10-Q

United States Securities and Exchange Commission
Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2011

or

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 001-16391

TASER INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

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

(480) 991-0797
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

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

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

There were 59,497,286 shares of the issuer’s common stock, par value $0.00001 per share, outstanding as of August 4, 2011.

TASER INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED June 30, 2011
TABLE OF CONTENTS

	Page
PART I — FINANCIAL INFORMATION
Item 1. Consolidated financial statements (unaudited)
Consolidated balance sheets as of June 30, 2011 and December 31, 2010		3
Consolidated statements of operations for the three and six months ended June 30, 2011 and 2010		4
Consolidated statements of cash flows for the three and six months ended June 30, 2011 and 2010		5
Notes to consolidated financial statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3. Quantitative and Qualitative Disclosures About Market Risk		31
Item 4. Controls and Procedures		31
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		32
Item 1A. Risk Factors		32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 6. Exhibits		33
SIGNATURES		33
INDEX TO EXHIBITS		34
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

Items 3, 4 and 5 are not applicable.

2

PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

TASER INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

	June 30, 2011			December 31, 2010
ASSETS
Current Assets:
Cash and cash equivalents	$	27,719,405		$	42,684,241
Short term investments		10,775,112			—
Accounts receivable, net of allowance of $200,000 at June 30, 2011 and December 31, 2010, respectively		9,978,838			13,542,535
Inventory		16,049,209			17,815,405
Prepaid expenses and other current assets		3,449,974			1,999,525
Deferred income tax assets, net		8,129,195			6,284,489
Total current assets		76,101,733			82,326,195
Property and equipment, net		31,768,928			35,905,765
Deferred income tax assets, net		13,819,753			13,919,753
Intangible assets, net		3,145,911			3,090,876
Other long-term assets		716,493			944,346
Total assets	$	125,552,818		$	136,186,935
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	4,995,678		$	4,550,789
Accrued liabilities		6,603,304			3,759,800
Current portion of deferred revenue		3,023,251			3,265,260
Customer deposits		276,417			372,145
Total current liabilities		14,898,650			11,947,994
Deferred revenue, net of current portion		3,719,053			4,392,860
Liability for unrecorded tax benefits		2,279,851			2,281,840
Total liabilities		20,897,554			18,622,694
Commitments and Contingencies
Stockholders’ Equity
Preferred stock, $0.00001 par value per share; 25 million shares authorized; no shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively		—			—
Common stock, $0.00001 par value per share; 200 million shares authorized; 59,704,086 and 62,621,268 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively		647			647
Additional paid-in capital		98,965,932			97,122,085
Treasury stock, 5,013,450 and 2,091,600 shares at June 30, 2011 and December 31, 2010, respectively		(27,208,053	)		(14,708,237	)
Retained earnings		32,910,091			35,185,191
Accumulated other comprehensive loss		(13,353	)		(35,445	)
Total stockholders’ equity		104,655,264			117,564,241
Total liabilities and stockholders’ equity	$	125,552,818		$	136,186,935

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

3

TASER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2011			2010			2011			2010
Net sales	$	21,198,055		$	19,120,525		$	44,315,004		$	42,964,426
Total cost of products sold		8,956,362			9,489,815			19,865,649			19,843,295
Gross margin		12,241,693			9,630,710			24,449,355			23,121,131
Sales, general and administrative expenses		9,065,847			9,988,885			18,401,230			20,276,107
Research and development expenses		2,793,235			3,055,049			5,545,699			7,194,965
Litigation judgment expense		3,301,243			—			3,301,243			—
Loss on impairment		1,350,504			—			1,350,504			—
Loss on write down / disposal of property and equipment, net		747,409			22,510			757,038			34,442
Loss from operations		(5,016,545	)		(3,435,734	)		(4,906,359	)		(4,384,383	)
Interest and other income, net		1,261,885			6,203			1,288,206			14,102
Loss before income tax benefit		(3,754,660	)		(3,429,531	)		(3,618,153	)		(4,370,281	)
Income tax benefit		(1,459,828	)		(2,070,142	)		(1,343,053	)		(2,518,287	)
Net loss	$	(2,294,832	)	$	(1,359,389	)	$	(2,275,100	)	$	(1,851,994	)
Loss per common and common equivalent shares
Basic	$	(0.04	)	$	(0.02	)	$	(0.04	)	$	(0.03	)
Diluted	$	(0.04	)	$	(0.02	)	$	(0.04	)	$	(0.03	)
Weighted average number of common and common equivalent shares outstanding
Basic		60,605,140			62,333,929			61,515,979			62,450,722
Diluted		60,605,140			62,333,929			61,515,979			62,450,722

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

4

TASER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	For the Six Months Ended June 30,
	2011			2010
Cash Flows from Operating Activities:
Net Loss	$	(2,275,100	)	$	(1,851,994	)
Adjustments to reconcile net loss to net cash (used) provided by operating activities:
Loss on impairment		1,350,504			—
Depreciation and amortization		4,117,580			3,128,328
Loss on write down / disposal of property and equipment, net		757,038			34,442
Provision for doubtful accounts		14,580			2,764
Provision / write-off of excess and obsolete inventory		328,870			806,350
Provision for warranty		79,886			321,137
Stock-based compensation expense		1,839,924			1,926,220
Litigation judgment accrual		3,301,243			—
Deferred income taxes		(1,744,706	)		(1,427,397	)
Provision for unrecognized tax benefits		(1,989	)		(65,159	)
Change in assets and liabilities:
Accounts receivable		3,546,984			4,383,916
Inventory		1,044,680			(4,797,031	)
Prepaids and other assets		(1,592,862	)		(2,705,926	)
Accounts payable and accrued liabilities		(599,996	)		(2,159,154	)
Deferred revenue		(915,816	)		119,355
Customer deposits		(95,728	)		(105,793	)
Net cash provided (used) by operating activities		9,155,092			(2,389,942	)
Cash Flows from Investing Activities:
Purchases of investments		(10,775,112	)		—
Purchases of property and equipment		(659,872	)		(3,193,856	)
Purchases of intangible assets		(213,276	)		(180,053	)
Net cash used by investing activities		(11,648,260	)		(3,373,909	)
Cash Flows from Financing Activities:
Repurchase of common stock		(12,499,816	)		—
Proceeds from stock options exercised		3,923			961,037
Net cash (used) provided by financing activities		(12,495,893	)		961,037
Effect of exchange rate change on cash and cash equivalents		24,225			(102,981	)
Net decrease in cash and cash equivalents		(14,989,061	)		(4,802,814	)
Cash and cash equivalents, beginning of period		42,684,241			45,505,049
Cash and cash equivalents, end of period	$	27,719,405		$	40,599,254
Supplemental Disclosure:
Cash paid for income taxes	$	36,000		$	528,532
Non-Cash Transactions:
Property and equipment purchases in accounts payable	$	507,260		$	39,134

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

5

TASER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. The Company and Summary of Significant Accounting Policies

TASER International, Inc. (“TASER” or the “Company”) is a developer and manufacturer of advanced electronic control devices (“ECDs”) designed for use in law enforcement, military, corrections, private security and personal defense. In addition, the Company has developed full technology solutions for the capture, storage and management of video/audio evidence as well as other tactical capabilities for use in law enforcement. The Company sells its products worldwide through its direct sales force, distribution partners, online store and third party resellers. The Company was incorporated in Arizona in September 1993 and reincorporated in Delaware in January 2001. The Company’s corporate headquarters and manufacturing facilities are located in Scottsdale, Arizona. The Company’s internet services and software development division facilities are located in Carpenteria, California.

The accompanying consolidated financial statements include the accounts of the Company, and its wholly owned subsidiary, TASER International Europe SE (“TASER Europe”). TASER Europe was established in 2010 to facilitate sales and provide customer service to our customers in the European region. All material intercompany accounts, transactions, and profits have been eliminated.

a. Basis of presentation, preparation and use of estimates

The accompanying unaudited consolidated financial statements of TASER include all adjustments (consisting only of normal recurring accruals) that in the opinion of management are necessary for the fair presentation of the Company’s operating results, financial position and cash flows as of June 30, 2011, and for the three and six months ended June 30, 2011 and 2010. The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been omitted from these unaudited consolidated financial statements in accordance with applicable rules. The results of operations for the three and six months ended June 30, 2011 and 2010, are not necessarily indicative of the results to be expected for the full year (or any other period) and all results of operations included herein should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

b. Segment information and major customers

Management has determined that its operations presently are comprised of one reportable segment, the sale of ECDs, accessories and other products and services. Based on the introduction of new product offerings in 2010, management will evaluate how the operating results of the Company will be reviewed internally on a go forward basis in order to improve the level of resource decision making and assessment of segment performance. Based on this evaluation, management will make the necessary changes to its internal management reporting system and subsequently, will perform a review to determine if the Company will redefine its reportable operating segments in accordance with U.S. GAAP. For the three and six months ended June 30, 2011 and 2010, sales by geographic area were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
United States		77	%		84	%		77	%		79	%
Other Countries		23	%		16	%		23	%		21	%
Total		100	%		100	%		100	%		100	%

Sales to customers outside of the United States are typically denominated in U.S. dollars and are attributed to each country based on the billing address of the distributor or customer. For the three months ended June 30, 2011, sales to Australia represented approximately 10% of net sales. For the three months ended June 30, 2010, no individual country outside of the U.S. represented a material amount of total net sales. For the six months ended June 30, 2011 and 2010, no individual country outside of the U.S. represented a material amount of total net sales.

In the three months ended June 30, 2011, two distributors represented approximately 15% and 11% of total net sales. In the three months ended June 30, 2010, one distributor represented approximately 10% of total net sales. In the six months ended June 30, 2011, one distributor represented approximately 12% of total net sales. In the six months ended June 30, 2010, one distributor represented approximately 10% of total net sales. At June 30, 2011, the Company had receivables from two distributors comprising 19% and 14% of its aggregate accounts receivable balance. At December 31, 2010, the Company had receivables from three customers comprising 19%, 11% and 10% of its aggregate accounts receivable balance. These customers are unaffiliated distributors of the Company’s products.

6

TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

c. Loss per common share

Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the periods presented. Diluted loss per share reflects the potential dilution that could occur if such options were exercised using the treasury stock method. The calculation of the weighted average number of shares outstanding and loss per share are as follows:

	For the Three Months Ended June 30						For the Six Months Ended June 30,
	2011			2010			2011			2010
Numerator for basic and diluted loss per share
Net loss	$	(2,294,832	)	$	(1,359,389	)	$	(2,275,100	)	$	(1,851,994	)
Denominator for basic loss per share - weighted average shares outstanding		60,605,140			62,333,929			61,515,979			62,450,722
Dilutive effect of shares issuable under stock options outstanding		—			—			—			—
Denominator for diluted loss per share - adjusted weighted average shares outstanding		60,605,140			62,333,929			61,515,979			62,450,722
Net loss per common share
Basic	$	(0.04	)	$	(0.02	)	$	(0.04	)	$	(0.03	)
Diluted	$	(0.04	)	$	(0.02	)	$	(0.04	)	$	(0.03	)

As a result of the net loss per share for the three months and six months ended June 30, 2011, the effects of 7,031,017 and 7,015,738 stock options, respectively, were excluded from the calculation as their effect would have been to reduce net loss per share. As a result of the net loss for the three and six months ended June 30, 2010, the effects of 6,335,522 and 4,753,281 stock options, respectively, were excluded from the calculation as their effect would have been to reduce the net loss per share.

d. Warranty costs

The Company warrants its X2 ECDs, X3 ECDs, X26 ECDs, M26 ECDs, XREP, TASER CAM, Shockwave, AXON Tactical Computer, Com Hub user interface, Synapse Evidence Transfer Manager (ETM), and HeadCam products from manufacturing defects on a limited basis for a period of one year after purchase, and thereafter will replace any defective unit for a fee. The TASER C2 product is warranted for a period of 90 days after purchase. The Company also sells extended warranties for periods of up to four years after the expiration of the limited one year warranty. After the one year standard warranty expires, if the device fails to operate properly for any reason, the Company will replace the TASER X26 for a prorated discounted price depending on when the product was placed into service. These fees are intended to cover the handling and repair costs and include a profit. Management tracks historical data related to returns and warranty costs on a quarterly basis, and estimates future warranty claims by applying the estimated weighted average return rate to the product sales for the period. If management becomes aware of a component failure that could result in larger than anticipated returns from its customers, the reserve would be increased. The reserve for warranty returns is included in accrued liabilities on the consolidated balance sheet. The following table summarizes the changes in the estimated product warranty liabilities for the six months ended June 30, 2011 and 2010.

	2011			2010
Balance at January 1,	$	646,113		$	369,311
Utilization of accrual		(395,911	)		(264,291	)
Warranty expense		79,886			321,137
Balance at June 30,	$	330,088		$	426,157

7

TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

e. Capitalized software development costs

For development costs related to EVIDENCE.com, the Company’s Software as a Service (SaaS) product, the Company capitalizes qualifying computer software costs that are incurred during the application development stage. Costs related to preliminary project planning activities and post-implementation activities are expensed as incurred. For the three and six months ended June 30, 2011, the Company did not capitalize any such costs. For the three and six months ended June 30, 2010, the Company capitalized $528,000 and $1,320,000, respectively, of qualifying software development costs.

f. Fair value of financial instruments

The Company uses the fair value framework for measuring financial assets and liabilities measured on a recurring basis and for non-financial assets and liabilities when these items are remeasured. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The Company categorizes each of its fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

• Level 1 — Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.

• Level 2 — Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.

• Level 3 — Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company has cash equivalents which at June 30, 2011 and December 31, 2010 are comprised of money market mutual funds, valued using Level 1 valuation techniques. At June 30, 2011, the Company held some short term investments consisting of commercial paper. Based on management’s ability and intent to hold these investments to maturity, they are recorded at amortized cost on the balance sheet. Refer to note 2 for additional fair value disclosures for these short term investments. The Company’s financial instruments also include accounts receivable, accounts payable and accrued liabilities. Due to the short-term nature of these instruments, their fair value approximates their carrying value on the balance sheet.

g. Valuation of Long-lived Assets

We review long-lived assets, such as property and equipment and intangible assets subject to and not subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We utilize a two-step approach to testing long-lived assets for impairment. The first step tests for possible impairment indicators. If an impairment indicator is present, the second step measures whether the asset is recoverable based on a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Our review requires the use of judgment and estimates.

In the three and six months ended June 30, 2011, the Company recognized $1,350,504 in impairment charges associated with its Protector product line following the Company’s decision to abandon ongoing operations relating to this line. No impairment charges were recorded in 2010.

In the three and six months ended June 30, 2011, the Company incurred a loss on write down/disposal of property and equipment of $747,000 and $757,000, respectively following a decision to dispose of surplus equipment for Evidence.com options. Loss on write down/disposal of equipment for the three and six months ended June 30, 2010 was $23,000 and $34,000, respectively.

8

TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

h. Recently adopted accounting guidance

In October 2009, the FASB issued authoritative guidance on revenue recognition that became effective for the Company beginning January 1, 2011. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued authoritative guidance on business combinations concerning the disclosure of supplementary pro forma information which will be effective for the Company prospectively for business combinations for which the acquisition date is on or after January 1, 2011. The new guidance clarifies the acquisition date that should be used for reporting the pro forma financial information disclosures when comparative financial statements are presented. The amendments are also designed to improve the usefulness of the pro forma revenue and earnings disclosures by requiring a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination. Management does not expect adoption of this new guidance to have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued guidance to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. The guidance became effective for the Company effective January 1, 2011 and its adoption did not have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued guidance to require presentation of the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This guidance will be effective for the Company on January 1, 2012, and management does not believe its adoption will have a material impact on the Company’s consolidated financial statements.

2. Cash, cash equivalents, and investments

Cash and cash equivalents include funds on hand and short-term investments with original maturities of three months or less. Short-term investments include securities generally having maturities of 90 days to one year. The Company’s short-term investments are invested in commercial paper, which, based on management’s intent and ability, are classified as held to maturity investments, recorded at amortized cost.

9

TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

The following is a summary of cash, cash equivalents and held-to-maturity investments by type at June 30, 2011 and December 31, 2010:

	June 30, 2011								December 31, 2010
			Gross		Gross						Gross		Gross
			Unrealized		Unrealized						Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
Cash and money market funds	$	27,719,405	$	—	$	—	$	27,719,405	$	42,684,241	$	—	$	—	$	42,684,241
Commercial paper		10,675,112		84		15,251		10,659,945		—		—		—		—
Certificate of Deposit		100,000		—		319		99,681		—		—		—		—
Total cash, cash equivalents and investments	$	38,494,517	$	84	$	15,570	$	38,479,031	$	42,684,241	$	—	$	—	$	42,684,241

The following table summarizes the classification of cash, cash equivalents and investments in the accompanying balance sheet:

	June 30,		December 31,
	2011		2010
Cash	$	8,231,945	$	12,282,389
Cash equivalents		19,487,460		30,401,852
Total cash and cash equivalents		27,719,405		42,684,241
Short term investments		10,775,112		—
Long term investments		—		—
	$	38,494,517	$	42,684,241

The commercial paper investments, identified above as short-term investments at June 30, 2011, have contractual maturities of less than one year. At June 30, 2011, held-to-maturity short-term investments have gross unrealized losses of $15,570, which have been in a continuous unrealized loss position for less than 12 months. The unrealized losses on the Company’s investments in commercial paper are due to interest rate fluctuations. As these investments were originally purchased at a premium, are short-term in nature, are expected to be redeemed at par value and because the Company has the ability and intent to hold these investments to maturity, the Company does not consider these investments to be other than temporarily impaired at June 30, 2011.

