as follows: (i)
0.75% of sport sales in the United States (ii) 1% of sports sales internationally.(10)
    
    Mr. Hedquist resigned from his position as our Chief Financial Officer effective December 14,
2007.(11)
    
    Does not include a discretionary cash bonus of $1,400 paid to Mr. Hedquist in November 2006
based on our performance during the fiscal year ended September 30, 2006.(12)
    
    Does not include 2,200 shares of restricted stock issued to Mr. Hedquist on January 16, 2007
based upon our performance during the fiscal year ended September 30, 2006.(13)
    
    Constitutes a discretionary bonus paid to Mr. Hoffmann in November 2007 in cash based on our
performance during the fiscal year ended September 30, 2007. Does not include a discretionary
cash bonus of $450 paid to Mr. Hoffmann in November 2006 based on our performance during the
fiscal year ended September 30, 2006.(14)
    
    Consists of 625 shares of restricted stock issued to Mr. Hoffmann as a discretionary bonus
based on our performance during the fiscal year ended September 30, 2007. The shares of
restricted stock were approved and declared as of November 28, 2007, when our common stock had
a fair market value of $1.65. Does not include 600 shares of restricted stock issued to Mr.
Hoffmann on January 16, 2007 based upon our performance during the fiscal year ended September
30, 2006.
 Employment Agreement with our Executives
 Chief Executive Officer
    25




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Executive Bonus Compensation
   Outstanding Equity Awards at Fiscal Year-End
  Severance and Change of Control Arrangements
   26




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Director Compensation
  Fees Earned or
    
    
    
    
    
    
    All OtherName
    
    Paid in Cash
    
    
    Stock Awards   (1)
    
    
    Compensation
    
    
    TotalTom Adams
    
    $
    22,500
    
    
    $
    8,211
    
    
    
    0
    
    
    $
    30,711Darrell Brandt
    
    
    28,500
    
    
    
    8,211
    
    
    
    0
    
    
    
    36,711Fernando Caralt
    
    
    0
    
    
    
    0
    
    
    $
    12,500
    (2)
    
    
    12,500Robert Nelson
    
    
    44,000
    
    
    
    8,211
    
    
    
    0
    
    
    
    52,211Boris Popov
    
    
    30,000
    
    
    
    8,211
    
    
    $
    27,333
    (3)
    
    
    65,544Edward Underwood
    
    
    32,000
    
    
    
    8,211
    
    
    
    0
    
    
    
    40,211
 (1)
    
    Amount reflects the dollar amount recognized for financial statement reporting purposes
for the fiscal year ended September 30, 2007 in accordance with SFAS No. 123(R) relating to
(i) stock awards to our non-employee directors of 6,000 shares of our common stock on May
15, 2007, at the fair market value of our common stock on the date of grant and (ii) stock
awards to our non-employee directors of 6,000 shares of our common stock on June 15, 2006,
at fair market value of our common stock on the date of grant. Assumptions used in the
calculation of this amount for non-employees are identified in Note 2 to our financial
statements for the year ended September 30, 2007 included elsewhere in this Annual Report.(2)
    
    Amount reflects payments made to Mr. Caralt for consulting services provided to our
Company during the fiscal year ended September 30, 2007 pursuant to the terms of our
securities purchase agreement dated June 25, 2007 with CIMSA Ingenierias de Sistemas, S.A.,
of which Mr. Caralt is the president, chief executive officer and a director.(3)
    
    Amount reflects payments made to Mr. Popov for consulting services provided to our
Company pursuant to the terms of a consulting agreement entered into with Mr. Popov on
November 19, 2004, as amended.    
 ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
   27




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Amount and Nature ofName and Address of Beneficial Owner
    
    Beneficial Ownership  (1)
    
    

Percent of ClassDarrel D. Brandt
    
    
    1,699,077
    (2)
    
    
    15.0Boris Popov
    
    
    459,700
    (3)
    
    
    4.1Thomas H. Adams, Jr.
    
    
    209,516
    (3)
    
    
    1.9Robert L. Nelson
    
    
    83,480
    (4)
    
    
    *Edward L. Underwood
    
    
    47,046
    (5)
    
    
    *Fernando Caralt
    
    
    1,378,676
    (6)
    
    
    11.9Larry E. Williams
    
    
    78,745
    (7)
    
    
    *John M. Gilmore
    
    
    1,750
    
    
    
    *Frank Hoffman
    
    
    450
    
    
    
    *Carl D. Langr
    
    
    0
    
    
    
    Cirrus Design Corporation
    
    
    1,150,000
    
    
    
    10.24515 Taylor CircleDuluth, MN 55811CIMSA Ingenieria de Sistemas, S.A.
    
    
    1,378,676
    (8)
    
    

    11.9P.I. El Ramassasr  C/Valles, s/nBarcelona, SpainAll executive officers and directors
    
    
    3,958,440
    (9)
    
    
    34.0as a group (10 persons)
 
 *
    
    Less than 1%(1)
    
    Unless otherwise indicated, all persons have sole voting power and sole investment power with
respect to the shares indicated. Includes shares that may be acquired by exercise of options
currently exercisable (including options becoming exercisable within 60 days).(2)
    
    Includes 15,000 shares issuable upon exercise of vested options. Beneficial ownership based
upon a Form 13G filed on February 12, 2008.(3)
    
    Includes 15,000 shares issuable upon exercise of vested options.(4)
    
    Includes warrants to purchase an aggregate of 6,296 shares of common stock at an exercise
price of $2.00.(5)
    
    Includes warrants to purchase an aggregate of 5,009 shares of common stock at an exercise
price of $2.00. Does not include shares beneficially owned by Cirrus Design Corporation. Mr.
Underwood is an executive director of an entity that controls Cirrus Design Corporation.(6)
    
    Represents (i) 1,102,941 shares of common stock held by CIMSA Ingenieria de Sistemas, S.A.
and (ii) warrants to purchase an aggregate of 275,735 of common stock at an exercise price of
$2.00 held by CIMSA Ingenieria de Sistemas, S.A., of which Mr. Caralt is the President, Chief
Executive Officer, and a Director. Mr. Caralt disclaims beneficial ownership of the
securities held by CIMSA.(7)
    
    Includes warrants to purchase an aggregate of 4,596 shares of common stock at an exercise
price of $2.00.(8)
    
    Includes warrants to purchase an aggregate of 275,735 shares of common stock.(9)
    
    Includes 45,000 shares issuable upon exercise of vested options and 291,636 shares issuable
upon exercise of outstanding warrants.  28




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ITEM 12.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
    Corporate Governance
   29




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ITEM 13. EXHIBITS
  Exhibit No.
    
    Description3.1
    
    Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to the Companys Registration Statement
on Form SB-2 filed on March 21, 2007).3.2
    
    Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 of our Registration Statement on Form SB-2 filed on
March 21, 2007).4.1
    
    Form of Director Stock Option Agreement (incorporated by
reference to Exhibit 4.1 of our Registration Statement Form S-8
filed on February 23, 2005).4.2
    
    Schedule of Director Stock Options pertaining to Exhibit 4.1
(incorporated by reference to Exhibit 4.2 of our Registration
Statement Form S-8 filed on February 23, 2005).4.3
    
    Form of Subscription Agreement entered into with investors in
private placements completed from October 2006 to January 2007
(incorporated by reference to Exhibit 4.3 of the Companys Form
10-KSB filed December 26, 2006).4.4
    
    Form of Subscription Agreement entered into with certain
officers and directors in June 2006 (incorporated by reference
to Exhibit 4.6 to the Companys Registration Statement on Form
SB-2 filed on February 22, 2007).4.5
    
    Subscription Agreement entered into with Darrel D. Brandt in
June 2006 (incorporated by reference to Exhibit 4.7 to the
Companys Registration Statement on Form SB-2 filed on February
22, 2007).4.6
    
    Form of Warrant issued to certain investors in our private
placement offering completed from October 2006 to January 2007
(incorporated by reference to Exhibit 4.2 of the Companys Form
10-QSB filed February 14, 2007).4.7
    
    Form of Agent Warrant issued to placement agent in the private
placement offering completed from October 2006 to January 2007
(incorporated by reference to Exhibit 4.3 of the Companys Form
10-QSB filed February 14, 2007).4.8
    
    Form of Warrant issued to CIMSA Ingenieria de Sistemas, S.A.
dated June 25, 2007 (incorporated by reference to Exhibit 4.1 of
the Companys Current Report on Form 8-K filed on June 26,
2007).10.1
    
    Purchase and Supply Agreement dated September 17, 1999 between
us and Cirrus Design Corporation (incorporated by reference to
Exhibit 10.1 of the Companys Report on Form 8-K filed September
20, 1999).10.2
    
    Amendment to Purchase and Supply Agreement dated February 6,
2006 between us and Cirrus Design Corporation (incorporated by
reference to Exhibit 10.1 of the Companys Quarterly Report for
the quarter ended March 31, 2006 filed on May 22, 2006).**10.3
    
    Covenant not to Compete Agreement dated October 26, 1995 between
us and the president and majority shareholder of Second Chantz
Aerial Survival Equipment, Inc. (incorporated by reference to
Exhibit 10.2 of the Companys Annual Report on Form 10-KSB for
the fiscal year ended September 30, 1995).10.4
    
    Stipulation and Confession of Judgment among us, Charles F.
Parsons, and Aerospace Marketing, Inc. dated September 19, 2005
(incorporated by reference to Exhibit 10.1 of the Companys
Current Report on Form 8-K filed September 23, 2005).10.5
    
    Security Agreement dated September 19, 2005 granted by us in
favor of Charles F. Parsons and Aerospace Marketing, Inc.
(incorporated by reference to Exhibit 10.2 of the Companys
Current Report on Form 8-K filed September 23, 2005).10.6
    
    Resignation, Consulting, Non-Competition and General Release
Agreement dated October 14, 2004 with Mark B. Thomas
(incorporated by reference to Exhibit 10.1 of the Companys
Quarterly Report on Form 10-QSB for the quarter ended December
31, 2004).10.8
    
    Consulting Agreement with Boris Popov dated November 17, 2004
(incorporated by reference to Exhibit 10.4 of the Companys
Quarterly Report on Form 10-QSB for the quarter ended December
31, 2004).10.9
    
    Employment Agreement with Larry E. Williams dated January 4,
2007 (incorporated by reference to Exhibit 10.10 of the
Companys Registration Statement on Form SB-2 filed on February
22, 2007).10.10
    
    Securities Purchase Agreement between the Company and CIMSA
Ingenieria de Sistemas, S.A. dated June 22, 2007 (incorporated
by reference to Exhibit 10.1 of the Companys Current Report on
Form 8-K filed on June 26, 2007).10.11
    
    Loan Agreement between Anchor Bank St. Paul, N.A. and the
Company dated August 15, 2007 (incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K filed
on August 24, 2007).
  30




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##### Table of Contents



Exhibit No.
    
    Description10.12
    
    Promissory Note made by the Company in favor of Anchor Bank St.
Paul, N.A. dated August 15, 2007 (incorporated by reference to
Exhibit 10.2 of the Companys Current Report on Form 8-K filed
on August 24, 2007).10.13
    
    Security Agreement between the Company and Anchor Bank St. Paul,
N.A. dated August 15, 2007 (incorporated by reference to Exhibit
10.3 of the Companys Current Report on Form 8-K filed on August
24, 2007).10.14
    
    Asset Purchase Agreement between Advanced Tactical Fabrication,
Inc., Head Lites Corporation, and the shareholders of Head Lites
Corporation dated November 16, 2007 (incorporated by reference
to Exhibit 10.1 of the Companys Current Report on Form 8-K
filed on November 21, 2007).10.15
    
    Master Agreement between Ballistic Recovery Systems Inc.,
Advanced Tactical Fabrication, Inc., Head Lites Corporation, and
Gary Lesley dated November 16, 2007 (incorporated by reference
to Exhibit 10.1 of the Companys Current Report on Form 8-K
filed on November 21, 2007).14.1
    
    Code of Ethics for Senior Financial Executives (filed as Exhibit
B with 2004 Proxy Statement filed January 23, 2004)21.1
    
    List of Subsidiaries23.1
    
    Consent of Virchow, Krause & Company, LLP31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certifications
 **
    
    Confidential treatment has been granted as to certain portions of this exhibit pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 Audit Fees
  Financial Information Systems Design and Implementation Fees
  Tax Fees
  All Other Fees
  Audit Committee
 de minimis
  31




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##### Table of Contents



SIGNATURES
  Ballistic Recovery Systems, Inc.By:
    /s/ Larry E. WilliamsLarry E. WilliamsChief Executive Officer, President and DirectorBy:
    /s/ Carl D. LangrCarl D. LangrChief Financial Officer  Name
    
    Title
    
    Date/s/ Larry E. Williams

Larry E. Williams
    
    Chief Executive
Officer, President, Chief Operating Officer and Director (Principal Executive Officer)
    
    March 6, 2008/s/ Carl D. Langr

Carl D. Langr
    
    Chief Financial
Officer (Principal Financial and Accounting Officer)
    
    March 6, 2008/s/ Robert L. Nelson
    
    Chairman, Secretary and Director
    
    March 6, 2008Robert L. Nelson/s/ Boris Popov
    
    Director
    
    March 6, 2008Boris Popov/s/ Thomas H. Adams, Jr.
    
    Director
    
    March 6, 2008Thomas H. Adams, Jr./s/ Darrel D. Brandt
    
    Director
    
    March 6, 2008Darrel D. BrandtDirectorEdward UnderwoodDirectorFernando Caralt
  32




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##### Table of Contents



Index to Consolidated Financial Statements
 Report of Independent Registered Public Accounting Firm Virchow, Krause & Company, LLP
    
    
    F-2Consolidated Balance Sheets as of September 30, 2007 and 2006
    
    
    F-3Consolidated Statements of Operations for the Years Ended September 30, 2007 and 2006
    
    
    F-5Consolidated Statements of Shareholders Equity for the Years Ended September 30, 2007 and 2006
    
    
    F-6Consolidated Statements of Cash Flows for the Years Ended September 30, 2007 and 2006
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
  F-1




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F-2




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##### Table of Contents



Ballistic Recovery Systems, Inc. and Subsidiary
 
 Consolidated Balance Sheets
September 30, 2007 and 2006
 2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    914,523
    
    
    $
    53,722Accounts receivable  net of allowance for doubtful accounts of $65,000 and
$22,924, respectively
    
    
    1,317,113
    
    
    
    541,642Inventories
    
    
    1,788,266
    
    
    
    2,458,003Deferred tax asset  current portion
    
    
    85,000
    
    
    
    160,700Note receivable
    
    
    56,826
    
    
    
    Prepaid expenses
    
    
    286,130
    
    
    
    144,509Total current assets
    
    
    4,447,858
    
    
    
    3,358,576Furniture, fixtures and leasehold improvements
    
    
    1,308,235
    
    
    
    1,092,085Less accumulated depreciation and amortization
    
    
    (662,032
    )
    
    
    (506,831
    )Furniture, fixtures and leasehold improvements  net
    
    
    646,203
    
    
    
    585,254Other assets:Patents, net of accumulated amortization of $11,814 and $11,425, respectively
    
    
    600
    
    
    
    989Goodwill
    
    
    
    
    
    
    103,774Deferred tax asset  net of current portion
    
    
    1,416,000
    
    
    
    1,221,516Long-term prepaid expenses
    
    
    33,842
    
    
    
    109,925Covenants not to compete, net of accumulated amortization of $588,041 and
$569,789, respectively
    
    
    16,970
    
    
    
    35,222Total other assets
    
    
    1,467,412
    
    
    
    1,471,426Total assets
    
    $
    6,561,473
    
    
    $
    5,415,256
   F-3




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##### Table of Contents



Ballistic Recovery Systems, Inc. and Subsidiary
Consolidated Balance Sheets
September 30, 2007 and 2006
 2007
    
    
    2006Liabilities And Shareholders EquityCurrent liabilities:Line of credit  bank
    
    $
    
    
    
    $
    302,265Current portion of covenants not to compete, shareholder
    
    
    
    
    
    
    7,069Accounts payable
    
    
    776,251
    
    
    
    692,550Customer deposits
    
    
    104,410
    
    
    
    42,916Accrued payroll
    
    
    75,939
    
    
    
    73,613Other accrued liabilities
    
    
    294,726
    
    
    
    244,930Total current liabilities
    
    
    1,251,326
    
    
    
    1,363,343Long-term debt, less current portion
    
    
    