3. Inventory

Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost of raw materials, which approximates the first-in, first-out (FIFO) method, and includes allocations of manufacturing labor and overhead. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories to their net realizable value. Inventories as of June 30, 2011 and December 31, 2010 consisted of the following:

	June 30, 2011			December 31, 2010
Raw materials and work-in-process	$	12,430,725		$	11,817,579
Finished goods		4,158,460			6,348,490
Reserve for excess and obsolete inventory		(539,976	)		(350,664	)
	$	16,049,209		$	17,815,405

10

TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

4. Intangible assets

Intangible assets consisted of the following at June 30, 2011 and December 31, 2010:

		June 30, 2011						December 31, 2010
		Gross				Net		Gross				Net
		Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Useful Life	Amount		Amortization		Amount		Amount		Amortization		Amount
Amortized intangible assets:
Domain names	5 Years	$	168,428	$	88,894	$	79,534	$	237,911	$	66,006	$	171,905
Issued patents	4 to 15 Years		1,370,969		299,476		1,071,493		1,040,148		264,716		775,432
Issued trademarks	9 to 11 Years		235,600		50,056		185,544		207,721		37,659		170,062
Non compete agreements	5 to 7 Years		150,000		140,000		10,000		150,000		130,000		20,000
			1,924,997		578,426		1,346,571		1,635,780		498,381		1,137,399
Unamortized intangible assets:
TASER Trademark			900,000				900,000		900,000				900,000
Patents and trademarks pending			899,340				899,340		1,053,477				1,053,477
			1,799,340				1,799,340		1,953,477				1,953,477
		$	3,724,337	$	578,426	$	3,145,911	$	3,589,257	$	498,381	$	3,090,876

Amortization expense for the three and six months ended June 30, 2011, was approximately $41,000 and $80,000, respectively. Amortization expense for the three and six months ended June 30, 2010, was approximately $24,000 and $48,000, respectively. Estimated amortization expense of intangible assets for the remaining six months of 2011, the next five years ended December 31, and thereafter is as follows:

2011 (remainder of year)	$	74,546
2012		129,093
2013		129,096
2014		128,179
2015		119,427
2016		106,556
Thereafter		659,674
	$	1,346,571

5. Accrued liabilities

Accrued liabilities consisted of the following at June 30, 2011 and December 31, 2010:

	June 30, 2011		December 31, 2010
Accrued salaries and benefits	$	1,620,218	$	1,411,716
Accrued litigation judgment expense		3,300,000		—
Accrued expenses		1,352,998		1,668,477
Accrued warranty expense		330,088		646,113
Accrued income tax		—		33,494
	$	6,603,304	$	3,759,800

11

TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

6. Income taxes

Deferred Tax Assets

The net deferred income tax assets at June 30, 2011, include net operating loss and alternative minimum tax carryforwards, capitalized research and development costs, research and development tax credits, non-qualified stock-based compensation expense, deferred warranty revenue, warranty and inventory reserves and accrued vacation, partially offset by accelerated depreciation expense. The Company’s total current and long term deferred tax assets balance at June 30, 2011, is $21.9 million.

In preparing the Company’s consolidated financial statements, management assesses the likelihood that its deferred tax assets will be realized from future taxable income. In evaluating the Company’s ability to recover its deferred income tax assets, management considers all available positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Management exercises significant judgment in determining its provisions for income taxes, its deferred tax assets and liabilities, and its future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred tax assets. Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgment that could become subject to audit by tax authorities in the ordinary course of business, as well as the generation of sufficient future taxable income. Management believes that, as of June 30, 2011, based on an evaluation and projections of future sales and profitability for fiscal 2011, no valuation allowance is necessary. However, such deferred tax assets could be reduced in the future if projections of future taxable income during the carryforward period are reduced.

The Company has completed research and development tax credit studies which identified approximately $5.9 million in tax credits for Federal, Arizona and California income tax purposes related to the 2003 through 2010 tax years, net of the federal benefit on the Arizona and California research and development tax credits. Management has made the determination that it is more likely than not that the full benefit of the research and development tax credit will not be sustained on examination and accordingly has established a cumulative liability for unrecognized tax benefits of $2.2 million as of June 30, 2011. In addition, management accrued approximately $106,000 for estimated uncertain tax positions related to certain state income tax liabilities. As of June 30, 2011, management does not expect the amount of the unrecognized tax benefit liability to increase or decrease significantly within the next 12 months. Should the unrecognized tax benefits of $2.3 million be recognized, the Company’s effective tax rate would be favorably impacted.

The following presents a rollforward of our liability for unrecognized tax benefits as of June 30, 2011:

	Unrecognized
	Tax Benefits
Balance at January 1, 2011	$	2,281,840
Decrease in prior year tax positions		—
Increase in current year tax positions		(1,989	)
Decrease related to adjustment of previous estimates of activity		—
Decrease related to settlements with taxing authorities		—
Decrease related to lapse in statute of limitations		—
Balance at June 30, 2011	$	2,279,851

Effective Tax Rate

Our estimated full year effective tax rate, before discrete period adjustments, is approximately 48%, which is above the statutory rate due to the impact of non-deductible expenses for items such as Incentive Stock Option (“ISO”) expense, meals and entertainment and lobbying fees, which make our projected annual net income for tax purposes significantly higher than our book pre-tax income. The overall effective tax rate of 38.9% and 37.1% for the three and six months ended June 30, 2011, was below our estimated annual effective tax rate due to treating the litigation judgment expense, asset impairment expense and the lawsuit settlement proceeds as discrete items due to their significant and unusual nature and therefore taxeffecting them at the statutory rate.

12

TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

7. Stockholders’ equity

Stock Repurchase

In March 2011, TASER’s Board of Directors authorized a stock repurchase program to acquire up to $12.5 million of the Company’s outstanding common stock subject to stock market conditions and corporate considerations. Through June 30, 2011, the Company repurchased approximately 2.9 million shares at a weighted average cost, including commissions, of $4.28 per share and a total cost of $12.5 million. During July 2011, TASER’s Board of Directors authorized an additional repurchase program to acquire up to $20 million of the Company’s outstanding common stock, subject to stock market conditions and corporate considerations. Through August 4, 2011, the Company has repurchased a total of approximately 207,000 shares at an average cost of $4.22 per share and a total cost of $0.9 million.

Stock Option Activity

At June 30, 2011, the Company had four stock-based compensation plans, three of which are described more fully in Note 10 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K.

The following table summarizes the stock options available and outstanding as of June 30, 2011, as well as activity during the six months then ended:

				Outstanding Options
	Options Available						Weighted Average
	for Grant			Number of options			Exercise Price
Balance at December 31, 2010		2,478,768			7,507,286		$	5.71
Granted		(933,728	)		933,728		$	4.65
Exercised		—			(4,668	)	$	0.84
Expired/terminated		46,354			(46,354	)	$	5.46
Balance at June 30, 2011		1,591,394			8,389,992		$	5.59

The options outstanding as of June 30, 2011, have been segregated into five ranges for additional disclosure as follows:

	Options Outstanding						Options Exercisable
			Weighted						Weighted
			Average		Weighted Average				Average
			Exercise		Remaining		Number		Exercise
Range of Exercise Price	Number Outstanding		Price		Contractual Life		Exercisable		Price
$0.28 - $0.99		473,168	$	0.37		1.7		473,168	$	0.37
$1.03 - $2.41		650,379	$	1.62		1.3		650,379	$	1.62
$3.53 - $9.93		6,708,332	$	5.78		6.8		5,099,926	$	6.28
$10.07 - $19.76		533,413	$	11.94		4.4		533,413	$	11.94
$20.12 - $29.98		24,700	$	22.91		2.9		24,700	$	22.91
		8,389,992	$	5.59		6.0		6,781,586	$	5.87

The total fair value of options exercisable at June 30, 2011 and 2010 was $20.9 million and $19.7 million, respectively. The aggregate intrinsic value of options outstanding and options exercisable at June 30, 2011, was $4.2 million and $4.1 million, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $4.55 per share, and the exercise price multiplied by the number of options outstanding. Total intrinsic value of options exercised for the three and six month periods ended June 30, 2011, was $0 and approximately $13,000, respectively. Total intrinsic value of options exercised for the three and six month periods ended June 30, 2010 was approximately $39,000 and $2,128,000, respectively.

At June 30, 2011, the Company had approximately 1.6 million unvested options outstanding with a weighted average exercise price of $4.76 per share, weighted average grant date fair value of $2.19 per share and a weighted average remaining contractual life of 8.7 years. Of these unvested options outstanding, management estimates that approximately 1.5 million options will ultimately vest based on its historical experience.

13

TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

As of June 30, 2011, total unrecognized stock-based compensation expense related to unvested stock options was approximately $4.2 million, which is expected to be recognized over a remaining weighted average period of approximately 15 months.

Stock-Based Compensation Expense

The Company calculates the fair value of stock-based awards using the Black-Scholes-Merton option valuation model, which incorporates various assumptions including volatility, expected life, and interest rates. The assumptions used for the three and six month periods ended June 30, 2011 and 2010, and the resulting estimates of weighted-average fair value per share of options granted during those periods, are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Expected life of options	4.5 years			4.5 years			4.5 years			4.5 years
Weighted average volatility		52.8	%		62.2	%		55.7	%		61.5	%
Weighted average risk-free interest rate		1.5	%		2.0	%		1.7	%		2.1	%
Dividend rate		0.0	%		0.0	%		0.0	%		0.0	%
Weighted average fair value of options granted	$	2.01		$	2.25		$	2.17		$	2.71

The expected life of options represents the estimated period of time until exercise and is based on the Company’s historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of employee behavior. Expected stock price volatility is based on a combination of historical volatility of the Company’s stock and the one-year implied volatility of its publicly traded options for the related vesting periods. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The Company has not paid dividends in the past and does not plan to pay any dividends in the near future. The estimated fair value of stock-based compensation awards and other options is amortized to expense on a straight line basis over the relevant vesting period. As share-based compensation expense is recognized on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company’s forfeiture rate was calculated based on its historical experience of awards which ultimately vested.

Reported share-based compensation was classified as follows for the three and six months ended June 30, 2011 and 2010:

	Three Months Ended June 30				Six Months Ended June 30
	2011		2010		2011		2010
Cost of Products Sold	$	51,976	$	80,476	$	104,980	$	151,985
Sales, general and administrative expenses		649,566		724,464		1,372,745		1,522,591
Research and development expenses		175,465		111,686		362,199		251,644
	$	877,007	$	916,626	$	1,839,924	$	1,926,220

Total share-based compensation expense recognized in the income statement for the three and six months ended June 30, 2011, includes approximately $430,000 and $1.4 million, respectively, related to Incentive Stock Options (“ISOs”) for which no tax benefit is recognized. Total share-based compensation expense recognized in the income statement for the three and six months ended June 30, 2010, includes approximately $503,000 and $1.3 million, respectively, related to ISOs for which no tax benefit is recognized. The Company did not tax effect the share-based compensation expense for tax purposes related to the non-qualified disposition of ISOs exercised and sold as the benefit will be recorded when the Company is in a position to realize the benefit with an offset to taxes payable in future periods. The total unrecognized tax benefit related to the non-qualified disposition of stock options in the three and six months ended June 30, 2011, was approximately $430,000 and $1.4 million, respectively. The total unrecognized tax benefit related to the non-qualified disposition of stock options in the three and six months ended June 30, 2010, was approximately $39,000 and $2.1 million, respectively.

The Company has granted a cumulative total of 950,800 performance-based stock options from 2008 through June 30, 2011, the vesting of which is contingent upon the achievement of certain performance criteria related to the successful and timely development and market acceptance of future product introductions, as well as the future sales and operating performance of the Company. Compensation expense is recognized over the implicit service period (the date the performance condition is expected to be achieved) based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date. At June 30, 2011, 259,452 unvested performance options with a fair value of approximately $603,000 remain outstanding. No options were forfeited during the three or six months ended June 30, 2011. During the three and six months ended June 30, 2010, 25,000 and 225,000 of these options, respectively, were forfeited, resulting in the reversal of approximately $52,000 and $346,000, respectively, of previously recognized compensation expense.

14

TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

8. Line of credit

The Company has a line of credit agreement with a total availability of $10.0 million. The line is secured by the Company’s accounts receivable and inventory and bears interest at varying rates of interest, currently LIBOR plus 1.25%. The line of credit which was amended and renewed in June 2011, primarily to remove the borrowing base restriction, matures on June 30, 2013 and requires monthly payments of interest only. At June 30, 2011, there was no amount outstanding under the line of credit. There have been no borrowings under the line of credit to date. The Company’s agreement with the bank requires compliance with certain financial and other covenants including maintenance of minimum tangible net worth and a fixed charge coverage ratio. The ratio of total liabilities to tangible net worth can be no greater than 1:1, and the fixed coverage charge ratio can be no less than 1.25:1, based upon a trailing twelve-month period. At June 30, 2011, the Company’s tangible net worth ratio was 0.21:1 and its fixed charge coverage ratio was 2.65:1. Accordingly, the Company was in compliance with those covenants.

9. Commitments and Contingencies

Product Litigation

The Company is currently named as a defendant in 52 lawsuits in which the plaintiffs allege either wrongful death or personal injury in situations in which the TASER device was used (or present) by law enforcement officers in connection with arrests or during training exercises. Companion cases arising from the same incident have been combined into one for reporting purposes.

In addition, 132 other lawsuits have been dismissed or judgment entered in favor of the Company which are not included in this number. An appeal was filed by the plaintiff in the Lee (TN), Thompson (MI), Marquez (AZ), Oliver (FL) and Rosa (CA) cases where judgment was entered in favor of the Company. In July 2011, the Court of Appeals affirmed the judgment in favor of the Company in the Lee (TN) appeal and in August denied the plaintiff’s request for a rehearing. These cases are not included in this number or in the table below.

Also not included in the number of pending lawsuits or in the table below is the Heston lawsuit in which a jury verdict was entered against the Company on June 6, 2008, and judgment was entered against the Company on January 30, 2009 in the amount of $153,150 as compensatory damages, $1,423,127 as attorney fees, and $182,000 as costs. These damages, fees and costs are covered by the Company’s insurance policies. The jury found that Mr. Heston’s own actions were 85% responsible for his death. The jury assigned 15% of the responsibility to TASER for a “negligent failure to warn” that extended or multiple TASER ECD applications could cause muscle contractions that could potentially contribute to acidosis to a degree that could cause cardiac arrest. The jury inappropriately awarded $5,200,000 in punitive damages against TASER, which were subsequently disallowed by the Court on October 24, 2008. The Court denied the balance of the Company’s motion for judgment as a matter of law on all other grounds. The Company has filed a notice of appeal with respect to the judgment and plaintiffs have filed a notice of cross appeal.

The Turner (NC) lawsuit was tried in July 2011 and resulted in a jury verdict of $10 million against the Company. The Company has filed post trial motions seeking judgment as a matter of law notwithstanding the verdict and in the alternative a new trial or alternatively a remittitur of the jury award. The court has not yet entered judgment. The Company has recorded a litigation judgment expense of $3.3 million in the second quarter of 2011, which represents management’s best estimate of the Company’s uninsured portion of the judgment after consideration of available insurance coverage.

With respect to each of the pending 52 lawsuits, the following table lists the name of plaintiff, the date the Company was served with process, the jurisdiction in which the case is pending, the type of claim and the status of the matter. While the facts vary from case to case, the product liability claims are typically based on an alleged product defect resulting in injury or death, usually involving a failure to warn, and the plaintiffs are seeking monetary damages. This table also lists those cases that were dismissed or judgment entered during the most recent fiscal quarter. Cases that were dismissed or judgment entered in prior fiscal quarters are not included in this table. The claims and in some instances, the defense of each of these lawsuits has been submitted to our insurance carriers that maintained insurance coverage during these applicable periods and we continue to maintain product liability insurance coverage with varying limits and deductibles. Our product liability insurance coverage during these periods ranged from $5,000,000 to $10,000,000 in coverage limits and from $10,000 to $1,000,000 in per incident deductibles. For the 2010 insurance policy year, our product liability insurance coverage was $10 million and, as noted above, in the Turner (NC) case the Company received an adverse $10 million jury verdict. After consideration of remaining available insurance coverage, the Company's uninsured exposure related to this case is approximately $3.3 million. While the Company will explore every possible legal channel to have this verdict overturned, in the event the verdict stands, the Company's insurance coverage for the 2010 policy year will be exhausted and, for any other claims relating to the 2010 policy year, the Company will not have insurance coverage for defense costs or any other adverse judgments, should they arise. We are defending each of these lawsuits vigorously and do not expect these lawsuits to individually and in the aggregate, materially affect our business, results of operations or financial condition.