    
    
    
    320,000Long-term debt refinanced through equity offering in October and November 2006
    
    
    
    
    
    
    729,091Total liabilities
    
    
    1,251,326
    
    
    
    2,412,434Commitments and contingenciesShareholders equity:Undesignated shares $(.01 par value; 35,000,000 and 15,000,000 shares
authorized, respectively; none issued and outstanding)
    
    
    
    
    
    
    Common stock $(.01 par value; 15,000,000 and 10,000,000 shares authorized,
respectively; 11,304,767 and 8,089,619 shares, respectively, issued and
outstanding)
    
    
    113,048
    
    
    
    80,896Additional paid-in capital
    
    
    10,262,357
    
    
    
    6,306,007Accumulated deficit
    
    
    (5,065,258
    )
    
    
    (3,384,081
    )Total shareholders equity
    
    
    5,310,147
    
    
    
    3,002,822Total liabilities and shareholders equity
    
    $
    6,561,473
    
    
    $
    5,415,256
   F-4




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##### Table of Contents



Ballistic Recovery Systems, Inc. and Subsidiary
 
 Consolidated Statements of Operations
For the Years Ended September 30, 2007 and 2006
 2007
    
    
    2006Sales
    
    $
    9,402,351
    
    
    $
    9,191,729Cost of sales
    
    
    7,901,032
    
    
    
    5,860,516Gross profit
    
    
    1,501,319
    
    
    
    3,331,213Selling, general and administrative
    
    
    2,620,734
    
    
    
    2,566,624Research and development
    
    
    556,314
    
    
    
    465,415Impairment of goodwill
    
    
    103,774
    
    
    
    Intangible amortization
    
    
    18,253
    
    
    
    121,640Income (loss) from operations
    
    
    (1,797,756
    )
    
    
    177,534Other income (expense):Interest expense
    
    
    (35,440
    )
    
    
    (132,249
    )Other income
    
    
    33,235
    
    
    
    292Income (loss) before income taxes
    
    
    (1,799,961
    )
    
    
    45,577Income taxes expense (benefit)
    
    
    (118,784
    )
    
    
    18,200Net income (loss)
    
    
    (1,681,177
    )
    
    $
    27,377Basic earnings (loss) per common share
    
    $
    (0.16
    )
    
    $
    0.00Weighted average number of shares outstanding  Basic
    
    
    10,223,379
    
    
    
    7,810,186Diluted earnings (loss) per common share
    
    $
    (0.16
    )
    
    $
    0.00Weighted average number of shares outstanding  Diluted
    
    
    10,223,379
    
    
    
    7,842,257Dividends per share
    
    $
    0.00
    
    
    $
    0.00
   F-5




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##### Table of Contents



Ballistic Recovery Systems, Inc. and Subsidiary
 
 Consolidated Statements of Shareholders Equity
For the Years Ended September 30, 2007 and 2006
 Common Stock
    
    
    Additional
    
    
    
    
    
    
    Share-Number of
    
    
    
    
    
    
    Paid-in
    
    
    Accumulated
    
    
    holdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance September 30, 2005
    
    
    7,685,434
    
    
    $
    76,854
    
    
    $
    5,782,590
    
    
    $
    (3,411,458
    )
    
    $
    2,447,986Issuance of common stock in lieu of cash
for board of directors fees
    
    
    30,000
    
    
    
    300
    
    
    
    45,000
    
    
    
    
    
    
    
    45,300Stock option exercises for cash
    
    
    51,229
    
    
    
    512
    
    
    
    42,427
    
    
    
    
    
    
    
    42,939Issuance of common stock in private
placement
    
    
    322,956
    
    
    
    3230
    
    
    
    435,990
    
    
    
    
    
    
    
    439,220Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,377
    
    
    
    27,377Balance September 30, 2006
    
    
    8,089,619
    
    
    
    80,896
    
    
    
    6,306,007
    
    
    
    (3,384,081
    )
    
    
    3,002,822Issuance of common stock in lieu of cash for
employee bonuses
    
    
    36,867
    
    
    
    369
    
    
    
    54,931
    
    
    
    
    
    
    
    55,300CIMSA stock sale, net of offering costs
    
    
    1,102,941
    
    
    
    11,029
    
    
    
    1,435,809
    
    
    
    
    
    
    
    1,446,838Issuance of common stock in lieu of cash
for board of directors fees
    
    
    30,000
    
    
    
    300
    
    
    
    55,200
    
    
    
    
    
    
    
    55,500Stock option exercises for cash
    
    
    10,500
    
    
    
    105
    
    
    
    14,385
    
    
    
    
    
    
    
    14,490Issuance of common stock in private
placement, net of offering costs
    
    
    2,034,840
    
    
    
    20,349
    
    
    
    2,396,025
    
    
    
    
    
    
    
    2,416,374Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,681,177
    )
    
    
    (1,681,177
    )Balance September 30, 2007
    
    
    11,304,767
    
    
    $
    113,048
    
    
    $
    10,262,357
    
    
    $
    (5,065,258
    )
    
    $
    5,310,147
   F-6




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##### Table of Contents



Ballistic Recovery Systems, Inc. and Subsidiary
 
 Consolidated Statements of Cash Flow
For the Years Ended September 30, 2007 and 2006
 2007
    
    
    2006Cash flows from operating activity:Net income (loss)
    
    $
    (1,681,177
    )
    
    $
    27,377Adjustments to reconcile net income (loss) to net cash from operating activities:Deferred income tax
    
    
    (118,784
    )
    
    
    75,184Depreciation and amortization
    
    
    155,590
    
    
    
    150,310Amortization of covenants not to compete
    
    
    18,252
    
    
    
    121,640Impairment of goodwill
    
    
    103,774
    
    
    
    Amortization of stock issued in lieu of cash for board services
    
    
    41,055
    
    
    
    18,120Change in allowance for doubtful accounts
    
    
    42,076
    
    
    
    12,924(Increase) decrease in:Accounts and note receivable
    
    
    (874,373
    )
    
    
    (96,758
    )Inventories
    
    
    669,737
    
    
    
    (997,084
    )Income taxes receivable
    
    
    
    
    
    
    230,544
    )Prepaid expenses
    
    
    (127,176
    )
    
    
    (82,992
    )Long-term prepaid expenses
    
    
    3,419
    
    
    
    18,188Increase (decrease) in:Accounts payable
    
    
    83,701
    
    
    
    387,253Customer deposits
    
    
    61,494
    
    
    
    (82,339Accrued payroll and other accrued liabilities
    
    
    107,423
    
    
    
    46,112
    )Net cash (deficit) from operating activities
    
    
    (1,514,990
    )
    
    
    (171,521
    )Cash flows from investing activities:Capital expenditures
    
    
    (216,150
    )
    
    
    (149,610
    )Payment for Patent
    
    
    
    
    
    
    (750
    )Net cash (deficit) from investing activities
    
    
    (216,150
    )
    
    
    (150,360
    )Cash flows from financing activities:Proceeds from exercise of common stock options
    
    
    14,490
    
    
    
    42,939Proceeds from issuance of common stock
    
    
    3,935,876
    
    
    
    439,220Payments for long-term prepaid expenses  stock offering costs
    
    
    
    
    
    
    (72,664
    )Net proceeds (payments) from borrowings under line of credit  bank
    
    
    (302,265
    )
    
    
    97,550Principal payments on long-term debt
    
    
    (1,049,091
    )
    
    
    (150,909Principal payments on covenant not to compete
    
    
    (7,069
    )
    
    
    (83,635
    )Net cash from financing activities
    
    
    2,591,941
    
    
    
    272,501Increase (decrease) in cash and cash equivalents
    
    
    860,801
    
    
    
    (49,380
    )Cash and cash equivalents  beginning of year
    
    
    53,722
    
    
    
    103,102Cash and cash equivalents  end of year
    
    $
    914,523
    
    
    $
    53,722
   F-7




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##### Table of Contents



Ballistic Recovery Systems, Inc. and Subsidiary
 
 Notes to Consolidated Financial Statements
September 30, 2007 and 2006
 1.
    