15

TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

Plaintiff	Served	Jurisdiction	Claim Type	Status
Glowczenski	Oct-04	US District Court, ED NY	Wrongful Death	Trial rescheduled, date to be determined
Washington	May-05	US District Court, ED CA	Wrongful Death	Discovery Phase
Bagnell	Jul-06	Supreme Court for British Columbia, Canada	Wrongful Death	Dismissed
Hollman	Aug-06	US District Court, ED NY	Wrongful Death	Discovery Phase
Oliver	Sep-06	US District Court, MD FL, Orlando Division	Wrongful Death	Dismissed
Augustine	Jan-07	11th Judicial Circuit Court, Miami-Dade, FL	Wrongful Death	Dismissed
Wendy Wilson, Estate of Ryan Wilson	Aug-07	District Court Boulder County, CO	Wrongful Death	Dismissal Pending
Jack Wilson, Estate of Ryan Wilson (Companion to Wendy Wilson)	Nov-07	District Court Boulder County, CO	Wrongful Death	Dismissal Pending
Salinas	Aug-08	US District Court, ND CA	Wrongful Death	Motion Phase,off trial calendar
Thomas (Pike)	Oct-08	US District Court, WD Louisiana, Alexandria	Wrongful Death	Discovery Phase
Carroll	Mar-09	US District Court, SD TX	Wrongful Death	Dismissed
Shrum	May-09	Allen County District Court, Iola, KS	Wrongful Death	Trial Scheduled February 2012
Athetis	May-09	US District Court, AZ	Wrongful Death	Discovery Phase
Abrahams	Jul-09	CA Superior Court, Yolo County	Wrongful Death	Discovery Phase-trial scheduled September 2012
Humphreys	Oct-09	CA Superior Court, San Joaquin County	Wrongful Death	Discovery Phase
Terriquez	Feb-10	Superior Court of CA, Orange County	Wrongful Death	Discovery Phase, trial scheuduled January 2012
Rich	Feb-10	US District Court, NV	Wrongful Death	Discovery Phase
McKenzie	Feb-10	US Disctrict Court, ED CA	Wrongful Death	Dismissed
Turner	Feb-10	General Court of Justice, Superior Court Div, Mecklenburg County, NC	Wrongful Death	Jury award for $10 million. Post trial motions filed, judgment not filed.
Doan	Apr-10	Queens Bench Alberta, Red Deer Judicial Dist.	Wrongful Death	Pleading Phase
Piskkura	May-10	US District Court, OH	Wrongful Death	Discovery Phase, trial scheuduled March 2012
Corbin	Jun-10	Houston County Court, MD AL	Wrongful Death	Discovery Phase, trial scheuduled October 2011
Swayzer	Jun-10	US District Court, ND CA	Wrongful Death	Dismissed
DuBoise	Aug-10	US District Court, ED MO	Wrongful Death	Discovery Phase, trial scheduled October 2011
Vaugn	Sep-10	US District Court, ND CA	Wrongful Death	Dismissed
Kelly	Oct-10	District Court for Harris County, TX	Wrongful Death	Discovery Phase, trial scheduled October 2011
Jacobs	Oct-10	District Court for Travis County, TX	Wrongful Death	Discovery Phase, trial scheduled October 2012
Woodward	Nov-10	Sumner County TN Court, 18th Judicial District	Wrongful Death	Dismissed
Juran	Dec-10	Hennepin County District Court, 4th Judicial District	Wrongful Death	Discovery Phase
Shymko	Dec-10	The Queens Bench, Winnipeg Centre, Manitoba	Wrongful Death	Pleading Phase
Williams	Dec-10	US District Court, MS	Wrongful Death	Discovery Phase, trial scheduled April 2012
English	May-11	US District Court, WD, VA	Wrongful Death	Discovery Phase, trial scheduled April 2012
Wilson (MO)	May-11	US District Court, ED, MO	Wrongful Death	Pleading Phase
Terrell (TX)	Jun-11	US District Court, SD, TX	Wrongful Death	Pleading Phase
Sylvester (CA)	Jun-11	US District Court, ND, CA	Wrongful Death	Pleading Phase
La Day (TX)	Jun-11	US District Court, ED TX	Wrongful Death	Pleading Phase
Stewart	Oct-05	Circuit Court for Broward County, FL	Training Injury	Discovery Phase
Husband	Mar-06	British Columbia Supreme Court, Canada	Training Injury	Discovery Phase, trial scheduled March 2012
Grable	Aug-08	FL 6th Judicial Circuit Court, Pinellas County	Training Injury	Discovery Phase
Koon	Dec-08	17th Judicial Circuit Court, Broward County, FL	Training Injury	Discovery Phase
Bickle	Mar-09	18th Judicial District Court, Gallatin County, MT	Training Injury	Discovery Phase, trial scheduled December 2011
Foley	Mar-09	US District Court, MA	Training Injury	Dismissed
Peppler	Apr-09	Circuit Court 5th Judicial Dist., Sumter City, FL	Training Injury	Discovery Phase
Kandt	Jun-09	US District Court, ND NY	Training Injury	Discovery Phase
Ginger	Apr-10	Iowa District Court, Marion County	Training Injury	Dismissed
Maynard	Apr-10	Superior Court, Hartford Judicial District, CT	Training Injury	Discovery Phase
Butler	Jan-11	US District Court, ND TX	Training Injury	Discovery Phase, trial scheduled April 2012
Derbyshire	Nov-09	Ontario Superior Court of Justice	Officer Injury	Discovery Phase
Hollenback	Dec-10	St. Louis County Circuit Court MO	Officer Injury	Discovery Phase, trial scheduled January 2012
Strough	Feb-11	US District Court, ED MO	Officer Injury	Discovery Phase, trial scheduled December 2012
Lucas	Jun-09	US District Court, ED CA	Suspect Injury During Arrest	Dismissed
Wheat	Jul-09	CA Superior Court, Los Angeles County	Suspect Injury During Arrest	Discovery Phase, trial scheduled September 2011
Fahy	Dec-09	Circuit Court of City of St. Louis	Suspect Injury During Arrest	Discovery Phase, trial scheduled August 2012
Tylecki	Jan-10	US District Court, DE	Suspect Injury During Arrest	Dismissed
Thompson	Mar-10	11th Judicial Circuit Court Miami-Dade County, FL	Suspect Injury During Arrest	Discovery Phase
Wilson	Apr-10	US District Court, ND IL, ED	Suspect Injury During Arrest	Discovery Phase
Patterson	Jun-10	Circuit Court Pontotoc County, MS	Suspect Injury During Arrest	Discovery Phase, trial scheduled April 2012
Hadnot	Sep-10	US District Court, ED TX	Suspect Injury During Arrest	Dismissed
Streeter	Dec-10	US District Court, OR	Suspect Injury During Arrest	Discovery Phase, trial scheduled April 2012
Valkanet	Mar-11	US District Court, ND IL	Suspect Injury During Arrest	Discovery Phase
Sanders	Mar-11	US District Court, ND IL	Suspect Injury During Arrest	Discovery Phase
Payne	Mar-11	Blount County Circuit Court, TN	Suspect Injury During Arrest	Discovery Phase
Jefferson	Apr-11	US District Court, ED TX	Injury During Incarceration	Discovery Phase
Fountain	May-11	US District Court, MD FL	Suspect Injury During Arrest	Discovery Phase, trial scheduled April 2013
Alusa (UT)	May-11	US District Court, CD UT	Suspect Injury During Arrest	Pleading Phase
Diehl (PA)	Jun-11	Court of Common Pleas, Blair County, PA	Unknown	Pleading Phase

16

TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

Other Litigation

In October 2007, we filed a lawsuit in Arizona Superior Court for Maricopa County against Steve Ward and Mark Johnson, both former TASER employees and VIEVU LLC, et. al. for breach of duty of loyalty, breach of contract, breach of fiduciary duty, and conversion. This lawsuit does not involve our ECD business and we do not expect this litigation to have a material impact on our financial results. Defendants Ward and VIEVU LLC filed an answer and counterclaim for declaration of non-infringement, tortious interference with contractual relations, tortious interference with business expectancy, and abuse of process. The lawsuit seeks compensatory damages, constructive trust, exemplary damages, injunctive relief attorneys’ fees, costs and disbursements. Cross motions for summary judgment were filed and on March 4, 2009, the Court denied Defendants’ motion for summary judgment on the trade secret claim and on April 9, 2009, the Court granted TASER’s motion for summary judgment against Ward on the breach of fiduciary duty and the breach of duty of loyalty claims. We filed a Motion to Extend Discovery Period by and to reconvene the Deposition of Steve Ward, and Defendants have filed Defendant’s Response in Opposition to this motion. In addition, Defendants Steve Ward and VIEVU LLC have filed a Motion for Reconsideration or in the alternative to make the Court’s Ruling a Final Judgment and Stay Proceeding Pending Outcome of Appeal. The Court denied the Motion for Reconsideration, but granted the motion to make the Court’s Ruling a Final Judgment and Stayed the Proceeding Pending Outcome of Appeal. An appeal has been filed by Defendants Ward and VIEVU LLC to the Arizona State Court of Appeals. The appellate court reversed the Superior Court and remanded the case back to Superior Court for trial. On June 14, 2010 TASER filed a petition for review with the Arizona Supreme Court and Ward filed a cross petition for review on June 29, 2010. The Arizona Supreme Court declined review of either petition and a trial date has been set for August 2011.

In June 2008, we filed an amended complaint in the State Court of Fulton County, Georgia, joining as a plaintiff in an existing lawsuit previously filed by certain current and former stockholders of the Company against Morgan Stanley & Co., Inc., and ten other brokerage firms alleging a conspiracy to unlawfully, deceptively, and fraudulently manipulate the price of the Company’s common stock in the context of illegal naked shorting. Specifically, the amended complaint alleges that the defendants committed conspiracy and endeavored to violate the Georgia Racketeer Influenced and Corrupt Organization Act; Securities Fraud; Theft By Taking; Theft By Deception; Violation of The Georgia Computer Systems Protection Act; Violation of the Georgia Securities Act; Violation of the Georgia Computer Systems Protection Act; and Conversion. The lawsuit seeks compensatory and punitive damages as well as expenses of litigation including attorneys’ fees and costs. Defendants have filed motions to dismiss or alternatively a motion for a more definite statement, and on July 29, 2009, the Court entered an order denying Defendants’ motion to dismiss and alternatively a motion for a more definite statement. Discovery has begun in this litigation and no trial date has been set. Defendants removed the case to United States District Court for the District of Georgia and Plaintiffs have filed a motion to remand the case back to state court. The court has not yet ruled on this motion to remand. However, we have reached a settlement with all of the Defendants and this litigation has been dismissed as of June 30, 2011. Settlement proceeds of approximately $1.3 million are recorded as other income on the statement of operations for the three and six months ended June 30, 2011.

In February 2009, we filed a complaint in the United States District Court for the District of Nevada against James F. McNulty, Jr., Robert Gruder, and Stinger Systems, Inc. alleging securities fraud under 15 U.S.C. § 78j, trade libel, unfair competition under the Lanham Act, 15 U.S.C. § 1125, abuse of process, and deceptive trade practices. Our complaint seeks compensatory damages, punitive damages, injunctive relief, attorneys’ fees and costs. Defendants filed motions to dismiss and on March 25, 2010 the Court denied Defendants’ motion on all claims except the securities fraud claim. Defendant McNulty filed a counterclaim on August 2, 2010 alleging that TASER’s XREP product infringes U.S. Patents 5,831,199 and 6,877,434. The counterclaim seeks declaratory and injunctive relief, compensatory, treble and punitive damages, and attorneys fees. The court issued a ruling in July 2011 dismissing TASER’s claims for civil conspiracy and abuse of process and affirming the magistrate’s order requiring defendants to disclose tax and stock information to TASER and ruling that TASER’s counterclaim for declaratory judgment with respect to the patent claims should not be dismissed. No trial date has been set.

In January 2011 we were served with a complaint in the matter of GEOTAG, Inc. v. TASER International, et. al. that was filed in the United States District Court for the Eastern District of Texas, Marshall Division which alleges that a dealer geographical locator feature on TASER’s website infringes upon plaintiff’s US Patent No. 5,930,474. The complaint seeks a judgment of infringement, a permanent injunction against infringement, an award for damages, costs, expenses and prejudgment and post-judgment interest, and an award for enhanced damages and attorneys’ fees. TASER has licensed this locator feature from a third party and has denied liability for infringement. This lawsuit is at the pleading phase and no trial date has been set.

In July 2011 we were served with a complaint in the matter of Integrity Staffing Professionals v. TASER International, Inc., et.al. that was filed in the Superior Court for the County of Ventura, California which alleges that the Company owes Integrity Staffing Professionals a fee for hiring 2 consultants. The complaint alleges breach of contract, breach of implied covenants, intentional and negligent interference with contractual relationships, civil conspiracy and unfair business practices. The complaint seeks compensatory, general, punitive damages, interest, attorneys’ fees and costs. This lawsuit is at the pleading phase and no trial date has been set.

17

TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

General

From time to time, the Company is notified that it may be a party to a lawsuit or that a claim is being made against it. It is the Company’s policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on the Company. After carefully assessing the claim, and assuming we determine that we are not at fault, we vigorously defend and pursue any lawsuit filed against or by the Company. Although we do not expect the outcome in any pending individual case to be material, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts provided by insurance coverage and will not have a material adverse effect on our business, operating results or financial condition. In addition, the Company has one lawsuit where the costs of legal defense incurred are in excess of its liability insurance deductibles. As of June 30, 2011, the Company has been fully reimbursed by its insurance company for these legal costs. The Company may settle a lawsuit in situations where a settlement can be obtained for nuisance value and for an amount that is expected to be less than the cost of defending a lawsuit. The number of product liability lawsuits dismissed includes a small number of police officer training injury lawsuits that were settled by the Company and dismissed in cases where the settlement economics to the Company were significantly less than the cost of litigation. In addition, it is the Company’s policy to not settle suspect injury or death cases, although the Company’s insurance company may settle such lawsuits over the Company’s objection where the case is over the Company’s liability insurance deductibles. Due to the confidentiality of our litigation strategy and the confidentiality agreements that are executed in the event of a settlement, the Company does not identify or comment on which specific lawsuits have been settled or the amount of any settlement.

10. Related Party Transactions

Aircraft charter

The Company reimburses Thomas P. Smith, Chairman of the Company’s Board of Directors for business use of his personal aircraft. For the three and six months ended June 30, 2011, the Company incurred expenses of approximately $24,000 and $78,000, respectively, to Thomas P. Smith. For the three and six months ended June 30, 2010, the Company incurred expenses of approximately $67,000 and $146,000, respectively, to Thomas P. Smith. At June 30, 2011, there was approximately $18,000 of outstanding payables due to Thomas P. Smith. At December 31, 2010, the Company had no outstanding payables due to Thomas P. Smith. Management believes that the rates charged by Thomas P. Smith are equal to or below commercial rates the Company would pay to charter similar aircraft from independent charter companies.

TASER Foundation

In November 2004, the Company established the TASER Foundation. The TASER Foundation is a 501(c)(3) non-profit corporation and has been granted tax exempt status by the Internal Revenue Service. The TASER Foundation’s mission is to honor the service and sacrifice of local and federal law enforcement officers in the United States and Canada lost in the line of duty by providing financial support to their families. Over half of the initial $1 million endowment was contributed directly by TASER International, Inc. employees. The Company bears all administrative costs of the TASER Foundation in order to ensure 100% of all donations are distributed to the families of fallen officers. For the three and six months ended June 30, 2011, the Company incurred approximately $2,300 and $3,900, respectively, in such administrative costs. For the three and six months ended June 30, 2010, the Company incurred approximately $30,000 and $76,000, respectively, in such administrative costs. The Company is authorized by its Board of Directors to make a discretionary contribution up to a maximum of $200,000 per quarter. For the three and six months ended June 30, 2011 and 2010, the Company did not make a discretionary contribution to the TASER Foundation.

Consulting services

The Company engages Mark Kroll, a member of the Board of Directors, to provide consulting services. The expenses relating to these services for the three and six months ended June 30, 2011, were approximately $63,000 and $116,000, respectively. The expenses relating to these services for the three and six months ended June 30, 2010, were approximately $26,000 and $56,000, respectively. At June 30, 2011 and December 31, 2010, the Company had accrued liabilities of approximately $9,000 and $20,000, respectively, for these services.

18

TASER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

11. Employee Benefit Plan

The Company has a defined contribution profit sharing 401(k) plan (the “Plan”) for eligible employees, which is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Employees are entitled to make tax-deferred contributions of up to the maximum allowed by law of their eligible compensation, but not exceeding $16,500. The Company currently matches 100% of the first 3% of eligible compensation contributed to the Plan by each participant and 50% of the next 2% of eligible compensation contributed to the plan by each participant. Beginning January 1, 2008, the Company’s matching contributions are immediately vested. The Company’s matching contributions to the Plan for the three and six months ended June 30, 2011, were approximately $130,000 and $255,000, respectively. The Company’s matching contributions to the Plan for the three and six months ended June 30, 2010, were approximately $129,000 and $266,000, respectively. Future matching or profit sharing contributions to the Plan are at the Company’s sole discretion.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following is a discussion of the Company’s financial condition as of June 30, 2011, and results of operations for the three and six months ended June 30, 2011 and 2010. The following discussion may be understood more fully by reference to the consolidated financial statements, notes to the consolidated financial statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations section contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Certain statements contained in this report may be deemed to be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, and the Company intends that such forward-looking statements be subject to the safe-harbor created thereby. Such forward-looking statements may relate to, among other things: the impact of recently adopted accounting standards and guidance; estimated amortization charges in future years and our projected tax rate for 2011; our expectations about unrecognized tax benefits and deferred income taxes; assumptions about the future vesting of outstanding stock options and the amortization of costs relating thereto; our litigation strategy; our intentions to hold our investment securities to maturity and expectations relating to the redemption prices of these securities; our intentions concerning our stock repurchase program in 2011; the outcome of pending litigation against us; our intentions to evaluate our internal reporting structure and operating segments; the sufficiency of our valuation reserves, including warranty, accounts receivable and inventory reserves; the sufficiency of our capital resources and the availability of financing to the Company and our strategy with respect to hedging activities. We caution that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward-looking statements herein. Such factors include, but are not limited to: market acceptance of our products; budgetary and political constraints of prospects and customers; litigation risks resulting from alleged product-related injuries and media publicity concerning allegations of deaths occurring after use of the TASER device and the negative impact this publicity could have on sales; our dependence on sales of our TASER X26 ECDs; our ability to manage our growth; our ability to ramp manufacturing production to meet demand; the outcome of pending litigation; establishment and expansion of our direct and indirect distribution channels; the acceptance of our EVIDENCE.com software model; our ability to design, introduce and sell new products; delays in development schedules; risks relating to acquisitions and joint ventures; the length of our sales cycle and our ability to realize benefits from our marketing and selling efforts; risks of governmental regulations, including regulations of our products by the U.S. Consumer Product Safety Commission, regulation of our products as a “crime control” product by the Federal government, state and local government regulation and foreign regulation, our compliance with regulations governing the environment, including but not limited to, regulations within the European Union; our ability to protect our intellectual property; intellectual property infringement claims and relating litigation costs; competition in foreign countries relating to foreign patents; our successful identification of existing intellectual property rights that might infringe on our developments; the adverse effects that could result from our products being classified as firearms by the United States Bureau of Alcohol and Firearms; product defects; rapid technological change; our dependence on third party suppliers for key components of our products; component shortages; our dependence on foreign suppliers for key components; rising costs of raw materials and transportation relating to petroleum prices; catastrophic events; security vulnerabilities and service outages and disruptions relating to our EVIDENCE.com service; fluctuations in quarterly operating results; foreign currency fluctuations; counterparty risks relating to cash balances held in excess of FDIC insurance limits; employee retention risks and other factors identified in documents filed by us with the Securities and Exchange Commission, including those set forth in our Form 10-K for the year ended December 31, 2010, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, under the caption “Risk Factors.”

Overview

Our core mission is to protect life, prevent conflict and resolve disputes through technologies that make communities safer. We are a market leader in the development and manufacture of advanced electronic control devices (ECDs) designed for use in law enforcement, military, corrections, private security and personal defense.