    Nature of BusinessBallistic Recovery Systems, Inc. (the Company or we) designs, manufactures and distributes
rocket deployed whole-aircraft emergency parachute systems for use on general aviation and
recreational aviation aircraft. The emergency parachute systems are intended for use in the
event of an in-air emergency and are designed to bring down the entire aircraft and its
occupants under the parachute canopy. In the general aviation market, the Company is currently
producing and selling emergency recovery systems for four four-place general aviation aircraft,
known as the Cirrus Design SR20 (SR20) and SR22, and the Cessna 172 and 182. The products for
Cirrus Design Corporation (Cirrus Design) were developed in a joint effort between the Company
and Cirrus Design.In the recreational aviation market, the Company sells products to several hundred different
aircraft designs that are categorized as ultralights and experimental aircraft.During the fiscal year ended September 30, 2007, the Company diversified and commenced
manufacturing high visibility safety products for a company (Head Lites Corporation) located in
South St. Paul, MN. During November, 2007, the Company, through a company owned 90% by the
Company, purchased Head Lites Corporation (see Note 13).The Companys products are sold both domestically and internationally.2.
    
    Summary of Significant Accounting PoliciesPrinciples of ConsolidationIn September 2005, the Company formed its wholly-owned subsidiary, BRS de Mexico S.A. de C.V.
The consolidated financial statements include the wholly-owned subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.Foreign Currency Translations and TransactionsThe Company accounts for its Mexico foreign asset and liability transactions and operations in
U.S. dollars. Therefore, there is not any material accumulated other comprehensive income or
loss. Results of operations are translated using the average exchange rates throughout the
year. Transaction gains or losses are recorded as incurred.Accounting PrinciplesThe consolidated financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States of America.Use of EstimatesThe preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of expenses during the reporting period. Actual results could differ from those
estimates. The estimates for deferred tax assets for United States net operating losses is a
significant estimate and based on assumptions of future profitability of the Company.Cash ConcentrationsBank balances exceeded federally insured levels during 2007 and 2006 and exceeded federally
insured levels as of September 30, 2007. Generally, these balances may be redeemed upon demand
and therefore bear minimal risk.
  F-8




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##### Table of Contents



Cash and Cash EquivalentsShort-term investments with an original maturity of three months or less at the date of purchase
are considered to be cash equivalents and are stated at their fair value.Accounts Receivable, credit risk and allowance for doubtful accountsThe Company sells its products to domestic and foreign companies. The Company reviews
customers credit history before extending unsecured credit and established an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific customers and other
information. The Company does not accrue interest on past due accounts receivable. Unless
specific arrangements have been made, accounts receivable over 30 days are considered past due.
The Company writes off accounts receivable when they are deemed uncollectible. Accounts
receivable are shown net of an allowance for doubtful accounts of $65,000 and $22,924 at
September 30, 2007 and 2006, respectively. The Companys contract research and development
projects are billed to its customers on an uncollateralized credit basis. The estimated loss
that management believes is probable is included in the allowance for doubtful accounts. Due to
uncertainties in the collection process, however, it is at least reasonably possible that
managements estimate will change during the next year, which cannot be estimated.Customer ConcentrationThe Company had sales to one major customer, Cirrus Design, which represented 74.4% of the
Companys total sales for fiscal year 2007 and 70.7% of the Companys total sales for fiscal
year 2006. This customer also accounted for 62% (or $821,000) and 63% (or $339,000) of accounts
receivable at September 30, 2007 and 2006, respectively. The Company supplies parachute systems
to Cirrus Design from the Companys general aviation product line. A separate customer
accounted for 13.3% of accounts receivable at September 30, 2007.In its recreational aviation product line, the Company primarily distributes its products
through dealers and distributors who in turn sell the products to the end consumer. The Company
believes that in the event that any individual dealers or distributors cease to represent the
Companys products, alternative dealers or distributors can be established.Valuation of InventoriesThe Companys inventories are stated at the lower of cost or market and include materials, labor
and overhead. Cost is determined by the first-in, first-out (FIFO) method. Provisions to
reduce inventories to the lower of cost or market are made based on a review of excess and
obsolete inventories through an examination of historical component consumption, current market
demands and shifting product technology. Significant assumptions with respect to market trends
are utilized to formulate our provision methods. Sudden or downward changes in markets we serve
may cause us to record additional inventory revaluation charges in future periods. These
variances could directly impact gross profit performance and may cause variability in gross
profit results from reporting period to reporting period. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 151 Inventory Costs an amendment to ARB No. 43,
Chapter 4, the Company expenses unallocated overhead as a current period expense based on
normal capacity of the Companys Mexico and South St. Paul plant. Gross profit for the year
ended September 30, 2007 were negatively impacted due to production variances incurred as the
Company significantly increased labor in Mexico in advance of production anticipated for
additional product lines to be manufactured in Mexico and excessive variances in labor and raw
materials as the Companys Mexico operations increased significantly. As a result of the
Companys expected and unexpected Mexico production variances and under-utilization of labor,
the Companys gross profit decreased by approximately $1.5 million for the year ended September
30, 2007.Customer DepositsThe Company requires order deposits from most of its domestic and international customers.
These deposits represent either partial or complete down payments for orders. These down
payments are recorded as customer deposits. The deposits are recognized as revenue when the
product is shipped.
  F-9




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##### Table of Contents



Income TaxesDifferences between accounting rules and tax laws cause differences between the bases of certain
assets and liabilities for financial reporting purposes and tax purposes. The tax effects of
these differences, to the extent they are temporary, are recorded as deferred tax assets and
liabilities under SFAS 109. Temporary differences relate primarily to: stock based
compensation; allowances for doubtful accounts; inventory valuation allowances; depreciation;
net operating loss; and accrued expenses not currently deductible. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts more likely then not to
be realized.Furniture, Fixtures and Leasehold ImprovementsFurniture, fixtures and leasehold improvements are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related assets, ranging
from three to seven years for equipment and ten years for the airplane. When assets are retired
or otherwise disposed of, the cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is recognized in income for the period. The cost of
maintenance and repairs is expensed as incurred; significant renewals and betterments are
capitalized. Deduction is made for retirements resulting from renewals or betterments.
Leasehold improvements are amortized using the straight-line method over the shorter of the
lease term, or the estimated useful life of the assets.GoodwillThe Company applies SFAS No. 142, Goodwill and Other Intangible Assetsrelated to the carrying
amount of goodwill and other intangible assets. Goodwill is tested for impairment annually in
the fourth quarter or more frequently if changes in circumstances or the occurrence of events
suggest impairment exists.The Mexico operations are tested for impairment in the fourth quarter or at other times if an
event occurs or circumstances change that would reduce the fair value of the Mexico operation.
Due to operating profits and cash flows being lower than expected for both the years
ended September 30, 2007 and 2006, in the opinion of the Companys management, goodwill during
the year ended September 30, 2007 was impaired. A goodwill impairment loss of approximately
$104,000 was recognized in the Mexico subsidiary. The fair value of that subsidiary was
estimated using the expected present value of future cash flows.IntangiblesPatents are recorded at cost and are being amortized on a straight-line method over 17 years.
The covenants not to compete are recorded at cost and are being amortized using the
straight-line method over the terms of the agreement which range from two to fifteen years. The
weighted average life of the covenants not to compete is 1.5 years at September 30, 2007.Components of intangible assets are as follows:
 September 30, 2007
    
    
    September 30, 2006Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationIntangible assets
subject to
amortization:Patents
    
    $
    12,414
    
    
    $
    11,814
    
    
    $
    12,414
    
    
    $
    11,425Covenants not to compete
    
    $
    605,011
    
    
    $
    588,041
    
    
    $
    605,011
    
    
    $
    569,789
 Amortization expense of intangible assets was $18,641and $121,640 for the years ended
September 30, 2007 and 2006, respectively. Amortization expense is estimated to approximate
$8,854, $8,116, and $0 for the years ending September 30, 2008, 2009, and 2010, respectively.
 F-10