Our mission to protect life has also been extended to prevent conflict and resolve disputes. We have learned that bringing a subject into custody is not the end of the challenge for law enforcement. In fact, it is typically just the beginning since a significant number of incidents that start as a physical conflict transition into a legal conflict. Whether it’s prosecuting and convicting the individual arrested, or responding to excessive use of force allegations, the post-incident legal process is a considerable part of the challenge that law enforcement faces on a continual basis and can often take years and millions of litigation dollars to resolve in the courtroom. To help law enforcement address this challenge, we have developed a fully integrated hardware and software solution that will provide our law enforcement customers the capabilities to capture, store, manage, share and analyze video and other digital evidence. Finally, the optimum situation is to have prevented the conflict from ever escalating. TASER ECDs and AXON on-officer video have a measured and positive effect on better suspect and officer behavior, as well as achieving compliance without escalation of force.

20

TASER solutions deliver significant results to our customers and to communities in which they are deployed. With over 275 independent studies confirming the safety of TASER ECDs relative to other force options, TASER ECDs have proven to be a safer alternative to other uses of force in situations of conflict. Further, most reporting agencies demonstrate overall decreases in use of force, and decreases in suspect and officer injuries resulting from conflict. Reducing uses of force and gaining compliance by use of a TASER ECD has provided significant reductions in worker’s compensation expenses and claims for excessive use of force for agencies, cities and taxpayers.

Technological innovation is the foundation for our long-term growth and we intend to maintain our commitment to the research and development of our technology for both new and existing products that further our mission. At the same time we have established industry leading training services to provide our users a comprehensive overview of legal and policy issues, medical information and risk mitigation relating to our ECDs and the use of force. We have built a network of distribution channels for selling and marketing our products and services to law enforcement agencies, primarily in North America, with ongoing focus and effort placed on expanding these programs in international, military and other markets. Over 16,000 law enforcement agencies in over 40 countries have made initial purchases of our TASER brand devices for testing or deployment. To date, we do not know of any significant sales of any competing ECD products.

Results of Operations

Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010

The following table sets forth, for the periods indicated, our consolidated statements of operations as well as the percentage relationship to total net sales of items included in our consolidated statements of operations (dollars in thousands):

	Three Months Ended June 30,										Increase / (Decrease)
	2011					2010					$			%
Net sales	$	21,198		100.0	%	$	19,121		100.0	%	$	2,077			10.9	%
Cost of products sold		8,956		42.3	%		9,490		49.6	%		(534	)		-5.6	%
Gross margin		12,242		57.7	%		9,631		50.4	%		2,611			27.1	%
Sales, general and administrative expenses		9,066		42.8	%		9,988		52.2	%		(923	)		-9.2	%
Research and development expenses		2,793		13.2	%		3,055		16.0	%		(262	)		-8.6	%
Litigation judgment expense		3,301		15.6	%		—		—			3,301			100.0	%
Asset impairment		1,351		6.4	%		—		—			1,351			100.0	%
Loss on write down / disposal of fixed assets		747		3.5	%		23		0.1	%		724				*
Loss from operations		(5,017	)	-23.7	%		(3,435	)	-18.0	%		(1,582	)		46.0	%
Interest and other income, net		1,262		6.0	%		6		0.0	%		1,256				*
Loss before benefit for income taxes		(3,755	)	-17.7	%		(3,429	)	-17.9	%		(326	)		9.5	%
Benefit for income taxes		(1,460	)	-6.9	%		(2,070	)	-10.8	%		610			-29.5	%
Net Income/(Loss)	$	(2,295	)	-10.8	%	$	(1,359	)	-7.1	%	$	(936	)		68.9	%

Note: Table may not foot due to rounding differences
*	Not Meaningful

Net Sales

For the three months ended June 30, 2011 and 2010, sales by product line and by geography were as follows (dollars in thousands):

	Three Months Ended June 30,
	2011				2010
Sales by Product Line
TASER X26	$	10,053	47.4	%	$	10,008	52.3	%
Single Cartridges		5,473	25.8	%		4,877	25.5	%
TASER X2		1,414	6.7	%		—	—
TASER Cam		507	2.4	%		552	2.9	%
TASER C2		506	2.4	%		855	4.5	%
ADVANCED TASER		244	1.2	%		286	1.5	%
AXON/EVIDENCE.com		140		*		45		*
TASER X3		77		*		87		*
XREP		68		*		150		*
Other		2,716	12.8	%		2,261	11.8	%
Total	$	21,198	100.0	%	$	19,121	100.0	%

* Less than 1%

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	Three Months Ended June 30,
	2011			2010
United States		77	%		84	%
Other Countries		23	%		16	%
Total		100	%		100	%

Net sales increased $2.1 million, or 11%, to $21.2 million for the second quarter of 2011 compared to $19.1 million for the second quarter of 2010. The increase in sales versus the prior year quarter was primarily driven by an increase in individually significant orders to international customers, while domestic sales strengthened on the back of launching the TASER X2 during the quarter which contributed 7% to total net sales. Sales of our X26 ECDs remained flat, while cartridge sales increased $0.6 million or 12%. Sales of other ECD products and accessories including TASER Cam, TASER C2, ADVANCED TASER, TASER X3 and XREP declined by $0.5 million and on a combined basis represented 7% of total net sales vs. 10% in the prior year. Other sales, which include extended warranty revenue, out of warranty repairs, government research grants, training and shipping revenues, increased $0.5 million driven by an increase in out of warranty repairs and training revenue from our annual TASER Master Instructor Conference.

International sales for the second quarter of 2011 and 2010 represented approximately $4.8 million, or 23%, and $3.1 million, or 16%, of total net sales, respectively.

Cost of Products Sold

Cost of products sold decreased by $0.5 million, or 6%, to $9.0 million for the second quarter of 2011 compared to $9.5 million for the second quarter of 2010. As a percentage of net sales, cost of products sold decreased to 42.2% in the second quarter of 2011 compared to 49.6% in the second quarter of 2010. The net decrease in costs as a percent of sales is driven by a combination of offsetting factors. Manufacturing costs decreased 12.3% as a percentage of sales, attributable to a more favorable product and market segment sales mix with a larger contribution to net sales from higher margin products, including the newly launched X2, and higher margin international sales; production efficiency was improved with reductions in temporary labor and overtime as well as a reduction in rework effort; leverage on indirect manufacturing costs was improved following an 11% increase in sales, while indirect salary costs have been reduced following headcount reductions and severance charges in the prior year and obsolete inventory charges have also been reduced as have warranty provision charges resulting from reduced product returns. Offsetting the reduction in manufacturing costs as a percentage of net sales, approximately $1.3 million, of EVIDENCE.com datacenter operating and software maintenance costs are included in costs of products sold in the second quarter of 2011 compared to only $0.2 million in the prior year following the commercial availability of the service, representing a 4.9% increase in costs as a percentage of sales. A significant portion of these costs were included as part of research and development in the prior year.

Gross Margin

Gross margin increased $2.6 million, or 27%, to $12.2 million for the second quarter of 2011 compared to $9.6 million for the second quarter of 2010. As a percentage of net sales, gross margin increased to 57.8% for the second quarter of 2011 compared to 50.4% for the second quarter of 2010, a result of the factors discussed above under cost of products sold.

22

Sales, General and Administrative Expenses

For the three months ended June 30, 2011 and 2010, sales, general and administrative (“SG&A”) expenses were comprised of the following (dollars in thousands):

	Three Months Ended June 30,
							$			%
	2011			2010			Change			Change
Salaries, benefits and bonus	$	2,410		$	2,866		$	(456	)		-15.9	%
Legal, professional and accounting fees		1,197			1,141			56			4.9	%
Travel and meals		699			763			(64	)		-8.4	%
Stock-based compensation		650			724			(74	)		-10.2	%
Consulting and lobbying		720			666			54			8.1	%
Depreciation and amortization		412			504			(92	)		-18.2	%
Sales and Marketing		1,062			491			571			116.3	%
D&O and liability insurance		460			416			44			10.6	%
Other		1,456			2,418			(962	)		-39.8	%
Total	$	9,066		$	9,989		$	(928	)		-9.3	%
Sales, general and administrative as % of net sales		42.8	%		52.2	%

Sales, general and administrative expenses were $9.1 million and $10.0 million in the second quarter of 2011 and 2010, respectively, a decrease of $0.9 million, or 9%. As a percentage of total net sales, SG&A expenses decreased to 42.7% for the second quarter of 2011 compared to 52.2% for the second quarter of 2010. The dollar decrease for the second quarter of 2011 compared to the same period in 2010 is attributable to a $0.5 million reduction in salaries, benefits, bonus and stock-based compensation primarily driven by measures taken to reduce our salaried headcount and fixed cost infrastructure in 2010 including some one time severance charges. This was partially offset by a $0.6 million increase in sales and marketing related costs including advertising, tradeshows and outside commissions, primarily driven by product launch costs for the TASER X2 and timing of the annual TASER Master Instructor conference, which took place in the second quarter of 2011, but in the third quarter of 2010. In addition, $0.8 million relating to a litigation settlement for an officer injury during arrest claim was included in other expense in the prior year.

Research and Development Expenses

Research and development expenses were $2.8 million and $3.1 million for the second quarter of 2011 and 2010, respectively, a decrease of $0.3 million, or 9%, compared to the prior period. The reduction is partially attributable to costs in the prior year for the AXON product as well as the impact of cost-reduction measures including headcount reductions and associated severance expense incurred in the prior year. Additionally, the launch of EVIDENCE.com resulted in the Company including $1.3 million of expenses in cost of products sold for ongoing delivery and maintenance of the product, some of which were previously included in R&D in the second quarter of 2010, prior to the service launch in the second quarter of 2010.

Litigation Judgment Expense

Litigation judgment expense represents a $3.3 million charge in the second quarter of 2011 for an adverse jury verdict received in the case of Turner v. TASER International, Inc., et al. This represents management’s best estimate of the Company’s uninsured portion of the judgment after consideration of available insurance coverage. The court has not yet entered an order of judgment and based on the court excluding and failing to instruct the jury to consider significant evidence that the Company believes demonstrates contributory negligence on the part of the plaintiff, the Company has moved for judgment in its favor notwithstanding the verdict and will pursue all appropriate legal channels including filing an appeal in this matter at the appropriate time should an adverse judgment be subsequently entered.

Loss on Impairment

A $1.4 million asset impairment charge was recorded in the second quarter of 2011 following our determination to abandon operations of our Protector product line.

23

Loss on Write Down / Disposal of Property and Equipment, Net

A loss of $0.7 million from the write down / disposal of property and equipment was incurred following our decision to dispose of surplus equipment for EVIDENCE.com operations.

Interest and Other Income, Net

Interest and other income of $1.3 million in the second quarter includes proceeds from a settlement agreement reached in a lawsuit against various brokerage firms involving the naked shorting of the Company’s stock.

Benefit for Income Taxes

The benefit for income taxes decreased by $0.6 million to $1.5 million for the second quarter of 2011 compared to $2.1 million for the second quarter of 2010. Our estimated full year effective tax rate for 2011, before discrete period adjustments, is approximately 48%, which is above the statutory rate due to the impact of non-deductible expenses for items such as ISO stock option expense, meals and entertainment and lobbying fees, which make our projected annual net income for tax purposes significantly higher than our book pre-tax income. The overall effective tax rate of 38.9% for the three months ended June 30, 2011, was below our estimated annual effective tax rate due to treating the litigation judgment expense, asset impairment expense and the lawsuit settlement proceeds as discrete items due to their significant and unusual. The 60.4% effective tax rate for the three months ended June 30, 2010, is due to the higher impact that non-deductible expenses were expected to have on 2010’s projected annual pre-tax income.

Net Loss

Our net loss increased to $2.3 million, or $(0.04) per basic and diluted share, for the second quarter of 2011 compared to a net loss of $1.4 million, or $(0.02) per basic and diluted share, for the second quarter of 2010.

Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010

The following table sets forth, for the periods indicated, our statements of operations as well as the percentage relationship to total net revenues of items included in our statements of operations (dollars in thousands):

	Six Months Ended June 30,										Increase / (Decrease)
	2011					2010					$			%
Net sales	$	44,315		100.0	%	$	42,964		100.0	%	$	1,351			3.1	%
Cost of products sold		19,866		44.8	%		19,843		46.2	%		23			0.1	%
Gross margin		24,449		55.2	%		23,121		53.8	%		1,328			5.7	%
Sales, general and administrative expenses		18,401		41.5	%		20,276		47.2	%		(1,875	)		-9.2	%
Research and development expenses		5,546		12.5	%		7,195		16.7	%		(1,649	)		-22.9	%
Litigation judgment expense		3,301		7.4	%		—		—			3,301			100.0	%
Asset impairment		1,351		3.0	%		—		—			1,351			100.0	%
Loss on write down / disposal of fixed assets		757		1.7	%		34		0.2	%		723				*
Loss from operations		(4,906	)	-11.1	%		(4,384	)	-10.2	%		(522	)		11.9	%
Interest and other income, net		1,288		2.9	%		14		0.0	%		1,274				*
Loss before benefit for income taxes		(3,618	)	-8.2	%		(4,370	)	-10.2	%		752			-17.2	%
Benefit for income taxes		(1,343	)	-3.0	%		(2,518	)	-5.9	%		1,175			-46.7	%
Net loss	$	(2,275	)	-5.1	%	$	(1,852	)	-4.3	%	$	(423	)		22.8	%

Note:	Table may not foot due to rounding differences
*	Not Meaninful

24

Net Sales

For the six months ended June 30, 2011 and 2010, sales by product line and by geography were as follows (dollars in thousands):

	Six Months Ended June 30,
	2011				2010
Sales by Product Line
TASER X26	$	20,334	45.9	%	$	20,679	48.1	%
Single Cartridges		12,147	27.4	%		10,495	24.4	%
TASER X2		1,414	3.2	%		—	—
TASER Cam		1,147	2.6	%		2,815	6.6	%
TASER C2		1,781	4.0	%		2,081	4.8	%
ADVANCED TASER		2,009	4.5	%		545	1.3	%
AXON/EVIDENCE.com		327		*		45		*
TASER X3		304		*		537	1.2	%
XREP		163		*		962	2.2	%
Other		4,689	10.6	%		4,805	11.2	%
Total	$	44,315	100.0	%	$	42,964	100.0	%

* Less than 1%

	Three Months Ended June 30,
	2011			2010
United States		77	%		84	%
Other Countries		23	%		16	%
Total		100	%		100	%

Net sales increased $1.4 million, or 3%, to $44.3 million for the first six months of 2011 compared to $43.0 million for the first six months of 2010. The increase in sales versus the prior year is driven by some larger individually significant orders in both the international and Federal markets; while domestically, the launch of the TASER X2 helped offset weaker demand for other products. The net result compared to the prior year, is that sales of single cartridges increased $1.7 million, or 16%, and ADVANCED TASER sales increased $1.5 million, or 269%, while X2 sales contributed $1.4 million to total sales. TASER Cam sales declined $1.7 million, or 59%, following a large international order in 2010, while sales of our X26, X3, XREP and C2 ECD products declined by a combined $1.7 million, or 7%.

International sales for the first six months of 2011 and 2010 represented approximately $10.2 million, or 23%, and $9.0 million or 21% of total net sales, respectively.

Cost of Products Sold

Cost of products sold remained flat at $19.9 million for the first six months of 2011 compared to $19.8 million for the first six months of 2010. As a percentage of net sales, cost of products sold decreased to 44.8% in the first half of 2011 compared to 46.2% in the first half of 2010. The net decrease in costs as a percent of sales is driven by a combination of offsetting factors. Manufacturing costs decreased 6.6% as a percentage of sales, attributable to a more favorable market segment mix with higher margin international sales; a more favorable product sales mix with a larger contribution to net sales from higher margin products, including the newly launched X2, replacing products such as X3 and XREP, which had lower margins and initial yields; production efficiency was improved with reductions in temporary labor and overtime as well as a reduction in rework effort; leverage on indirect manufacturing costs was improved following the 3% increase in sales, while indirect salary costs have been reduced following headcount reductions and severance charges in the prior year; and obsolete inventory and scrap charges have also been reduced as have warranty provision charges resulting from increased focus on quality initiatives, which reduced product returns. Offsetting the reduction in manufacturing costs as a percentage of net sales is approximately $2.5 million of EVIDENCE.com datacenter operating and software maintenance costs in costs of products sold in the first half of 2011 compared to only $0.2 million in the prior year following the commercial availability of the service, representing a 5.2% increase in costs as a percentage of sales. A significant portion of these costs were included as part of research and development in the prior year.

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Gross Margin

Gross margin increased $1.3 million, or 6%, to $24.4 million for the first half of 2011 compared to $23.1 million for the first half of 2010. As a percentage of net sales, gross margin increased to 55.2% for the first six months of 2011 compared to 53.8% for the first six months of 2010. The improvement in gross margin as a percentage of net sales for the first half of 2011 reflects improved leverage on higher sales levels as well as the factors noted above under the discussion of cost of products sold.

Sales, General and Administrative Expenses

For the six months ended June 30, 2011 and 2010, sales, general and administrative expenses were comprised as follows (dollars in thousands):

	Six Months Ended June 30,
							$			%
	2011			2010			Change			Change
Salaries, benefits and bonus	$	5,098		$	5,791		$	(693	)		-12.0	%
Legal, professional and accounting fees		2,727			2,517			210			8.3	%
Sales and Marketing		1,818			2,091			(273	)		-13.1	%
Travel and meals		1,497			1,534			(37	)		-2.4	%
Stock-based compensation		1,373			1,523			(150	)		-9.8	%
Consulting and lobbying services		1,438			1,264			174			13.8	%
Depreciation and amortization		946			981			(35	)		-3.6	%
D&O and liability insurance		918			835			83			9.9	%
Other		2,586			3,740			(1,154	)		-30.9	%
Total	$	18,401		$	20,276		$	(1,875	)		-9.2	%
Sales, general and administrative as % of net sales		41.5	%		47.2	%

Sales, general and administrative expenses were $18.4 million and $20.3 million in the first six months of 2011 and 2010, respectively, a decrease of $1.9 million, or 9%. As a percentage of total net sales, sales, general and administrative expenses decreased to 41.5% for the first half of 2011 compared to 47.2% for the first half of 2010. The dollar decrease for the first half of 2011 compared to the same period in 2010 is attributable to a $0.8 million reduction in salaries, benefits, bonus and stock-based compensation primarily driven by measures taken to reduce our salaried headcount and fixed cost infrastructure in 2010, including some one-time severance charges. Sales and marketing and travel-related costs including advertising, tradeshows and outside commissions have been reduced overall by $0.3 million as we continue to focus on reducing discretionary spending, despite having X2 product launch costs and the annual TASER conference in the second quarter of 2011 versus the third quarter of 2010. In addition, $0.8 million relating to a litigation settlement for an officer injury during arrest claim was included in other expense in the prior year which is driving the decrease in other expenses. Offsetting these reductions, legal, professional and accounting fees increased driven by the timing and volume of pending litigation while consulting and lobbying have increased due to some sales and legal related activity.