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##### Table of Contents



Revenue Recognition The Company recognizes revenue in accordance with Securities and Exchange Commissions Staff
Accounting Bulletin No. 104 (SAB No. 104) Revenue, which requires that four basic criteria be
met before revenue can be recognized: (i) persuasive evidence of a customer arrangement exists; (ii) the price is fixed or determinable;
(iii) collectibility is reasonably assured; and (iv) product delivery has occurred and services
have been rendered. Sales are not conditional based on customer acceptance provisions or
installation obligations. The Company recognizes revenue as products are shipped based on FOB
shipping point terms when title passes to the customer.Comprehensive IncomeSFAS No. 130, Reporting Comprehensive Income, establishes standards for the reporting and
disclosure of comprehensive income and its components, which will be presented in association
with a companys consolidated financial statements. Comprehensive income is defined as the
change in a business enterprises equity during a period arising from transactions, events or
circumstances relating to non-owner sources, such as foreign currency translation adjustments
and unrealized gains or losses on available-for-sale securities. It includes all changes in
equity during a period except those resulting from investments by or distributions to owners.
For the years ended September 30, 2007 and 2006, net income (loss) and comprehensive income
(loss) were equivalent.Fair Value of Financial InstrumentsSFAS No. 107, Disclosures About Fair Value of Financial Instrumentsrequires disclosure of the
estimated fair value of financial instruments as follows:
 Short-term Assets and Liabilities:
 The fair values of cash and cash equivalents, accounts receivable, accounts payable, accrued
liabilities, line of credit-bank, and short-term debt approximate their carrying values due to
the short-term nature of these financial instruments.
 Long-term Debt and Covenants Not to Compete:
 The fair value of long-term debt and covenants not to compete approximate their carrying value
because the terms are equivalent to borrowing rates currently available to the Company for
debt with similar terms and maturities.Segment ReportingA business segment is a distinguishable component of an enterprise that is engaged in providing
an individual product or service or a group of related products or services and that is subject
to risks and returns that are different from those of other business segments. The Companys
segments have similar economic characteristics and are similar in the nature of the products
sold, type of customers, methods used to distribute the Companys products and regulatory
environment. Management believes that the Company meets the criteria for aggregating its
operating segments into a single reporting segment.Stock-Based CompensationSFAS No. 123, Accounting for Stock-Based Compensation(SFAS 123), provides for the use of a
fair value based method of accounting for employee stock compensation. However, SFAS 123 also
allows an entity to continue to measure compensation cost for stock options granted to employees
using the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees(APB 25) and related interpretations, which
only requires charges to compensation expense for the excess, if any, of the fair value of the
underlying stock at the date a stock option is granted (or at an appropriate subsequent
measurement date) over the amount the employee must pay to acquire the stock,if such amounts
differ materially from historical amounts. The Company has elected to continue to account for
employee stock options using the intrinsic value method under APB 25. By making that election,
it is required by SFAS 123 and SFAS 148, Accounting for Stock-Based Compensation Transition
and Disclosure to provide pro forma disclosures of net income (loss) and earnings (loss) per
share as if a fair value based method of accounting had been applied.
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On December 16, 2004, the FASB, issued SFAS No. 123(R), Share-Based Payment, which is a
revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options, to be valued at
fair value on the date of grant, and to be expensed over the applicable vesting period. Pro
forma disclosure of the income statement effects of share-based payments is no longer an alternative. For the Company, SFAS No. 123(R) is effective for all share-based awards granted on
or after October 1, 2006. In addition, companies must also recognize compensation expense
related to any awards that are not fully vested as of the effective date. Compensation expense
for the unvested awards will be measured based on the fair value of the awards previously
calculated in developing the pro forma disclosures in accordance with the provisions of
SFAS No. 123. We implemented SFAS No. 123(R) on October 1, 2006 using the modified prospective
method.There were no options granted in the year ended September 30, 2007 or that were vested or
modified. As such, the Company did not record any compensation pursuant to SFAS No. 123(R) for
the year ended September 30, 2007 for options granted. The Company did grant 30,000 shares of
common stock on May 16, 2007 for board services to be rendered. The fair value at the date of
the grant was $1.83 per share. The Company is expensing the fair value over the period services
are rendered. The amortization for stock granted for the year ended September 30, 2007 was
$13,875. Amortization of shares issued in the year ended September 30, 2006 was $27,180 and
$18,120 for the years ended September 30, 2007 and 2006, respectively.Had compensation costs been determined in accordance with the fair value method prescribed by
SFAS No. 123 for all options issued to employees and amortized over the vesting period, the
Companys net income applicable to common shares and earnings per common share (basic and
diluted) for plan options would not have changed for the year ended September 30, 2006.Earnings (loss) per Common ShareBasic earnings (loss) per common share are computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted earnings (loss)
per common share is computed by dividing net income (loss) by the weighted average number of
common shares outstanding plus all additional common stock that would have been outstanding if
potentially dilutive common stock related to stock options and warrants had been issued.
Weighted average shares outstanding-diluted includes 0 and 32,071 shares of dilutive securities
for the years ended September 30, 2007 and 2006, respectively.Following is a reconciliation of basic and diluted earnings (loss) per common share for fiscal
years ended September 30, 2007 and 2006, respectively:
 Fiscal Year endedSeptember 30,2007
    
    
    2006Earnings (loss) per common share  basic:Net income (loss)
    
    $
    (1,681,177
    )
    
    $
    27,377Weighted average shares outstanding
    
    
    10,223,379
    
    
    
    7,810,186Earnings (loss) per common share  basic
    
    $
    (0.16
    )
    
    $
    0.00Earnings (loss) per common share  diluted:Net income (loss)
    
    $
    (1,681,177
    )
    
    $
    27,377Weighted average shares outstanding
    
    
    10,223,379
    
    
    
    7,810,186Common stock equivalents
    
    
    
    
    
    
    32,071Weighted average shares and potential
diluted shares outstanding
    
    
    10,223,379
    
    
    
    7,842,257Earnings (loss) per common share  diluted
    
    $
    (0.16
    )
    
    $
    0.00
 The Company uses the treasury method for calculating the dilutive effect of the stock options
and warrants (using the average market price).
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Warrants and options of 978,894 and 45,000 were excluded for the computation of diluted
earnings per share for the year ended September 30, 2007 since the net effect was
anti-dilutive for the year. Warrants for 16,401 were excluded from the computation of diluted
earnings per share for the year ended September 30, 2006 since their effect was anti-dilutive
for the year.Recently Issued Accounting PronouncementsIn July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be
taken in its tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is
effective in fiscal years beginning after December 15, 2006. The provisions of FIN 48 are to
be applied to all tax positions upon initial adoption, with the cumulative effect adjustment
reported as an adjustment to the opening balance of retained earnings. The Company is
currently assessing the impact of FIN 48 on its results of operations and financial position.During February 2007, the FASB Board issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159). This statement permits entities to choose to
measure many financial instruments and certain other items at fair value. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company is currently
assessing the effect that SFAS 159 will have on its results of operations and financial
position.During December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 (SFAS 160). This statement establishes
accounting and reporting standards for noncontrolling interests in subsidiaries and for the
deconsolidation of subsidiaries and clarifies that a noncontrolling interest in a subsidiary
is an ownership interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. This Statement also requires expanded disclosures that
clearly identify and distinguish between the interests of the parent owners and the interests
of the noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008. The Company does not believe that the adoption of
SFAS 160 will have a material effect on its results of operations or financial position.During December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations
(SFAS 141 (Revised 2007)). While this statement retains the fundamental requirement of SFAS
141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be
used for all business combinations, SFAS 141 (Revised 2007) now establishes the principles and
requirements for how an acquirer in a business combination: recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interests in the acquiree; recognizes and measures the goodwill acquired in the
business combination or the gain from a bargain purchase; and determines what information
should be disclosed in the financial statements to enable the users of the financial
statements to evaluate the nature and financial effects of the business combination. SFAS 141
(Revised 2007) is effective for fiscal years beginning on or after December 15, 2008. The
Company does not believe that the adoption of SFAS 141 (Revised 2007) will have a material
effect on its results of operations or financial position.Research and Development CostsResearch and development costs are charged to expense as incurred.Advertising ExpensesNon-direct response advertising expenses are recognized in the period incurred. Non-direct
response advertising expenses totaled $29,802 in 2007 and $18,649 in 2006.Legal CostsThe Company expenses its legal costs as incurred except settlements which are expensed when a
claim is probable and estimatable.
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Shipping and Handling CostsThe Company records amounts being charged to customers for shipping and handling as sales and
costs incurred in cost of sales.3.
    
    Cirrus Design Purchase and Supply AgreementThe Company currently operates under a Purchase and Supply Agreement with Cirrus, in September
1999 and amended February 2006 (the Cirrus Supply Agreement). Under the Cirrus Supply
Agreement, the Company is the non-exclusive supplier of the parachute recovery system to
Cirrus.The current term of the Cirrus Supply Agreement expires in December 2008, but the Agreement is
subject to rolling automatic renewal terms of 18 months, unless terminated by either party
upon 18 months advance notice. The recent amendment to the Agreement also provides that
Cirrus will maintain product liability insurance on the parachute system whose components are
directly or indirectly supplied by BRS. Additionally, Cirrus has agreed to indemnify BRS for
all related product liability claims involving the BRS parachute system (except for claims for
economic losses or damage related solely to the aircraft) related to parachute systems sold to
Cirrus after February 6, 2006. The Cirrus Supply Agreement also gives Cirrus limited
exclusivity for an increased gross weight (3,600 pound) system for a period of one year after
introduction.4.
    
    Covenants Not to CompeteOn October 26, 1995 the Company entered into an agreement with the president and majority
shareholder of Second Chantz Aerial Survival Equipment, Inc. (SCI), whereby SCI ceased all
business activities, and SCIs president and majority shareholder entered into a ten-year
covenant not to compete with the Company. The payments required under this agreement
contained a non-interest-bearing portion and a portion that bears interest at a rate below the
Companys incremental borrowing rate. Under generally accepted accounting principles the
future payments were discounted at the Companys incremental borrowing rate. The 4% ten year
note called for monthly payments of $4,036 through October 2005. Payments under this
agreement were unsecured.On August 16, 2004, the Company extended the non-compete period by five additional years in
exchange for the exercise of stock options held by SCIs president under a stock subscription
agreement backed by a promissory note. The note had a principal sum of $12,500 together with
aggregate interest on the unpaid principal balance of $2,500. Payments under the note began
July 1, 2005 and continued monthly with a final maturity date of October 1, 2005. The present
value of the Companys obligation under this agreement was recorded as an intangible asset and
was being amortized over a range of two to 15 years.On October 14, 2004, the Company and Mr. Mark Thomas entered into a Resignation, Consulting,
Non-Competition and General Release Agreement (the Resignation Agreement) in connection with
Mr. Thomas resignation as Chief Executive Officer, Chief Financial Officer, President, and as
a director of the Company. Pursuant to the terms of the Resignation Agreement, Mr. Thomas
resigned such offices effective October 14, 2004.Mr. Thomas agreed, for a two year period, not to 1) call on or solicit Company customers, 2)
directly or indirectly, become employed by, consult with, manage, own or operate any business
engaged in the design, manufacturing, marketing or distribution of (i) emergency parachute
recovery systems for recreational, general and commercial aviation aircraft and unmanned
aircraft or (ii) general aviation aircraft. Mr. Thomas also agreed not to divulge any trade
secrets or confidential information regarding the Company. In exchange for such Resignation
Agreement, the Company agreed to pay Mr. Thomas an aggregate of $230,000; $60,000 of which was
paid 15 days after execution of the Agreement and $170,000 of which would be paid over a 24
month period ($7,083 per month) during the compliance of Mr. Thomas non-competition
/non-disclosure requirements. The agreement ended during the year ended September 30, 2007.
  F-14




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##### Table of Contents



5.
    
    Other Financial InformationInventoriesThe components of inventories consist of the following at September 30:
 2007
    
    
    2006Raw materials
    
    $
    1,179,076
    
    
    $
    2,100,501Work in process
    
    
    598,486
    
    
    
    340,434Finished goods
    
    
    10,704
    
    
    
    17,068Total inventories
    
    $
    1,788,266
    
    
    $
    2,458,003
 Note Receivable
  Furniture, Fixtures and Leasehold Improvements
  2007
    
    
    2006Office furniture and equipment
    
    $
    411,823
    
    
    $
    345,535Manufacturing equipment
    
    
    613,229
    
    
    
    463,367Airplane
    
    
    283,183
    
    
    
    283,183Total fixed assets
    
    $
    1,308,235
    
    
    $
    1,092,085
 Depreciation Expense
  Long-Term Prepaid Expenses
  2007
    
    
    2006Stock offering costs
    
    $
    
    
    
    $
    72,664Other
    
    
    33,842
    
    
    
    37,261Total long-term prepaid expenses
    
    $
    33,842
    
    
    $
    109,925
  Long-Lived Assets
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##### Table of Contents



Other Accrued Liabilities
  2007
    
    
    2006Bonus Accrual
    
    $
    147,413
    
    
    $
    215,971Other Miscellaneous Accruals
    
    
    147,313
    
    
    
    28,959$
    294,726
    
    
    $
    244,930
 Export Sales
  Major Suppliers
  Related Parties
 Active Agreement
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##### Table of Contents



Profit Sharing Plan
  Product Warranties
  6.
    
    Geographical Information
  United States
    
    
    Mexico
    
    
    ConsolidatedAs of September 30, 2007 or for the year ended:Total assets
    
    $
    5,743,770
    
    
    $
    817,703
    
    
    $
    6,561,473Long-lived assets
    
    $
    973,320
    
    
    $
    334,915
    
    
    $
    1,308,235Inventories
    
    $
    1,305,478
    
    
    $
    482,788
    
    
    $
    1,788,266
 United States
    
    
    Mexico
    
    
    ConsolidatedAs of September 30, 2006 or for the year ended:Total assets
    
    $
    4,687,830
    
    
    $
    727,426
    
    
    $
    5,415,256Long-lived assets
    
    $
    890,705
    
    
    $
    201,380
    
    
    $
    1,092,085Inventories
    
    $
    1,931,957
    
    
    $
    526,046
    
    
    $
    2,458,003
 7.
    
    Line-of Credit Borrowings
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##### Table of Contents



8.
    
    Long-Term DebtOn November 15, 2006, the Company paid the entire unpaid principal and interest outstanding
on the first note detailed below and paid $5,000 towards unpaid principal on the second note
detailed below with money raised through equity financing on October 25, 2006 (see Note 10).
As such, the first note payable detailed below was classified at September 30, 2006 as
long-term pursuant to SFAS No. 6 Classification of Short-Term Obligations Expected to be
Refinanced. On June 18, 2007, the remaining $315,000 was paid with proceeds with a private
equity offering.The components of long-term debt consisted of the following at September 30:
 2007
    
    
    2006Note payable  Parsons, paid in full November 2006
    
    $
    0
    
    
    $
    729,091Note payable  Parsons, paid in full June 2007
    
    
    0
    
    
    
    320,000Total long-term debt
    
    
    0
    
    
    
    1,049,091Less: debt refinanced with equity offering
    
    
    0
    
    
    
    729,091Less: current portion
    
    
    0
    
    
    
    Long-term debt, net of current portion
    
    $
    0
    
    
    $
    320,000
 9.
    
    Income Taxes
  2007
    
    
    2006Current:Federal
    
    $
    0
    
    
    $
    (56,984
    )State
    
    
    0
    
    
    
    0Deferred
    
    
    (118,784
    )
    
    
    75,184$
    (118,784
    )
    
    $
    18,200
  2007
    
    
    2006United States
    
    $
    (99,961
    )
    
    $
    315,620Mexico
    
    
    (1,700,000
    )
    
    
    (270,043
    )Total
    
    $
    (1,799,961
    )
    
    $
    45,577
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##### Table of Contents



2007
    
    
    2006Deferred income tax assets:Amortization
    
    $
    9,000
    
    
    $
    12,000Allowance for doubtful accounts
    
    
    26,000
    
    
    
    9,000Vacation accruals
    
    
    13,000
    
    
    
    12,000Asset valuation reserves
    
    
    9,000
    
    
    
    39,600Net Operating Losses-United States
    
    
    1,371,000
    
    
    
    707,516Net Operating Loss-Mexico
    
    
    594,000
    
    
    
    0Legal Settlement Accruals
    
    
    0
    
    
    
    420,000Income Tax Credits
    
    
    100,000
    
    
    
    115,000Other accruals
    
    
    0
    
    
    
    51,900Inventory Section 263 adjustment
    
    
    28,000
    
    
    
    36,2002,150,000
    
    
    
    1,403,216Deferred income tax liabilities  depreciation
    
    
    (55,000
    )
    
    
    (21,000
    )Valuation Allowance
    
    
    (594,000
    )
    
    
    0Net deferred income tax assets
    
    $
    1,501,000
    
    
    $
    1,382,216
  2007
    
    
    2006Deferred tax asset  current portion
    
    $
    85,000
    
    
    $
    160,700Deferred tax asset  non-current portion
    
    
    1,416,000
    
    
    
    1,221,516Total
    
    $
    1,501,000
    
    
    $
    1,382,216
  2007
    
    
    2006Federal statutory tax rate
    
    
    (34.0
    )%
    
    
    34.0
    %State taxes, net of federal benefit
    
    
    (6.3
    )
    
    
    6.3Valuation reserve on Mexican Losses
    
    
    33.0
    
    
    
    0Other
    
    
    0.7
    
    
    
    (0.6
    )Effective tax rate
    
    
    (6.6
    )%
    
    
    39.7
    %
  10.
    