Research and Development Expenses

Research and development expenses decreased $1.6 million, or 23%, to $5.5 million for the first six months of 2011 compared to $7.2 million for the first six months of 2010. The reduction is driven by the impact of cost-reduction measures including headcount reductions and associated severance expenses incurred in the prior year. Additionally, the launch of EVIDENCE.com resulted in the Company including $2.4 million of expenses in cost of products sold for ongoing delivery and maintenance of the product, some of which were previously included in R&D in the second quarter of 2010, prior to the service launch in the second quarter of 2010.

Litigation Judgment Expense

Litigation judgment expense represents a $3.3 million charge in the second quarter of 2011 for an adverse jury verdict received in the case of Turner v. TASER International, Inc., et al. This represents management’s best estimate of the Company’s uninsured portion of the judgment after consideration of available insurance coverage. The court has not yet entered an order of judgment and, based on the court excluding and failing to instruct the jury to consider significant evidence that the Company believes demonstrates contributory negligence on the part of the plaintiff, the Company has moved for judgment in its favor notwithstanding the verdict and will pursue all appropriate legal channels including filing an appeal in this matter at the appropriate time should an adverse judgment be subsequently entered.

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Loss on Impairment

A $1.4 million asset impairment charge was recorded in the second quarter of 2011 following our determination to abandon our Protector product line.

Interest and Other Income, Net

Interest and other income of $1.3 million in the six months ended June 30, 2011 includes proceeds from a settlement agreement reached in a lawsuit against various brokerage firms involving the naked shorting of the Company's stock.

Loss on Write Down / Disposal of Property and Equipment, Net

A loss of $0.8 million from the write down / disposal of Property and Equipment was incurred following the decision to dispose of surplus equipment for EVIDENCE.com operations.

Benefit for Income Taxes

The benefit for income taxes decreased by $1.2 million to $1.3 million for the first half of 2011 compared to $2.5 million for the first half of 2010. Our estimated full year effective tax rate for 2011, before discrete period adjustments, is approximately 48%, which is above the statutory rate due to the impact of non-deductible expenses for items such as ISO stock option expense, meals and entertainment and lobbying fees, which make our net income for tax purposes significantly higher than our book pre-tax income. The effective tax rate of 37.1% for the six months ended June 30, 2011, was below our estimated annual effective tax rate due to treating the litigation judgment expense, asset impairment expense and the lawsuit settlement proceeds as discrete items due to their significant and unusual nature and tax affecting them at the statutory rate. The 57.6% effective tax rate for the six months ended June 30, 2010 is due to the higher impact of non-deductible expenses were expected to have on 2010’s projected annual pre-tax income.

Net Loss

Our net loss increased by $0.4 million to $2.3 million for the first half of 2011 compared to $1.9 million for the first half of 2010. Net loss per basic and diluted share was $(0.04) for the first six months of 2011 compared to $(0.03) for the first six months of 2010.

Liquidity and Capital Resources

Summary

As of June 30, 2011, we had $38.5 million in cash, cash equivalents and investments, a decrease of $4.2 million from the end of 2010, which is a function of $9.2 million of cash provided by operations, partially offset by investments in property and equipment, and $12.5 million used for the buyback of Company common stock.

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for the six months ended June 30, 2011 and 2010 (dollars in thousands):

	Six Months Ended June 30,
	2011			2010
	(In thousands)
Net cash provided (used) by operating activities	$	9,155		$	(2,390	)
Net cash used by investing activities		(11,648	)		(3,374	)
Net cash (used) provided by financing activities	$	(12,496	)	$	961

Operating activities

Net cash provided by operating activities in the first half of 2011 of $9.2 million was primarily driven by pre-tax loss for the period adjusted for the add-back of non-cash expenses including stock-based compensation expense of $1.8 million, depreciation and amortization expense of $4.1 million, asset impairment charges of $1.4 million, and loss on write down / disposal of fixed assets of $0.8 million. Additionally, changes in working capital included a $3.6 million reduction in accounts receivable due to timing of collections and a decrease in sales for the month of June 2011 compared to December 2010, a $3.3 million litigation judgment accrual and a $1.0 million reduction in inventory as we have actively worked to reduce the levels of raw material and finished goods on hand. These changes were partially offset by an increase in prepaid assets driven by payment of our annual liability insurance premium, while accounts payable and accrued liabilities decreased $0.6 million due to reduced activity and timing of payments to vendors and deferred revenue decreased by $0.9 million as the rate of extended warranty purchases has decreased.

27

Net cash used by operating activities in the first six months of 2010 of $2.4 million was primarily driven by changes in working capital including a $2.2 million reduction in accounts payable and accrued liabilities due to timing of period-end check runs and a vendor payment of $1.0 million for the final installment on the cartridge automation equipment, a $4.8 million increase in inventory attributable to build of ECD finished goods for future orders as well as raw materials acquired for production of new and legacy products, and a $2.7 million increase in prepaid and other assets from the funding of our annual liability insurance premiums and an increase in our income taxes receivable position at June 30, 2010. These net uses of cash were partially offset by a $4.4 million reduction in accounts receivable due to timing of collections and lower sales levels as well the net loss for the period adjusted for the add-back of non-cash expenses including stock-based compensation expense of $1.9 million and depreciation and amortization expense of $3.1 million.

Investing activities

We used $11.6 million for investing activities in the first six months of 2011, comprised principally of $10.8 million for the purchase of short-term investments and $0.9 million for the acquisition of various production and computer equipment and intangible assets.

We used $3.4 million for investing activities in the first six months of 2010, comprised principally of $2.0 million for capitalized software development costs related to EVIDENCE.com and our Protector technology platform and $1.2 million for the acquisition of various production and computer equipment.

Financing activities

During the first six months of 2011, net cash used by financing activities was $12.5 million attributable to the repurchase of Company common stock during the quarter.

During the first six months of 2010, net cash provided by financing activities was $1.0 million attributable to proceeds from stock options exercised during the period.

Liquidity

Our most significant sources of liquidity continue to be funds generated by operating activities and available cash and cash equivalents. We believe funds generated from our expected results of operations, as well as available cash and cash equivalents, will be sufficient to finance our operations and strategic initiatives for 2011. This includes another $20.0 million stock repurchase program announced in July 2011, in addition to the $12.5 million buy-back that was completed in the first half of 2011. In addition, our newly renegotiated $10.0 million revolving credit facility is available for additional working capital needs or investment opportunities. The facility matures on June 30, 2013. There can be no assurance, however, that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our revolving credit facility.

Capital Resources

We have a revolving line of credit with a domestic bank with a total availability of $10.0 million. The line is secured primarily by the Company’s accounts receivable and inventory, and bears interest at varying rates, ranging from LIBOR plus 1.5% to prime. The line of credit matures on June 30, 2013, and requires monthly payments of interest only. At June 30, 2011, there were no borrowings under the line. Our agreement with the bank requires us to comply with certain financial and other covenants including maintenance of minimum tangible net worth and a fixed charge coverage ratio. The ratio of total liabilities to tangible net worth can be no greater than 1:1, and the fixed coverage charge ratio can be no less than 1.25:1, based upon a trailing twelve month period. At June 30, 2011, the Company’s tangible net worth ratio was 0.21:1 and its fixed charge coverage ratio was 2.65:1. Accordingly, the Company was in compliance with those covenants.

Based on our strong balance sheet and the fact that we had no outstanding debt at June 30, 2011, we believe financing will be available, both through our existing credit line and possible additional financing. However, there is no assurance that such funding will be available on terms acceptable to us, or at all.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements as of June 30, 2011.

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Critical Accounting Estimates

We have identified the following accounting estimates as critical to our business operations and the understanding of our results of operations. The preparation of this Quarterly Report on Form 10-Q requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. While we don’t believe that a change in these estimates is reasonably likely, there can be no assurance that our actual results will not differ from these estimates. The effect of these policies on our business operations is discussed below.

Standard Product Warranty Reserves

We warrant our law enforcement ECDs from manufacturing defects on a limited basis for a period of one year after purchase and thereafter will replace any defective TASER unit for a fee. The AXON Tactical Computer, the Com Hub user interface, Synapse Evidence Transfer Manager (ETM), and HeadCam are warranted for one year and TASER C2 is warranted for a period of 90 days after purchase. We track historical data related to returns and warranty costs on a quarterly basis and estimate future warranty claims based upon our historical experience. We have also historically increased our reserve amount if we become aware of a component failure that could result in larger than anticipated returns from our customers. As of June 30, 2011, our reserve for warranty returns was $330,000 compared to a $646,000 reserve at December 31, 2010. The reduction is substantially driven by a reduction in product returns which we believe reflects various quality initiatives implemented in our manufacturing process as well as the utilization of specifically identified reserves during the first half of 2011. In the event that actual warranty returns differ from these estimates, changes to warranty reserves might become necessary.

Inventory

Inventories are stated at the lower of cost or market, with cost determined using the weighted average cost of raw materials, which approximates the first-in, first-out (FIFO) method, and an allocation of manufacturing labor and overhead costs. The allocation of manufacturing labor and overhead costs includes management’s judgments of what constitutes normal capacity of our production facilities, and a determination of what costs are considered to be abnormal fixed production costs which are expensed as current period charges. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories to their net realizable value. These provisions are based on our best estimates after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions and other factors. Our reserve for excess and obsolete inventory increased to $540,000 at June 30, 2011, compared to $351,000 at December 31, 2010. In the event that actual excess, obsolete or slow-moving inventories differ from these estimates, changes to inventory reserves might become necessary.

Accounts Receivable

Sales are typically made on credit and we generally do not require collateral. We perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for estimated potential losses. Uncollectible accounts are written off when deemed uncollectible, and accounts receivable are presented net of an allowance for doubtful accounts. This allowance represents our best estimate and is based on our judgment after considering a number of factors including third-party credit reports, actual payment history, customer-specific financial information and broader market and economic trends and conditions. Our allowance for doubtful accounts was $200,000 at June 30, 2011 and December 31, 2010. In the event that actual uncollectible amounts differ from these estimates, changes in allowances for doubtful accounts might become necessary.

Valuation of Long-lived Assets

We review long-lived assets, such as property and equipment and intangible assets subject to and not subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We utilize a two-step approach to testing long-lived assets for impairment. The first step tests for possible impairment indicators. If an impairment indicator is present, the second step measures whether the asset is recoverable based on a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Our review requires the use of judgment and estimates. During the second quarter of 2011, we recognized a $1.35 million loss on impairment of our Protector product line following a decision to abandon ongoing operations. Management believes that, other than as previously noted, no such impairments have occurred. However, future events or circumstances may result in a charge to earnings if we determine that the carrying value of a long-lived asset is not recoverable.

Income Taxes

We recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carryforwards.

29

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Management must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties if any. We have completed research and development tax credit studies which identified approximately $5.9 million in tax credits for Federal, Arizona and California income tax purposes related to the 2003 through 2010 tax years, net of the federal benefit on the Arizona and California research and development tax credits. Management made the determination that it was more likely than not that the full benefit of the research and development tax credit would not be sustained on examination and accordingly, has established a cumulative liability for unrecognized tax benefits of $2.2 million as of June 30, 2011. Also included as part of the $2.3 million liability for unrecognized tax benefits is a management estimate of $106,000 related to uncertain tax positions for certain state income tax liabilities. As of June 30, 2011, management does not expect the amount of the unrecognized tax benefit liability to increase or decrease significantly within the next 12 months. Should the unrecognized tax benefit of $2.3 million be recognized, the Company’s effective tax rate would be favorably impacted. Our estimates are based on the information available to us at the time we prepare the income tax provisions. Our income tax returns are subject to audit by federal, state, local and foreign governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.

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

In preparing the Company’s consolidated financial statements, management assesses the likelihood that its deferred tax assets will be realized from future taxable income. In evaluating the Company’s ability to recover its deferred income tax assets, management considers all available positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Management exercises significant judgment in determining its provisions for income taxes, its deferred tax assets and liabilities and its future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred tax assets. Management believes that as of June 30, 2011, based on an evaluation and projections of future sales and profitability, no valuation allowance was deemed necessary. However, such deferred tax assets could be reduced in the future if projections of future taxable income during the carryforward period are reduced.

Stock Based Compensation

We estimate the fair value of our stock-based compensation by using the Black-Scholes-Merton option pricing model which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their stock options before exercising them (“expected term”), the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not vest (“forfeitures”). We have granted a combined total of 950,800 performance-based stock options, the vesting of which is contingent upon the achievement of certain performance criteria including the successful development and market acceptance of future product introductions as well as our future sales targets and operating performance. These options will vest and compensation expense will be recognized based on management’s best estimate of the probability of the performance criteria being satisfied using the most currently available projections of future product adoption and operating performance, adjusted at each balance sheet date. Changes in the subjective and probability-based assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized on our statements of operations. Refer to Note 7 to our consolidated financial statements for further discussion of how we determined our valuation assumptions.

Contingencies

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

30

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We invest in a limited number of financial instruments, which at June 30, 2011, consisted of investments in money market accounts and commercial paper, denominated in United States dollars.

All of our cash equivalents and marketable securities are treated as “held-to-maturity.” Investments in fixed rate interest earning instruments carry a degree of interest rate risk as their market value may be adversely impacted due to a rise in interest rates. As a result, we may suffer losses in principal if forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our debt securities as “held-to-maturity,” no gains or losses are recognized due to changes in interest rates and as such, a 10% change in interest rates would not have a material adverse affect on our results of operations. These securities are reported at amortized cost, which approximates fair value.

Additionally, we have access to a $10.0 million line of credit borrowing facility which bears interest at varying rates, ranging from LIBOR plus 1.5% to prime. At June 30, 2011, there was no amount outstanding under the line of credit. We have not borrowed any funds under the line of credit since its inception; however, should we need to do so in the future, such borrowings could be subject to adverse or favorable changes in the underlying interest rate.

Exchange Rate Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro related to transactions performed by TASER Europe. To date, we have not engaged in any currency hedging activities although we may do so in the future. Fluctuations in currency exchange rates could harm our business in the future.

The majority of our sales to our international customers are transacted in United States dollars and therefore, are not subject to exchange rate fluctuations. However, the cost to our customers increases when the U.S. dollar strengthens against their local currency. In this difficult economy, this risk of loss becomes a potential credit-risk for non-payment.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2011, to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management.

Changes in internal control over financial reporting

There was no change in our internal control over financial reporting during the fiscal quarter ended June 30, 2011, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

31

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See discussion of legal proceedings in Note 9 to the consolidated financial statements included in PART I, ITEM 1 of this Form 10-Q.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2010, and our Form 10-Q for the quarter ended March 31, 2011 under the heading “Risk Factors,” which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K and Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially, adversely affect our business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

On March 3, 2011, the Company announced that its board of directors had authorized a stock repurchase program pursuant to which the Company may repurchase up to $12.5 million of the Company’s common stock subject to stock market conditions and corporate considerations. This repurchase program was completed in the second quarter of 2011. The table below sets forth information regarding repurchases of our common stock by us during the three months ended June 30, 2011.

							Maximum Number (or
					Total Number of		Approximate Dollar
					Shares Purchased as		Value) of Shares that
					Part of Publicly		May Yet be
	Total Number of		Average Price Paid		Announced Plans or		Purchased Under the
Period	Shares Purchased		per Share		Programs		Plans or Programs
April		208,419	$	4.45		208,419	$	6,511,819
May		1,162,811	$	4.45		1,162,811	$	1,337,331
June		300,720	$	4.45		300,720	$	0
Total		1,671,950	$	4.45		1,671,950	$	0

In July 2011, TASER’s Board of Directors authorized an additional repurchase program to acquire to $20 million of the Company’s outstanding common stock. There is no expiration date for this program.

32

ITEM 6. EXHIBITS

10.1	Amendment to Credit Agreement dated as of June 23, 2011 between the Company and JP Morgan Chase Bank, N.A.
31.1	Principal Executive Officer Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2	Principal Financial Officer Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
*32	Principal Executive Officer and Principal Financial Officer Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**101	XBRL Instance Document
**101	XBRL Taxonomy Extension Schema Document
**101	XBRL Taxonomy Calculation Linkbase Document
**101	XBRL Taxonomy Label Linkbase Document
**101	XBRL Taxonomy Presentation Linkbase Document

*

Furnished

**

Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	TASER INTERNATIONAL, INC.
Date: August 8, 2011	/s/ Patrick W. Smith
	Patrick W. Smith
	Chief Executive Officer (Principal Executive Officer)
Date: August 8, 2011	/s/ Daniel M. Behrendt
	Daniel M. Behrendt
	Chief Financial Officer (Principal Financial and Accounting Officer)

33

Index to Exhibits

Exhibits:

10.1	Amendment to Credit Agreement dated as of June 23, 2011 between the Company and JP Morgan Chase Bank, N.A.
31.1	Principal Executive Officer Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2	Principal Financial Officer Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
*32	Principal Executive Officer and Principal Financial Officer Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**101	XBRL Instance Document
**101	XBRL Taxonomy Extension Schema Document
**101	XBRL Taxonomy Calculation Linkbase Document
**101	XBRL Taxonomy Label Linkbase Document
**101	XBRL Taxonomy Presentation Linkbase Document

*

Furnished

**

Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

34

EX-10.1

Exhibit 10.1

Amendment to Credit Agreement
with Termination of Negative Pledge Agreement and Consent

This agreement is dated as of June 23, 2011, by and between TASER International, Inc. (the “Borrower”) and JPMorgan Chase Bank, N.A. (together with its successors and assigns the “Bank”). The provisions of this agreement are effective on the date that this agreement has been executed by all of the signers and delivered to the Bank (the “Effective Date”).