    Shareholders EquityCommon StockOn June 22, 2006 and June 23, 2006, the Company accepted subscriptions from certain directors
and executive officers of the Company relating to the issuance of 322,956 shares of common stock
and warrants to acquire 16,401 shares of common stock for an aggregate purchase price of
$439,220. The warrants have a three-year term and an exercise price of $2.00 per share. The
Company paid no underwriting discounts or commissions in connection with these sales. The price
per share was determined by the placement agent that assisted with the equity offering that
closed in October 2006, November 2006, and January 2007. The common shares issued were
restricted and unregistered shares. The price per common share was $1.36 per share and the
market price was approximately $1.50 per share. The discount to market was due to the
significant number of shares issued and the fact the shares were restricted and unregistered.
The discount was not in exchange for board services or any other services rendered or to be
rendered. We registered the resale of the common stock issuable upon exercise of the warrants
and placement agents warrants pursuant to a registration statement on Form SB-2 which became
effective on March 23, 2007.On June 15, 2006, the Company issued 6,000 shares of common stock to each of its five Board
Members for a total of 30,000 shares, as partial compensation for the next five board meetings
through the Companys 2007 Annual Meeting of Stockholders. The shares were valued at $1.51
(fair value at the date of issuance) and are expensed as services are provided.
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During the third quarter of the fiscal year ended September 30, 2006, 15,000 stock options were
exercised resulting in net proceeds to the Company of $15,750. During the second quarter of the
fiscal year ended September 30, 2006, 30,000 stock options were exercised resulting in net proceeds to the Company of $27,189. In addition,
the Company retired 8,771 shares in the second quarter of the fiscal year ended September 30,
2006, and the proceeds were used by the individual to exercise an additional 15,000 stock
options.In closings completed on October 25, 2006, November 22, 2006 and January 10, 2007, the Company
completed a private placement offering to accredited investors of an aggregate of 508,710 units
at a price per unit of $5.44, each unit consisting of four shares of our common stock and a
three-year warrant to purchase an additional share of common stock at an exercise price of $2.00
per share. Accordingly, we issued an aggregate of 2,034,840 shares of common stock and
three-year warrants to purchase an aggregate of 508,710 shares of common stock in the offering,
in consideration of total gross proceeds of $2,767,382, less commissions of approximately
$193,717 paid to The Oak Ridge Financial Services Group, Inc., which served as a placement agent
in the offering. We further issued to Oak Ridge and its designated subagents three-year
warrants to purchase an aggregate of 178,048 shares of common stock at an exercise price of
$2.00 per share. We registered the resale of the common stock and the common stock issuable
upon exercise of the warrants and placement agents warrants pursuant to a registration
statement on Form SB-2 which became effective on March 23, 2007.During March 2007, 10,500 of stock options were exercised resulting in proceeds to the Company
of $14,490.During the first quarter of the fiscal year ended September 30, 2007, certain employees of the
Company were awarded an aggregate of 36,867 shares valued at $1.50 per share ($55,300) based on
individual bonus plans for the fiscal year ended September 30, 2006. The issuance of common
 shares issued was in lieu of cash for accrued bonuses as of September 30, 2006.On June 25, 2007, the Company issued 1,102,941 shares of common stock and a warrant to purchase
up to an additional 275,735 shares of common stock to CIMSA Ingenieria de Sistemas, S.A., a
Spanish company (CIMSA). The warrant has a three-year term and an exercise price of $2.00 per
share. The warrant is subject to price adjustment and economic anti-dilution features until
December 22, 2007, as well as anti-dilution protection from stock splits and similar events for
the term of the warrant. We received gross proceeds from the sale of common stock and the
warrant of $1,500,000. The Company agreed to register the resale of the common stock (including
the common stock issuable upon exercise of the warrant). There was no placement agent involved
with this transaction.Stock OptionsIn March 2004, the shareholders at their annual meeting approved the 2004 Stock Option Plan (the
2004 Plan), which provides for the granting of up to 600,000 options to officers, directors,
employees and consultants for the purchase of stock. No grants were made under this plan in
fiscal years 2007 and 2006.Stock option activity for the years ended September 30, 2007 and 2006 is as follows:
 Number of
    
    
    Option PriceRange perShares
    
    
    ShareBalance at September 30, 2005
    
    
    150,000
    
    
    $
    0.91 to $1.38Granted during fiscal year 2006
    
    
    
    
    
    
    Options exercised
    
    
    (60,000
    )
    
    $
    0.91 to $1.05Expirations
    
    
    
    
    
    
    Balance at September 30, 2006
    
    
    90,000
    
    
    $
    1.05 to $1.38Granted during fiscal year 2007
    
    
    
    
    
    
    Options expired
    
    
    (34,500
    )
    
    $
    1.38Options exercised
    
    
    (10,500
    )
    
    $
    1.38Balance at September 30, 2007
    
    
    45,000
    
    
    $
    1.05
 At September 30,
    
    2007
    
    
    2006Options vested and exercisable
    
    
    45,000
    
    
    
    90,000Shares available for options
    
    
    600,000
    
    
    
    600,000
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##### Table of Contents



The aggregate intrinsic value of options outstanding and exercisable at September 30, 2007 is
$26,100.The following tables summarize information about stock options outstanding and exercisable as of
September 30, 2007:
 Options Outstanding and ExercisableWeighted-Average
    
    Weighted-AverageNumber
    
    Remaining
    
    ExerciseExercise Price
    
    Outstanding
    
    Contractual Life
    
    Price$
    1.05
    
    
    
    45,000
    
    
    
    0.46
    
    
    $
    1.05
 Stock WarrantsOn June 22, 2006 and June 23, 2006, the Company accepted subscriptions from certain directors
and executive officers of the Company relating to the issuance of 322,956 shares of common stock
and warrants to acquire 16,401 shares of common stock for an aggregate purchase price of
$439,220. The warrants have a three-year term and an exercise price of $2.00 per share and were
registered with the SEC on March 23, 2007. The Company paid no underwriting discounts or
commissions in connection with these sales.During the fiscal year ended September 30, 2007, the Company completed three closings of a
private placements of its common stock. In this private placement, an aggregate of 686,758
warrants were issued. These warrants have a three-year term and an exercise price of $2.00 per
share and were registered with the SEC on March 23, 2007. In addition, warrants to purchase an
aggregate of 275,735 shares of common stock were issued in connection with the purchase of
1,102,941 shares of common stock by CIMSA. Total warrants outstanding were 978,894 and 16,401
at September 30, 2007 and 2006, respectively. The exercise price on all warrants was $2.00 per
share and the weighted average life of the warrants at September 30, 2007 was 2.28 years.11.
    
    Commitments and ContingenciesEmployment AgreementThe Company has a two-year employment agreement with Mr. Williams, our President and Chief
Executive Officer, dated January 4, 2007. Pursuant to the employment agreement, Mr. Williams is
eligible for a potential annual bonus of up to 100% of his base salary. The employment
agreement further provides that to the extent Mr. Williams is terminated without cause, as
defined in the employment agreement, he is entitled to a severance payment of 18 months of his
base salary, paid out over such period in accordance with the Companys payroll schedule. In
the event of a change of control, as defined in the employment agreement, pursuant to which Mr.
Williams is terminated without cause, Mr. Williams is entitled to 24 months of his base salary
paid out over such time in accordance with the Companys normal payroll. The employment
agreement includes standard confidentiality provisions and an 18-month non-compete provision.
In the event of a termination of employment without cause following a change of control, the
non-compete provisions shall continue for as long as severance payments are made (i.e., 24
months). Furthermore, the employment agreement provides that Mr. Williams will be nominated by
the Companys board of directors each year to serve as a director so long as he is Chief
Executive Officer. In the event Mr. Williams resigns or is terminated, the agreement provides
that Mr. Williams will also resign from the board.LeasesOn November 20, 2007, the Company entered into a lease with the City of South St. Paul for
leasing of approximately 20,800 square feet of space on an airport to be used for office and
production (see Note 13). The start date of the lease is estimated to be August 15, 2008 and
expire September 1, 2029. . The lease contains options to renew for two additional five year
terms as defined in the agreement. The estimated monthly rent ranges from $12,358 to $15,392
over the term of the lease.The Company leases its current production facility on an airport in South St. Paul, Minnesota.
Total rental expense for this operating lease during 2007 and 2006 was $51,102 and $42,831,
respectively This lease expired December 31, 2007 and the Company is currently paying on a
month to month basis until the new lease commences.
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The Company leases a second facility on the same airport for office space. Total rental expense
for this operating lease during 2007 and 2006 was $39,772 and $14,808 respectively. This lease
expires April 30, 2008. Provisions have been made with the landlord to be on a month to month
lease after that date until the office lease space is ready.The Company leases office and production space in Tijuana, Mexico. Total rental expense for this
operating lease during 2007 and 2006 was $103,248 and $88,332, respectively. This lease expired
on November 14, 2007 and has been extended for one year.On October 15, 2007, the Company established a parachute manufacturing facility in Pinebluff,
North Carolina with the specific purpose of meeting the Berry Amendment requirement for United
States content (related to defense related products). The term of the lease is from November 1,
2007 to October 30, 2010 and requires annual rent of $45,000 per year.The Company had leased a facility on the same airport for use in research and development.
Total rental expense for this operating lease during 2006 was $27,603. This lease was
terminated on July 31, 2006.
  Fiscal Year
    
    Amount2008
    
    $
    299,8162009
    
    
    232,8102010
    
    
    215,9252011
    
    
    175,7352012
    
    
    173,0952013 and thereafter
    
    
    2,396,861Total
    
    $
    3,494,242
 Legal Proceedings
 McGrath
 In April 2005, Sue Jean McGrath, individually and as successor in interest to Charles W.
McGrath, deceased, Charles W. McGrath III, Tanya Sue McGrath, Janny Sue McGrath, individually v.
Cirrus Design Corporation, Ballistic Recovery Systems, Inc., and Aerospace Systems and
Technologies, Inc., U.S. District Court, Northern District of California, File No. C05-1542, was
commenced. The plaintiffs have alleged vicarious liability, strict product liability,
negligence and breach of warranty against the defendants arising from the crash of a Cirrus
Design Corp. SR22 airplane near Sugar Bowl, California. On December 6, 2007, the court granted
summary judgment to all defendants, including the Company. The plaintiffs have agreed not to
pursue an appeal in exchange for the Companys agreement not to seek recoverable costs.
 Rayner
 On September 16, 2005, an action was commenced against the Company by Robert Treat Rayner in the
Circuit Court of the 5th Judicial Circuit in and from Lake County Florida, File No. 04 CA 1749.
The Complaint alleges that plaintiff was injured when his ultralight aircraft crashed while
being towed by another ultralight. Plaintiff alleges that he deployed his BRS system, but that
it failed to deploy properly. The Company is undertaking an investigation of the claim and has
responded to the suit. The case is currently in discovery. At this time, the Company cannot
state with any degree of certainty what the outcome of these matters will be or the amount or range of potential loss, if
any. The Company believes that it has strong defenses to the suit and will vigorously defend
against the claims.
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12.
    
    Supplemental Cash Flow Information
 Cash paid for the years ended September 30:
    
    2007
    
    
    2006Interest
    
    $
    40,938
    
    
    $
    127,816Income taxes paid (refunded)
    
    
    
    
    
    
    (287,428
    )
 Summary of non-cash activity:
 
    
    The Company issued 6,000 shares of common stock to its five non-employee board members
for a total of 30,000 shares as partial compensation for future board meetings on June 15,
2006 and on May 15, 2007. The common shares issued in 2007 and 2006 were valued at $55,500
and $45,300, respectively.
    
    The Company applied a covenant not to compete payable in the amount of $4,036 to a note
receivable from shareholder during fiscal year 2006.
    
    The Company issued 36,867 common shares during the year ended September 30, 2007 in lieu
of cash for bonuses accrued at September 30, 2007 ($55,300).
    
    Transfer of long-term prepaid offering costs recorded at September 30, 2006 to
additional paid-in capital of $72,664 during the year ended September 30, 2007.
 13.
    
    Subsequent EventsOn November 16, 2007, the Company acquired, through Advanced Tactical Fabrication, Inc. (ATF), a
majority owned subsidiary, substantially all of the assets of Head Lites Corporation (HLC), a
Minnesota corporation which manufactures high visibility safety products. ATF, which is 90%
owned by the Company and 10% HLC, will be based in South St. Paul, MN and have production
facilities in Pinebluff, North Carolina and Tijuana, Mexico. The purpose of the acquisition was
to diversify the companys product mix, diversify our customer base, and to better use our
manufacturing expertise and capacity in the Mexico production facility.ATF paid $648,400 in cash for the acquisition in addition to the assumption of certain
liabilities. In connection with the transaction, ATF entered into a five-year consulting
agreement with HLC, whereby ATF will be required to make monthly payments to HLC totaling
$50,000 in the first year and $42,000 each year thereafter. ATF also agreed to make monthly
non-compete payments to the majority shareholder of HLC for a period of five years, with
payments during the first year totaling approximately $36,000 and payments in each year
thereafter totaling $24,000. In addition, ATF will make five annual gross margin payments to
HLC in amounts equal to 8% of ATFs gross margin during each applicable fiscal year (subject to
increase under certain circumstances). ATFs operations are not included in the consolidated
financial statements since the date of acquisition was after September 30, 2007.The following table presents the acquisition cost of the assets acquired and liabilities
assumed, on an unaudited basis, based on the preliminary estimated values at the time of
acquisition:
 Cash
    
    $
    1800Accounts receivables
    
    
    151,800Inventories
    
    
    430,300Other current assets
    
    
    29,900Property, plant and equipment
    
    
    73,900Patents and trademarks
    
    
    44,100Trade accounts payable assumed
    
    
    (190,000
    )Net assets acquired
    
    
    541,800
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The table below reflects our unaudited pro forma combined results of operations as if the
acquisition had taken place as of October 1, 2006:
 
 Net Sales
    
    $
    11,860,000Net (Loss)
    
    $
    (2,066,000
    )Basic (loss) per common share
    
    $
    (.20
    )Diluted (loss) per common share
    
    $
    (.20
    )
 The pro forma unaudited results do not purport to be indicative of the results which would have
been obtained had the acquisition have completed as of the beginning of the earliest period
presented. Furthermore, the purchase price allocation is preliminary and subject to change.
Once the final purchase price allocation is determined, the unaudited pro forma combined results
of operations presented above may change.In conjunction with ATF purchasing Head Lites Corporation (see Note 13), the Company agreed to
loan up to $450,000 to ATF in consideration of certain secured promissory notes to be issued by
ATF. The notes have a three year term and bear interest at a rate equal to the prime rate plus
1%. The notes require quarterly payments which will be interest only for the first payment on
January 1, 2008, and principal and accrued interest commencing April 1, 2008, with the final
payment scheduled for July 1, 2010.On November 20, 2007, the Company entered into a lease with the City of South St. Paul for
leasing of approximately 20,800 square feet of space on an airport to be used for office and
production . The start date of the lease is estimated to be August 15, 2008 and will expire on
September 1, 2029. On July 23, 2007, the Company made a deposit of $16,070 and on October 19,
2007 made an additional $195,930 deposit for a total of $212,000 pursuant to the terms of the
lease.On October 15, 2007, the Company established a parachute manufacturing facility in Pinebluff,
North Carolina with the specific purpose of meeting the Berry Amendment requirement for United
States content (related to defense related products). The term of the lease is from November 1,
2007 to October 30, 2010 and requires annual rent of $45,000 per year.The Companys line of credit-bank, Note 7, has a balance of $820,000 outstanding as of February
20, 2008.
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EXHIBIT INDEX
 Exhibit No.
    
    Description21.1
    
    
    List of Subsidiaries23.1
    
    
    Consent of Virchow, Krause & Company, LLP31.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
    
    
    Section 1350 Certifications