WHEREAS, the Borrower and the Bank entered into a credit agreement dated June 22, 2004 (as amended, the “Credit Agreement”); and a Negative Pledge Agreement dated June 22, 2004 (the “Negative Pledge Agreement”) and

WHEREAS, the Borrower has requested and the Bank has agreed to amend the Credit Agreement as set forth in this agreement;

NOW, THEREFORE, in mutual consideration of the agreements contained herein and for other good and valuable consideration, the parties agree as follows:

1. DEFINED TERMS. Capitalized terms used in this agreement shall have the same meanings as in the Credit Agreement, unless otherwise defined in this agreement.

2. TERMINATION OF NEGATIVE PLEDGE AGREEMENT. The Negative Pledge Agreement is hereby terminated, the parties acknowledging that the covenants and events of default in the Credit Agreement concerning liens, transfers and other transactions involving Borrower’s properties, continue without modification except as provided for herein, in accordance with their stated terms.

3. CONSENT. The Bank agrees that Borrower shall be permitted, notwithstanding the provisions in sections 5.2.A and 5.2.B of the Credit Agreement, to repurchase its common shares for cash consideration not to exceed an aggregate amount of $15,000,000.00; provided however that this consent is conditioned on (a) Borrower’s compliance with all other terms and conditions of the Credit Agreement, giving effect to such repurchase; and (b) giving effect to such repurchase, the Borrower shall have a balance of unencumbered cash (determined in accordance with generally accepted accounting principles, consistently applied) of not less than $10,000,000.00. The consent provided for in this paragraph shall be in addition to the consent provided in the Amendment to Credit Agreement dated March 8, 2011.

4. MODIFICATION OF CREDIT AGREEMENT. The Credit Agreement is hereby amended as follows:

4.1 From and after the Effective Date, the following provisions are deleted in their entirety and reserved: (a) section 1.3, “Borrowing Base"; section 2.4 “Account”; section 2.9 “Eligible Accounts”; section 2.10 “Eligible Inventory”; section 2.11 “Inventory”; 2.13 “Margined Eligible Accounts”; and section 6.2 “Representations Regarding Assets.”

35

4.2 From and after the Effective Date, section 2.7 “Applicable Fee” of the Credit Agreement is hereby amended and restated to read as follows:

2.7 “Applicable Fee Rate” means with respect to any standby letter of credit fee or Non-Usage Fee, as the case may be, the rate per annum set forth below opposite the applicable Leverage Ratio (hereinafter defined in Section 5. 2 (J).

	Applicable Fee Rate
Leverage Ratio	Standby LOC Fee			Non-Usage Fee
Greater than 0.75 to 1.00		1.75	%		0.20	%
Less than or equal to 0.75 to 1.00 but greater than 0.25 to 1.00		1.50	%		0.15	%
Less than or equal to 0.25 to 1.00		1.25	%		0.10	%

4.3	From and after the Effective Date, section 4.5 “Financial Reports” letters C. and D. of the Credit Agreement are hereby deleted in their entirety.
4.4	From and after the Effective Date, section 5.2 letter C. of the Credit Agreement is hereby amended and restated to read as follows:
	C. Debt. Incur, contract for, assume, or permit to remain outstanding, indebtedness for borrowed money, installment obligations, or obligations under capital leases or operating leases, other than (1) unsecured trade debt incurred in the ordinary course of business, (2) indebtedness owing to the Bank, (3) indebtedness reflected in its latest financial statement furnished to the Bank prior to execution of this agreement and that is not to be paid with proceeds of borrowings under the Credit Facilities, (4) indebtedness outstanding as of the date hereof that has been disclosed to the Bank in writing and that is not to be paid with proceeds of borrowings under the Credit Facilities, and (5) additional indebtedness for borrowed money, installment obligations and obligations under capital leases or operating leases not to exceed $2,000,000.00 in the aggregate.

4.5

From and after the Effective Date, section 5.2 letter E. of the Credit Agreement is hereby amended and restated to read as follows:

E. Liens. Create or permit to exist any Lien on any of its Property except: existing Liens known to and approved by the Bank; Liens to the Bank; Liens incurred in the ordinary course of business securing current non-delinquent liabilities for taxes, worker’s compensation, unemployment insurance, social security and pension liabilities; and Liens on domain names, patents, trademarks, and noncompete agreements.

36

5. RATIFICATION. The Borrower ratifies and reaffirms the Credit Agreement and the Credit Agreement shall remain in full force and effect as modified by this agreement.

6. BORROWER REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants that (a) the representations and warranties contained in the Credit Agreement are true and correct in all material respects as of the date of this agreement, (b) no condition, event, act or omission which could constitute a default or an event of default under the Credit Agreement, as modified by this agreement, or any other Related Document exists, and (c) no condition, event, act or omission has occurred and is continuing that with the giving of notice, or the passage of time or both, would constitute a default or an event of default under the Credit Agreement, as modified by this agreement, or any other Related Document.

7. FEES AND EXPENSES. The Borrower agrees to pay all fees and out-of-pocket disbursements incurred by the Bank in connection with this agreement, including legal fees incurred by the Bank in the preparation, consummation, administration and enforcement of this agreement.

8. EXECUTION AND DELIVERY. This agreement shall become effective only after it is fully executed by the Borrower and the Bank, and the Bank shall have received from the Borrower the following documents: Note Modification Agreement.

9. ACKNOWLEDGEMENTS OF BORROWER / RELEASE. The Borrower acknowledges that as of the date of this agreement it has no offsets with respect to all amounts owed by the Borrower to the Bank arising under or related to the Credit Agreement, as modified by this agreement, or any other Related Document on or prior to the date of this agreement. The Borrower fully, finally and forever releases and discharges the Bank, its successors and assigns and their respective directors, officers, employees, agents and representatives (each a “Bank Party”) from any and all claims, causes of action, debts, demands and liabilities, of whatever kind or nature, in law or in equity, of the Borrower, whether now known or unknown to the Borrower, which may have arisen in connection with the Credit Agreement or the actions or omissions of any Bank Party related to the Credit Agreement on or prior to the date hereof. The Borrower acknowledges and agrees that this agreement is limited to the terms outlined above, and shall not be construed as an agreement to change any other terms or provisions of the Credit Agreement. This agreement shall not establish a course of dealing or be construed as evidence of any willingness on the Bank’s part to grant other or future agreements, should any be requested.

10. INTEGRATION, ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR WAIVER. The Credit Agreement, as modified by this agreement, and the other Related Documents contain the complete understanding and agreement of the Borrower and the Bank in respect of the Credit Facilities and supersede all prior understandings and negotiations. If any one or more of the obligations of the Borrower under this agreement or the Credit Agreement, as amended by this agreement, is invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of the Borrower shall not in any way be affected or impaired, and the invalidity, illegality or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of the obligations of the Borrower under this agreement, the Credit Agreement, as modified by this agreement, or any other Related Document in any other jurisdiction. No provision of the Credit Agreement, as modified by this agreement, or the other Related Documents, may be changed, discharged, supplemented, terminated, or waived except in a writing signed by the party against whom it is being enforced.

37

11. Governing Law and Venue. This agreement shall be governed by and construed in accordance with the laws of the State of Arizona (without giving effect to its laws of conflicts). The Borrower agrees that any legal action or proceeding with respect to any of its obligations under this agreement may be brought by the Bank in any state or federal court located in the State of Arizona, as the Bank in its sole discretion may elect. By the execution and delivery of this agreement, the Borrower submits to and accepts, for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of those courts. The Borrower waives any claim that the State of Arizona is not a convenient forum or the proper venue for any such suit, action or proceeding.

12. NOT A NOVATION. This agreement is a modification only and not a novation. Except as expressly modified by this agreement, the Credit Agreement, any other Related Documents, and all the terms and conditions thereof, shall be and remain in full force and effect with the changes herein deemed to be incorporated therein. This agreement is to be considered attached to the Credit Agreement and made a part thereof. This agreement shall not release or affect the liability of any guarantor of any promissory note or credit facility executed in reference to the Credit Agreement or release any owner of collateral granted as security for the Credit Agreement. The validity, priority and enforceability of the Credit Agreement shall not be impaired hereby. To the extent that any provision of this agreement conflicts with any term or condition set forth in the Credit Agreement, or any other Related Documents, the provisions of this agreement shall supersede and control. The Bank expressly reserves all rights against all parties to the Credit Agreement and the other Related Documents.

13. TIME IS OF THE ESSENCE. Time is of the essence under this agreement and in the performance of every term, covenant and obligation contained herein.

Borrower:
TASER International, Inc.
By:	/s/ Daniel M Behrendt
	DANIEL M BEHRENDT	CFO
	Printed Name	Title
Date Signed: June 28, 2011
Bank:
JPMorgan Chase Bank, N.A.
By:
	Printed Name	Title
Date Signed:

38

Note Modification Agreement

This agreement is dated as of June 23, 2011 (the “Agreement Date”), by and between TASER International, Inc. (the “Borrower”) and JPMorgan Chase Bank, N.A. (together with its successors and assigns, the “Bank”). The provisions of this agreement are effective on the date that this agreement has been executed by all of the signers and delivered to the Bank (the “Effective Date”).

WHEREAS, the Borrower executed a Line of Credit Note dated as of June 4, 2010 in the original principal amount of Ten Million and 00/100 Dollars ($10,000,000.00), (as same may have been amended or modified from time to time, the “Note”) as evidence of an extension of credit from the Bank to the Borrower, which Note has at all times been, and is now, continuously and without interruption outstanding in favor of the Bank; and,

WHEREAS, the Borrower has requested and the Bank has agreed that the Note be modified to the limited extent as hereinafter set forth in this agreement;

NOW THEREFORE, in mutual consideration of the agreements contained herein and for other good and valuable consideration, the parties agree as follows:

1. ACCURACY OF RECITALS. The Borrower acknowledges the accuracy of the Recitals stated above.

2. DEFINITIONS. Capitalized terms used in this agreement shall have the same meanings as in the Note, unless otherwise defined in this agreement.

3. MODIFICATION OF NOTE.

39

3.1 From and after the Effective Date, the provision in the Note captioned “Promise to Pay” is hereby amended as follows: The date on which the entire balance of unpaid principal plus accrued interest shall be due and payable immediately is hereby changed from June 30, 2011 to June 30, 2013.

3.2 From and after the Effective Date, the provision in the Note captioned “Applicable Margin” is hereby amended as follows:

“Applicable Margin” means with respect to any CB Floating Rate Advance or LIBOR Rate Advance, as the case may be, the rate per annum set forth below for such Advance and opposite the applicable Leverage Ratio. Leverage Ratio is defined in the Credit Agreement.

	Applicable Margin
	CB Floating Rate
Leverage Ratio	Advance	LIBOR Rate Advance
Greater than 0.75 to 1.00	minus 0.50%		1.75	%
Less than or equal to 0.75 to 1.00 but greater than 0.25 to 1.00	minus 0.75%		1.50	%
Less than or equal to 0.25 to 1.00	minus 1.00%		1.25	%

The Applicable Margin shall, in each case, be determined and adjusted quarterly on the first day of the month after the date of delivery of the quarterly and annual financial statements required by the Credit Agreement, provided, however, that if such financial statements are not delivered within two Business Days after the required date (each, an “Interest Determination Date”), the Applicable Margin shall increase to the maximum percentage amount set forth in the table above from the date such financial statements were required to be delivered to the Bank until received by the Bank. The Applicable Margin shall be effective from an Interest Determination Date until the next Interest Determination Date. Such determinations by the Bank shall be conclusive absent manifest error. The initial Applicable Margin for CB Floating Rate Advances is minus 1.00% and for LIBOR Rate Advances is 1.25%.

3.3 From and after the Effective Date, the provision in the Note captioned “Principal Payments” is hereby amended as follows:

Principal Payments. All outstanding principal and interest is due and payable in full on June 30, 2013, which is defined herein as the “Principal Payment Date”.

3.4 Each of the Related Documents is modified to provide that it shall be a default or an event of default thereunder if the Borrower shall fail to comply with any of the covenants of the Borrower herein or if any representation or warranty by the Borrower herein or by any guarantor in any Related Documents is materially incomplete, incorrect, or misleading as of the date hereof. As used in this agreement, the “Related Documents” shall include the Note and all applications for letters of credit, loan agreements, credit agreements, reimbursement agreements, security agreements, mortgages, deeds of trust, pledge agreements, assignments, guaranties, or any other instrument or document executed in connection with the Note or in connection with any other obligations of the Borrower to the Bank.

3.5 Each reference in the Related Documents to any of the Related Documents shall be a reference to such document as modified by this agreement.

40

4. RATIFICATION OF RELATED DOCUMENTS AND COLLATERAL. The Related Documents are ratified and reaffirmed by the Borrower and shall remain in full force and effect as they may be modified by this agreement. All property described as security in the Related Documents shall remain as security for the Note, as modified by this agreement, and the Liabilities under the other Related Documents.

5. BORROWER REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to the Bank that each of the representations and warranties made in the Note and the other Related Documents and each of the following representations and warranties are and will remain, true and correct until the later of maturity or the date on which all Liabilities evidenced by the Note are paid in full:

5.1 No default, event of default or event that would constitute a default or event of default but for the giving of notice, the lapse of time or both, has occurred and is continuing under any provision of the Note, as modified by this agreement, or any other Related Document.

5.2 No event has occurred which may in any one case or in the aggregate materially and adversely affect the financial condition, properties, business, affairs, prospects or operations of the Borrower or any guarantor or any subsidiary of the Borrower.

5.3 The Borrower has no defenses or counterclaims, offsets or adverse claims, demands or actions of any kind, personal or otherwise, that it could assert with respect to the Note or any other Liabilities.

5.4 The Note, as modified by this agreement, and the other Related Documents are the legal, valid, and binding obligations of the Borrower and the other parties, enforceable against the Borrower and other parties in accordance with their terms, except as may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors’ rights generally and by general principles of equity.

5.5 The Borrower, other than any Borrower who is a natural person, is validly existing under the laws of the State of its formation or organization. The Borrower has the requisite power and authority to execute and deliver this agreement and to perform the obligations described in the Related Documents as modified herein. The execution and delivery of this agreement and the performance of the obligations described in the Related Documents as modified herein have been duly authorized by all requisite action by or on behalf of the Borrower. This agreement has been duly executed and delivered by or on behalf of the Borrower.

6. BORROWER COVENANTS. The Borrower covenants with the Bank:

6.1 The Borrower shall execute, deliver, and provide to the Bank such additional agreements, documents, and instruments as reasonably required by the Bank to effectuate the intent of this agreement.

41

6.2 The Borrower fully, finally, and forever releases and discharges the Bank, its successors, and assigns and their respective directors, officers, employees, agents, and representatives (each a “Bank Party”) from any and all causes of action, claims, debts, demands, and liabilities, of whatever kind or nature, in law or equity, of the Borrower, whether now known or unknown to the Borrower, (i) in respect of the loan evidenced by the Note and the Related Documents, or of the actions or omissions of any Bank Party in any manner related to the loan evidenced by the Note or the Related Documents and (ii) arising from events occurring prior to the date of this agreement.

6.3 To the extent not prohibited by applicable law, the Borrower shall pay to the Bank:

6.3.1 All the internal and external costs and expenses incurred (or charged by internal allocation) by the Bank in connection with this agreement (including, without limitation, inside and outside attorneys, appraisal, appraisal review, processing, title, filing, and recording costs, expenses, and fees).

7. EXECUTION AND DELIVERY OF AGREEMENT BY THE BANK. The Bank shall not be bound by this agreement until (i) the Bank has executed this agreement and (ii) the Borrower performed all of the obligations of the Borrower under this agreement to be performed contemporaneously with the execution and delivery of this agreement.

8. INTEGRATION, ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR WAIVER. The Note, as modified by this agreement, and the other Related Documents contain the complete understanding and agreement of the Borrower and the Bank in respect of any Liabilities evidenced by the Note and supersede all prior understandings, and negotiations. If any one or more of the obligations of the Borrower under this agreement or the Note, as modified by this Agreement, is invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of the Borrower shall not in any way be affected or impaired, and the invalidity, illegality or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of the obligations of the Borrower under this agreement, the Note as modified by this agreement and the other Related Documents in any other jurisdiction. No provision of the Note, as modified by this agreement, or any other Related Documents may be changed, discharged, supplemented, terminated, or waived except in a writing signed by the party against whom it is being enforced.

9. GOVERNING LAW AND VENUE. This agreement shall be governed by and construed in accordance with the laws of the State of Arizona (without giving effect to its laws of conflicts). The Borrower agrees that any legal action or proceeding with respect to any of its obligations under the Note or this agreement may be brought by the Bank in any state or federal court located in the State of Arizona, as the Bank in its sole discretion may elect. By the execution and delivery of this agreement, the Borrower submits to and accepts, for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of those courts. The Borrower waives any claim that the State of Arizona is not a convenient forum or the proper venue for any such suit, action or proceeding. This agreement binds the Borrower and its successors, and benefits the Bank, its successors and assigns. The Borrower shall not, however, have the right to assign the Borrower’s rights under this agreement or any interest therein, without the prior written consent of the Bank.

10. COUNTERPART EXECUTION. This agreement may be executed in multiple counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts, taken together, shall constitute one and the same agreement.

11. NOT A NOVATION. This agreement is a modification only and not a novation. In addition to all amounts hereafter due under the Note, as modified by this agreement, and the other Related Documents, all accrued interest evidenced by the Note being modified by this agreement and all accrued amounts due and payable under the Related Documents shall continue to be due and payable until paid. Except for the modification(s) set forth in this agreement, the Note, the other Related Documents and all the terms and conditions thereof, shall be and remain in full force and effect with the changes herein deemed to be incorporated therein. This agreement is to be considered attached to the Note and made a part thereof. This agreement shall not release or affect the liability of any guarantor, surety or endorser of the Note or release any owner of collateral securing the Note. The validity, priority and enforceability of the Note shall not be impaired hereby. References to the Related Documents and to other agreements shall not affect or impair the absolute and unconditional obligation of the Borrower to pay the principal and interest on the Note when due. The Bank reserves all rights against all parties to the Note and the other Related Documents.

42

12. TIME IS OF THE ESSENCE. Time is of the essence under this agreement and in the performance of every term, covenant and obligation contained herein.

		Borrower:
Address:	17800 North 85th Street	TASER International, Inc.
	Scottsdale, AZ 85255

By:	/s/ Daniel M Behrendt
	DANIEL M BEHRENDT	CFO
	Printed Name	Title
Date Signed: June 28, 2011

SIGNATURE REQUIRED ON THE FOLLOWING PAGE

43

BANK’S ACCEPTANCE

The foregoing agreement is hereby agreed to and acknowledged.

Bank:
JPMorgan Chase Bank, N.A.
By:
	Printed Name	Title
Date
Signed:

44

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO
RULE 13a-14(a) UNDER THE
SECURITIES EXCHANGE ACT OF 1934

I, Patrick W. Smith, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, of TASER International, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2011	By:	/s/ Patrick W. Smith
		Patrick W. Smith
		Chief Executive Officer

45

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO
RULE 13a-14(a) UNDER THE
SECURITIES EXCHANGE ACT OF 1934

I, Daniel M. Behrendt, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, of TASER International, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2011	By:	/s/ Daniel M. Behrendt
		Daniel M. Behrendt
		Chief Financial Officer

EX-32

EXHIBIT 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of TASER International, Inc. (the “Company”) on Form 10-Q for the quarterly period ending June 30, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Patrick W. Smith, Chief Executive Officer of the Company, and Daniel M. Behrendt, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Patrick W. Smith

Patrick W. Smith

Chief Executive Officer

August 8, 2011

/s/ Daniel M. Behrendt

Daniel M. Behrendt

Chief Financial Officer

August 8, 2011

XML



Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)	Jun. 30, 2011	Dec. 31, 2010
Current Assets:
Allowance on accounts receivable	$ 200,000	$ 200,000
Stockholders' Equity
Preferred stock, par value	$ 0.00001	$ 0.00001
Preferred stock, shares authorized	25,000,000	25,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.00001	$ 0.00001
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares issued	59,704,086	62,621,268
Common stock, shares outstanding	59,704,086	62,621,268
Treasury stock, shares	5,013,450	2,091,600

XML



Consolidated Statements of Operations (Unaudited) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Consolidated Statements of Operations [Abstract]
Net sales	$ 21,198,055	$ 19,120,525	$ 44,315,004	$ 42,964,426
Total cost of products sold	8,956,362	9,489,815	19,865,649	19,843,295
Gross margin	12,241,693	9,630,710	24,449,355	23,121,131
Sales, general and administrative expenses	9,065,847	9,988,885	18,401,230	20,276,107
Research and development expenses	2,793,235	3,055,049	5,545,699	7,194,965
Litigation judgment expense	3,301,243		3,301,243
Loss on impairment	1,350,504		1,350,504
Loss on write down / disposal of property and equipment, net	747,409	22,510	757,038	34,442
Loss from operations	(5,016,545)	(3,435,734)	(4,906,359)	(4,384,383)
Interest and other income, net	1,261,885	6,203	1,288,206	14,102
Loss before income tax benefit	(3,754,660)	(3,429,531)	(3,618,153)	(4,370,281)
Income tax benefit	(1,459,828)	(2,070,142)	(1,343,053)	(2,518,287)
Net loss	$ (2,294,832)	$ (1,359,389)	$ (2,275,100)	$ (1,851,994)
Loss per common and common equivalent shares
Basic	$ (0.04)	$ (0.02)	$ (0.04)	$ (0.03)
Diluted	$ (0.04)	$ (0.02)	$ (0.04)	$ (0.03)
Weighted average number of common and common equivalent shares outstanding
Basic	60,605,140	62,333,929	61,515,979	62,450,722
Diluted	60,605,140	62,333,929	61,515,979	62,450,722

XML



Document and Entity Information (USD $)	6 Months Ended
	Jun. 30, 2011	Aug. 04, 2011	Jun. 30, 2010
Document and Entity Information [Abstract]
Entity Registrant Name	TASER INTERNATIONAL INC
Entity Central Index Key	0001069183
Document Type	10-Q
Document Period End Date	Jun. 30, 2011
Amendment Flag	false
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Public Float			$ 235,977,195
Entity Common Stock, Shares Outstanding		59,497,286

XML



Stockholders equity

6 Months Ended

Jun. 30, 2011

Stockholders' equity [Abstract]

Stockholders' equity

7. Stockholders’ equity

Stock Repurchase

In March 2011, TASER’s Board of Directors authorized a stock repurchase program to acquire up to $12.5 million of the Company’s outstanding common stock subject to stock market conditions and corporate considerations. Through June 30, 2011, the Company repurchased approximately 2.9 million shares at a weighted average cost, including commissions, of $4.28 per share and a total cost of $12.5 million. During July 2011, TASER’s Board of Directors authorized an additional repurchase program to acquire up to $20 million of the Company’s outstanding common stock, subject to stock market conditions and corporate considerations. Through August 4, 2011, the Company has repurchased a total of approximately 207,000 shares at an average cost of $4.22 per share and a total cost of $0.9 million.

Stock Option Activity

At June 30, 2011, the Company had four stock-based compensation plans, three of which are described more fully in Note 10 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K.

The following table summarizes the stock options available and outstanding as of June 30, 2011, as well as activity during the six months then ended:

				Outstanding Options
	Options Available						Weighted Average
	for Grant			Number of options			Exercise Price
Balance at December 31, 2010		2,478,768			7,507,286		$	5.71
Granted		(933,728	)		933,728		$	4.65
Exercised		—			(4,668	)	$	0.84
Expired/terminated		46,354			(46,354	)	$	5.46
Balance at June 30, 2011		1,591,394			8,389,992		$	5.59

The options outstanding as of June 30, 2011, have been segregated into five ranges for additional disclosure as follows:

	Options Outstanding						Options Exercisable
			Weighted						Weighted
			Average		Weighted Average				Average
			Exercise		Remaining		Number		Exercise
Range of Exercise Price	Number Outstanding		Price		Contractual Life		Exercisable		Price
$0.28 - $0.99		473,168	$	0.37		1.7		473,168	$	0.37
$1.03 - $2.41		650,379	$	1.62		1.3		650,379	$	1.62
$3.53 - $9.93		6,708,332	$	5.78		6.8		5,099,926	$	6.28
$10.07 - $19.76		533,413	$	11.94		4.4		533,413	$	11.94
$20.12 - $29.98		24,700	$	22.91		2.9		24,700	$	22.91
		8,389,992	$	5.59		6.0		6,781,586	$	5.87

The total fair value of options exercisable at June 30, 2011 and 2010 was $20.9 million and $19.7 million, respectively. The aggregate intrinsic value of options outstanding and options exercisable at June 30, 2011, was $4.2 million and $4.1 million, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $4.55 per share, and the exercise price multiplied by the number of options outstanding. Total intrinsic value of options exercised for the three and six month periods ended June 30, 2011, was $0 and approximately $13,000, respectively. Total intrinsic value of options exercised for the three and six month periods ended June 30, 2010 was approximately $39,000 and $2,128,000, respectively.

At June 30, 2011, the Company had approximately 1.6 million unvested options outstanding with a weighted average exercise price of $4.76 per share, weighted average grant date fair value of $2.19 per share and a weighted average remaining contractual life of 8.7 years. Of these unvested options outstanding, management estimates that approximately 1.5 million options will ultimately vest based on its historical experience.

As of June 30, 2011, total unrecognized stock-based compensation expense related to unvested stock options was approximately $4.2 million, which is expected to be recognized over a remaining weighted average period of approximately 15 months.

Stock-Based Compensation Expense

The Company calculates the fair value of stock-based awards using the Black-Scholes-Merton option valuation model, which incorporates various assumptions including volatility, expected life, and interest rates. The assumptions used for the three and six month periods ended June 30, 2011 and 2010, and the resulting estimates of weighted-average fair value per share of options granted during those periods, are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Expected life of options	4.5 years			4.5 years			4.5 years			4.5 years
Weighted average volatility		52.8	%		62.2	%		55.7	%		61.5	%
Weighted average risk-free interest rate		1.5	%		2.0	%		1.7	%		2.1	%
Dividend rate		0.0	%		0.0	%		0.0	%		0.0	%
Weighted average fair value of options granted	$	2.01		$	2.25		$	2.17		$	2.71

The expected life of options represents the estimated period of time until exercise and is based on the Company’s historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of employee behavior. Expected stock price volatility is based on a combination of historical volatility of the Company’s stock and the one-year implied volatility of its publicly traded options for the related vesting periods. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The Company has not paid dividends in the past and does not plan to pay any dividends in the near future. The estimated fair value of stock-based compensation awards and other options is amortized to expense on a straight line basis over the relevant vesting period. As share-based compensation expense is recognized on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company’s forfeiture rate was calculated based on its historical experience of awards which ultimately vested.

Reported share-based compensation was classified as follows for the three and six months ended June 30, 2011 and 2010:

	Three Months Ended June 30				Six Months Ended June 30
	2011		2010		2011		2010
Cost of Products Sold	$	51,976	$	80,476	$	104,980	$	151,985
Sales, general and administrative expenses		649,566		724,464		1,372,745		1,522,591
Research and development expenses		175,465		111,686		362,199		251,644
	$	877,007	$	916,626	$	1,839,924	$	1,926,220

Total share-based compensation expense recognized in the income statement for the three and six months ended June 30, 2011, includes approximately $430,000 and $1.4 million, respectively, related to Incentive Stock Options (“ISOs”) for which no tax benefit is recognized. Total share-based compensation expense recognized in the income statement for the three and six months ended June 30, 2010, includes approximately $503,000 and $1.3 million, respectively, related to ISOs for which no tax benefit is recognized. The Company did not tax effect the share-based compensation expense for tax purposes related to the non-qualified disposition of ISOs exercised and sold as the benefit will be recorded when the Company is in a position to realize the benefit with an offset to taxes payable in future periods. The total unrecognized tax benefit related to the non-qualified disposition of stock options in the three and six months ended June 30, 2011, was approximately $430,000 and $1.4 million, respectively. The total unrecognized tax benefit related to the non-qualified disposition of stock options in the three and six months ended June 30, 2010, was approximately $39,000 and $2.1 million, respectively.

The Company has granted a cumulative total of 950,800 performance-based stock options from 2008 through June 30, 2011, the vesting of which is contingent upon the achievement of certain performance criteria related to the successful and timely development and market acceptance of future product introductions, as well as the future sales and operating performance of the Company. Compensation expense is recognized over the implicit service period (the date the performance condition is expected to be achieved) based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date. At June 30, 2011, 259,452 unvested performance options with a fair value of approximately $603,000 remain outstanding. No options were forfeited during the three or six months ended June 30, 2011. During the three and six months ended June 30, 2010, 25,000 and 225,000 of these options, respectively, were forfeited, resulting in the reversal of approximately $52,000 and $346,000, respectively, of previously recognized compensation expense.

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Inventory

6 Months Ended

Jun. 30, 2011

Inventory [Abstract]

Inventory

3. Inventory

Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost of raw materials, which approximates the first-in, first-out (FIFO) method, and includes allocations of manufacturing labor and overhead. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories to their net realizable value. Inventories as of June 30, 2011 and December 31, 2010 consisted of the following:

	June 30, 2011			December 31, 2010
Raw materials and work-in-process	$	12,430,725		$	11,817,579
Finished goods		4,158,460			6,348,490
Reserve for excess and obsolete inventory		(539,976	)		(350,664	)
	$	16,049,209		$	17,815,405

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2011

Commitments and Contingencies [Abstract]

Commitments and Contingencies

9. Commitments and Contingencies

Product Litigation

The Company is currently named as a defendant in 52 lawsuits in which the plaintiffs allege either wrongful death or personal injury in situations in which the TASER device was used (or present) by law enforcement officers in connection with arrests or during training exercises. Companion cases arising from the same incident have been combined into one for reporting purposes.

In addition, 132 other lawsuits have been dismissed or judgment entered in favor of the Company which are not included in this number. An appeal was filed by the plaintiff in the Lee (TN), Thompson (MI), Marquez (AZ), Oliver (FL) and Rosa (CA) cases where judgment was entered in favor of the Company. In July 2011, the Court of Appeals affirmed the judgment in favor of the Company in the Lee (TN) appeal and in August denied the plaintiff’s request for a rehearing. These cases are not included in this number or in the table below.

Also not included in the number of pending lawsuits or in the table below is the Heston lawsuit in which a jury verdict was entered against the Company on June 6, 2008, and judgment was entered against the Company on January 30, 2009 in the amount of $153,150 as compensatory damages, $1,423,127 as attorney fees, and $182,000 as costs. These damages, fees and costs are covered by the Company’s insurance policies. The jury found that Mr. Heston’s own actions were 85% responsible for his death. The jury assigned 15% of the responsibility to TASER for a “negligent failure to warn” that extended or multiple TASER ECD applications could cause muscle contractions that could potentially contribute to acidosis to a degree that could cause cardiac arrest. The jury inappropriately awarded $5,200,000 in punitive damages against TASER, which were subsequently disallowed by the Court on October 24, 2008. The Court denied the balance of the Company’s motion for judgment as a matter of law on all other grounds. The Company has filed a notice of appeal with respect to the judgment and plaintiffs have filed a notice of cross appeal.

The Turner (NC) lawsuit was tried in July 2011 and resulted in a jury verdict of $10 million against the Company. The Company has filed post trial motions seeking judgment as a matter of law notwithstanding the verdict and in the alternative a new trial or alternatively a remittitur of the jury award. The court has not yet entered judgment. The Company has recorded a litigation judgment expense of $3.3 million in the second quarter of 2011, which represents management’s best estimate of the Company’s uninsured portion of the judgment after consideration of available insurance coverage.

With respect to each of the pending 52 lawsuits, the following table lists the name of plaintiff, the date the Company was served with process, the jurisdiction in which the case is pending, the type of claim and the status of the matter. While the facts vary from case to case, the product liability claims are typically based on an alleged product defect resulting in injury or death, usually involving a failure to warn, and the plaintiffs are seeking monetary damages. This table also lists those cases that were dismissed or judgment entered during the most recent fiscal quarter. Cases that were dismissed or judgment entered in prior fiscal quarters are not included in this table. The claims and in some instances, the defense of each of these lawsuits has been submitted to our insurance carriers that maintained insurance coverage during these applicable periods and we continue to maintain product liability insurance coverage with varying limits and deductibles. Our product liability insurance coverage during these periods ranged from $5,000,000 to $10,000,000 in coverage limits and from $10,000 to $1,000,000 in per incident deductibles. For the 2010 insurance policy year, our product liability insurance coverage was $10 million and, as noted above, in the Turner (NC) case the Company received an adverse $10 million jury verdict. After consideration of remaining available insurance coverage, the Company's uninsured exposure related to this case is approximately $3.3 million. While the Company will explore every possible legal channel to have this verdict overturned, in the event the verdict stands, the Company's insurance coverage for the 2010 policy year will be exhausted and, for any other claims relating to the 2010 policy year, the Company will not have insurance coverage for defense costs or any other adverse judgments, should they arise. We are defending each of these lawsuits vigorously and do not expect these lawsuits to individually and in the aggregate, materially affect our business, results of operations or financial condition.

Plaintiff	Served	Jurisdiction	Claim Type	Status
Glowczenski	Oct-04	US District Court, ED NY	Wrongful Death	Trial rescheduled, date to be determined
Washington	May-05	US District Court, ED CA	Wrongful Death	Discovery Phase
Bagnell	Jul-06	Supreme Court for British Columbia, Canada	Wrongful Death	Dismissed
Hollman	Aug-06	US District Court, ED NY	Wrongful Death	Discovery Phase
Oliver	Sep-06	US District Court, MD FL, Orlando Division	Wrongful Death	Dismissed
Augustine	Jan-07	11th Judicial Circuit Court, Miami-Dade, FL	Wrongful Death	Dismissed
Wendy Wilson, Estate of Ryan Wilson	Aug-07	District Court Boulder County, CO	Wrongful Death	Dismissal Pending
Jack Wilson, Estate of Ryan Wilson (Companion to Wendy Wilson)	Nov-07	District Court Boulder County, CO	Wrongful Death	Dismissal Pending
Salinas	Aug-08	US District Court, ND CA	Wrongful Death	Motion Phase,off trial calendar
Thomas (Pike)	Oct-08	US District Court, WD Louisiana, Alexandria	Wrongful Death	Discovery Phase
Carroll	Mar-09	US District Court, SD TX	Wrongful Death	Dismissed
Shrum	May-09	Allen County District Court, Iola, KS	Wrongful Death	Trial Scheduled February 2012
Athetis	May-09	US District Court, AZ	Wrongful Death	Discovery Phase
Abrahams	Jul-09	CA Superior Court, Yolo County	Wrongful Death	Discovery Phase-trial scheduled September 2012
Humphreys	Oct-09	CA Superior Court, San Joaquin County	Wrongful Death	Discovery Phase
Terriquez	Feb-10	Superior Court of CA, Orange County	Wrongful Death	Discovery Phase, trial scheuduled January 2012
Rich	Feb-10	US District Court, NV	Wrongful Death	Discovery Phase
McKenzie	Feb-10	US Disctrict Court, ED CA	Wrongful Death	Dismissed
Turner	Feb-10	General Court of Justice, Superior Court Div, Mecklenburg County, NC	Wrongful Death	Jury award for $10 million. Post trial motions filed, judgment not filed.
Doan	Apr-10	Queens Bench Alberta, Red Deer Judicial Dist.	Wrongful Death	Pleading Phase
Piskkura	May-10	US District Court, OH	Wrongful Death	Discovery Phase, trial scheuduled March 2012
Corbin	Jun-10	Houston County Court, MD AL	Wrongful Death	Discovery Phase, trial scheuduled October 2011
Swayzer	Jun-10	US District Court, ND CA	Wrongful Death	Dismissed
DuBoise	Aug-10	US District Court, ED MO	Wrongful Death	Discovery Phase, trial scheduled October 2011
Vaugn	Sep-10	US District Court, ND CA	Wrongful Death	Dismissed
Kelly	Oct-10	District Court for Harris County, TX	Wrongful Death	Discovery Phase, trial scheduled October 2011
Jacobs	Oct-10	District Court for Travis County, TX	Wrongful Death	Discovery Phase, trial scheduled October 2012
Woodward	Nov-10	Sumner County TN Court, 18th Judicial District	Wrongful Death	Dismissed
Juran	Dec-10	Hennepin County District Court, 4th Judicial District	Wrongful Death	Discovery Phase
Shymko	Dec-10	The Queens Bench, Winnipeg Centre, Manitoba	Wrongful Death	Pleading Phase
Williams	Dec-10	US District Court, MS	Wrongful Death	Discovery Phase, trial scheduled April 2012
English	May-11	US District Court, WD, VA	Wrongful Death	Discovery Phase, trial scheduled April 2012
Wilson (MO)	May-11	US District Court, ED, MO	Wrongful Death	Pleading Phase
Terrell (TX)	Jun-11	US District Court, SD, TX	Wrongful Death	Pleading Phase
Sylvester (CA)	Jun-11	US District Court, ND, CA	Wrongful Death	Pleading Phase
La Day (TX)	Jun-11	US District Court, ED TX	Wrongful Death	Pleading Phase
Stewart	Oct-05	Circuit Court for Broward County, FL	Training Injury	Discovery Phase
Husband	Mar-06	British Columbia Supreme Court, Canada	Training Injury	Discovery Phase, trial scheduled March 2012
Grable	Aug-08	FL 6th Judicial Circuit Court, Pinellas County	Training Injury	Discovery Phase
Koon	Dec-08	17th Judicial Circuit Court, Broward County, FL	Training Injury	Discovery Phase
Bickle	Mar-09	18th Judicial District Court, Gallatin County, MT	Training Injury	Discovery Phase, trial scheduled December 2011
Foley	Mar-09	US District Court, MA	Training Injury	Dismissed
Peppler	Apr-09	Circuit Court 5th Judicial Dist., Sumter City, FL	Training Injury	Discovery Phase
Kandt	Jun-09	US District Court, ND NY	Training Injury	Discovery Phase
Ginger	Apr-10	Iowa District Court, Marion County	Training Injury	Dismissed
Maynard	Apr-10	Superior Court, Hartford Judicial District, CT	Training Injury	Discovery Phase
Butler	Jan-11	US District Court, ND TX	Training Injury	Discovery Phase, trial scheduled April 2012
Derbyshire	Nov-09	Ontario Superior Court of Justice	Officer Injury	Discovery Phase
Hollenback	Dec-10	St. Louis County Circuit Court MO	Officer Injury	Discovery Phase, trial scheduled January 2012
Strough	Feb-11	US District Court, ED MO	Officer Injury	Discovery Phase, trial scheduled December 2012
Lucas	Jun-09	US District Court, ED CA	Suspect Injury During Arrest	Dismissed
Wheat	Jul-09	CA Superior Court, Los Angeles County	Suspect Injury During Arrest	Discovery Phase, trial scheduled September 2011
Fahy	Dec-09	Circuit Court of City of St. Louis	Suspect Injury During Arrest	Discovery Phase, trial scheduled August 2012
Tylecki	Jan-10	US District Court, DE	Suspect Injury During Arrest	Dismissed
Thompson	Mar-10	11th Judicial Circuit Court Miami-Dade County, FL	Suspect Injury During Arrest	Discovery Phase
Wilson	Apr-10	US District Court, ND IL, ED	Suspect Injury During Arrest	Discovery Phase
Patterson	Jun-10	Circuit Court Pontotoc County, MS	Suspect Injury During Arrest	Discovery Phase, trial scheduled April 2012
Hadnot	Sep-10	US District Court, ED TX	Suspect Injury During Arrest	Dismissed
Streeter	Dec-10	US District Court, OR	Suspect Injury During Arrest	Discovery Phase, trial scheduled April 2012
Valkanet	Mar-11	US District Court, ND IL	Suspect Injury During Arrest	Discovery Phase
Sanders	Mar-11	US District Court, ND IL	Suspect Injury During Arrest	Discovery Phase
Payne	Mar-11	Blount County Circuit Court, TN	Suspect Injury During Arrest	Discovery Phase
Jefferson	Apr-11	US District Court, ED TX	Injury During Incarceration	Discovery Phase
Fountain	May-11	US District Court, MD FL	Suspect Injury During Arrest	Discovery Phase, trial scheduled April 2013
Alusa (UT)	May-11	US District Court, CD UT	Suspect Injury During Arrest	Pleading Phase
Diehl (PA)	Jun-11	Court of Common Pleas, Blair County, PA	Unknown	Pleading Phase

Other Litigation

In October 2007, we filed a lawsuit in Arizona Superior Court for Maricopa County against Steve Ward and Mark Johnson, both former TASER employees and VIEVU LLC, et. al. for breach of duty of loyalty, breach of contract, breach of fiduciary duty, and conversion. This lawsuit does not involve our ECD business and we do not expect this litigation to have a material impact on our financial results. Defendants Ward and VIEVU LLC filed an answer and counterclaim for declaration of non-infringement, tortious interference with contractual relations, tortious interference with business expectancy, and abuse of process. The lawsuit seeks compensatory damages, constructive trust, exemplary damages, injunctive relief attorneys’ fees, costs and disbursements. Cross motions for summary judgment were filed and on March 4, 2009, the Court denied Defendants’ motion for summary judgment on the trade secret claim and on April 9, 2009, the Court granted TASER’s motion for summary judgment against Ward on the breach of fiduciary duty and the breach of duty of loyalty claims. We filed a Motion to Extend Discovery Period by and to reconvene the Deposition of Steve Ward, and Defendants have filed Defendant’s Response in Opposition to this motion. In addition, Defendants Steve Ward and VIEVU LLC have filed a Motion for Reconsideration or in the alternative to make the Court’s Ruling a Final Judgment and Stay Proceeding Pending Outcome of Appeal. The Court denied the Motion for Reconsideration, but granted the motion to make the Court’s Ruling a Final Judgment and Stayed the Proceeding Pending Outcome of Appeal. An appeal has been filed by Defendants Ward and VIEVU LLC to the Arizona State Court of Appeals. The appellate court reversed the Superior Court and remanded the case back to Superior Court for trial. On June 14, 2010 TASER filed a petition for review with the Arizona Supreme Court and Ward filed a cross petition for review on June 29, 2010. The Arizona Supreme Court declined review of either petition and a trial date has been set for August 2011.

In June 2008, we filed an amended complaint in the State Court of Fulton County, Georgia, joining as a plaintiff in an existing lawsuit previously filed by certain current and former stockholders of the Company against Morgan Stanley & Co., Inc., and ten other brokerage firms alleging a conspiracy to unlawfully, deceptively, and fraudulently manipulate the price of the Company’s common stock in the context of illegal naked shorting. Specifically, the amended complaint alleges that the defendants committed conspiracy and endeavored to violate the Georgia Racketeer Influenced and Corrupt Organization Act; Securities Fraud; Theft By Taking; Theft By Deception; Violation of The Georgia Computer Systems Protection Act; Violation of the Georgia Securities Act; Violation of the Georgia Computer Systems Protection Act; and Conversion. The lawsuit seeks compensatory and punitive damages as well as expenses of litigation including attorneys’ fees and costs. Defendants have filed motions to dismiss or alternatively a motion for a more definite statement, and on July 29, 2009, the Court entered an order denying Defendants’ motion to dismiss and alternatively a motion for a more definite statement. Discovery has begun in this litigation and no trial date has been set. Defendants removed the case to United States District Court for the District of Georgia and Plaintiffs have filed a motion to remand the case back to state court. The court has not yet ruled on this motion to remand. However, we have reached a settlement with all of the Defendants and this litigation has been dismissed as of June 30, 2011. Settlement proceeds of approximately $1.3 million are recorded as other income on the statement of operations for the three and six months ended June 30, 2011.

In February 2009, we filed a complaint in the United States District Court for the District of Nevada against James F. McNulty, Jr., Robert Gruder, and Stinger Systems, Inc. alleging securities fraud under 15 U.S.C. § 78j, trade libel, unfair competition under the Lanham Act, 15 U.S.C. § 1125, abuse of process, and deceptive trade practices. Our complaint seeks compensatory damages, punitive damages, injunctive relief, attorneys’ fees and costs. Defendants filed motions to dismiss and on March 25, 2010 the Court denied Defendants’ motion on all claims except the securities fraud claim. Defendant McNulty filed a counterclaim on August 2, 2010 alleging that TASER’s XREP product infringes U.S. Patents 5,831,199 and 6,877,434. The counterclaim seeks declaratory and injunctive relief, compensatory, treble and punitive damages, and attorneys fees. The court issued a ruling in July 2011 dismissing TASER’s claims for civil conspiracy and abuse of process and affirming the magistrate’s order requiring defendants to disclose tax and stock information to TASER and ruling that TASER’s counterclaim for declaratory judgment with respect to the patent claims should not be dismissed. No trial date has been set.

In January 2011 we were served with a complaint in the matter of GEOTAG, Inc. v. TASER International, et. al. that was filed in the United States District Court for the Eastern District of Texas, Marshall Division which alleges that a dealer geographical locator feature on TASER’s website infringes upon plaintiff’s US Patent No. 5,930,474. The complaint seeks a judgment of infringement, a permanent injunction against infringement, an award for damages, costs, expenses and prejudgment and post-judgment interest, and an award for enhanced damages and attorneys’ fees. TASER has licensed this locator feature from a third party and has denied liability for infringement. This lawsuit is at the pleading phase and no trial date has been set.

In July 2011 we were served with a complaint in the matter of Integrity Staffing Professionals v. TASER International, Inc., et.al. that was filed in the Superior Court for the County of Ventura, California which alleges that the Company owes Integrity Staffing Professionals a fee for hiring 2 consultants. The complaint alleges breach of contract, breach of implied covenants, intentional and negligent interference with contractual relationships, civil conspiracy and unfair business practices. The complaint seeks compensatory, general, punitive damages, interest, attorneys’ fees and costs. This lawsuit is at the pleading phase and no trial date has been set.

General

From time to time, the Company is notified that it may be a party to a lawsuit or that a claim is being made against it. It is the Company’s policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on the Company. After carefully assessing the claim, and assuming we determine that we are not at fault, we vigorously defend and pursue any lawsuit filed against or by the Company. Although we do not expect the outcome in any pending individual case to be material, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts provided by insurance coverage and will not have a material adverse effect on our business, operating results or financial condition. In addition, the Company has one lawsuit where the costs of legal defense incurred are in excess of its liability insurance deductibles. As of June 30, 2011, the Company has been fully reimbursed by its insurance company for these legal costs. The Company may settle a lawsuit in situations where a settlement can be obtained for nuisance value and for an amount that is expected to be less than the cost of defending a lawsuit. The number of product liability lawsuits dismissed includes a small number of police officer training injury lawsuits that were settled by the Company and dismissed in cases where the settlement economics to the Company were significantly less than the cost of litigation. In addition, it is the Company’s policy to not settle suspect injury or death cases, although the Company’s insurance company may settle such lawsuits over the Company’s objection where the case is over the Company’s liability insurance deductibles. Due to the confidentiality of our litigation strategy and the confidentiality agreements that are executed in the event of a settlement, the Company does not identify or comment on which specific lawsuits have been settled or the amount of any settlement.

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Related Party Transactions

6 Months Ended

Jun. 30, 2011

Related Party Transactions [Abstract]

Related Party Transactions

10. Related Party Transactions

Aircraft charter

The Company reimburses Thomas P. Smith, Chairman of the Company’s Board of Directors for business use of his personal aircraft. For the three and six months ended June 30, 2011, the Company incurred expenses of approximately $24,000 and $78,000, respectively, to Thomas P. Smith. For the three and six months ended June 30, 2010, the Company incurred expenses of approximately $67,000 and $146,000, respectively, to Thomas P. Smith. At June 30, 2011, there was approximately $18,000 of outstanding payables due to Thomas P. Smith. At December 31, 2010, the Company had no outstanding payables due to Thomas P. Smith. Management believes that the rates charged by Thomas P. Smith are equal to or below commercial rates the Company would pay to charter similar aircraft from independent charter companies.

TASER Foundation

In November 2004, the Company established the TASER Foundation. The TASER Foundation is a 501(c)(3) non-profit corporation and has been granted tax exempt status by the Internal Revenue Service. The TASER Foundation’s mission is to honor the service and sacrifice of local and federal law enforcement officers in the United States and Canada lost in the line of duty by providing financial support to their families. Over half of the initial $1 million endowment was contributed directly by TASER International, Inc. employees. The Company bears all administrative costs of the TASER Foundation in order to ensure 100% of all donations are distributed to the families of fallen officers. For the three and six months ended June 30, 2011, the Company incurred approximately $2,300 and $3,900, respectively, in such administrative costs. For the three and six months ended June 30, 2010, the Company incurred approximately $30,000 and $76,000, respectively, in such administrative costs. The Company is authorized by its Board of Directors to make a discretionary contribution up to a maximum of $200,000 per quarter. For the three and six months ended June 30, 2011 and 2010, the Company did not make a discretionary contribution to the TASER Foundation.

Consulting services

The Company engages Mark Kroll, a member of the Board of Directors, to provide consulting services. The expenses relating to these services for the three and six months ended June 30, 2011, were approximately $63,000 and $116,000, respectively. The expenses relating to these services for the three and six months ended June 30, 2010, were approximately $26,000 and $56,000, respectively. At June 30, 2011 and December 31, 2010, the Company had accrued liabilities of approximately $9,000 and $20,000, respectively, for these services.

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Line of credit

6 Months Ended

Jun. 30, 2011

Line of credit [Abstract]

Line of credit

8. Line of credit

The Company has a line of credit agreement with a total availability of $10.0 million. The line is secured by the Company’s accounts receivable and inventory and bears interest at varying rates of interest, currently LIBOR plus 1.25%. The line of credit which was amended and renewed in June 2011, primarily to remove the borrowing base restriction, matures on June 30, 2013 and requires monthly payments of interest only. At June 30, 2011, there was no amount outstanding under the line of credit. There have been no borrowings under the line of credit to date. The Company’s agreement with the bank requires compliance with certain financial and other covenants including maintenance of minimum tangible net worth and a fixed charge coverage ratio. The ratio of total liabilities to tangible net worth can be no greater than 1:1, and the fixed coverage charge ratio can be no less than 1.25:1, based upon a trailing twelve-month period. At June 30, 2011, the Company’s tangible net worth ratio was 0.21:1 and its fixed charge coverage ratio was 2.65:1. Accordingly, the Company was in compliance with those covenants.

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The Company and Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2011

The Company and Summary of Significant Accounting Policies [Abstract]

The Company and Summary of Significant Accounting Policies

1. The Company and Summary of Significant Accounting Policies

TASER International, Inc. (“TASER” or the “Company”) is a developer and manufacturer of advanced electronic control devices (“ECDs”) designed for use in law enforcement, military, corrections, private security and personal defense. In addition, the Company has developed full technology solutions for the capture, storage and management of video/audio evidence as well as other tactical capabilities for use in law enforcement. The Company sells its products worldwide through its direct sales force, distribution partners, online store and third party resellers. The Company was incorporated in Arizona in September 1993 and reincorporated in Delaware in January 2001. The Company’s corporate headquarters and manufacturing facilities are located in Scottsdale, Arizona. The Company’s internet services and software development division facilities are located in Carpenteria, California.

The accompanying consolidated financial statements include the accounts of the Company, and its wholly owned subsidiary, TASER International Europe SE (“TASER Europe”). TASER Europe was established in 2010 to facilitate sales and provide customer service to our customers in the European region. All material intercompany accounts, transactions, and profits have been eliminated.

a. Basis of presentation, preparation and use of estimates

The accompanying unaudited consolidated financial statements of TASER include all adjustments (consisting only of normal recurring accruals) that in the opinion of management are necessary for the fair presentation of the Company’s operating results, financial position and cash flows as of June 30, 2011, and for the three and six months ended June 30, 2011 and 2010. The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been omitted from these unaudited consolidated financial statements in accordance with applicable rules. The results of operations for the three and six months ended June 30, 2011 and 2010, are not necessarily indicative of the results to be expected for the full year (or any other period) and all results of operations included herein should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

b. Segment information and major customers

Management has determined that its operations presently are comprised of one reportable segment, the sale of ECDs, accessories and other products and services. Based on the introduction of new product offerings in 2010, management will evaluate how the operating results of the Company will be reviewed internally on a go forward basis in order to improve the level of resource decision making and assessment of segment performance. Based on this evaluation, management will make the necessary changes to its internal management reporting system and subsequently, will perform a review to determine if the Company will redefine its reportable operating segments in accordance with U.S. GAAP. For the three and six months ended June 30, 2011 and 2010, sales by geographic area were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
United States		77	%		84	%		77	%		79	%
Other Countries		23	%		16	%		23	%		21	%
Total		100	%		100	%		100	%		100	%

Sales to customers outside of the United States are typically denominated in U.S. dollars and are attributed to each country based on the billing address of the distributor or customer. For the three months ended June 30, 2011, sales to Australia represented approximately 10% of net sales. For the three months ended June 30, 2010, no individual country outside of the U.S. represented a material amount of total net sales. For the six months ended June 30, 2011 and 2010, no individual country outside of the U.S. represented a material amount of total net sales.

In the three months ended June 30, 2011, two distributors represented approximately 15% and 11% of total net sales. In the three months ended June 30, 2010, one distributor represented approximately 10% of total net sales. In the six months ended June 30, 2011, one distributor represented approximately 12% of total net sales. In the six months ended June 30, 2010, one distributor represented approximately 10% of total net sales. At June 30, 2011, the Company had receivables from two distributors comprising 19% and 14% of its aggregate accounts receivable balance. At December 31, 2010, the Company had receivables from three customers comprising 19%, 11% and 10% of its aggregate accounts receivable balance. These customers are unaffiliated distributors of the Company’s products.

c. Loss per common share

Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the periods presented. Diluted loss per share reflects the potential dilution that could occur if such options were exercised using the treasury stock method. The calculation of the weighted average number of shares outstanding and loss per share are as follows:

	For the Three Months Ended June 30						For the Six Months Ended June 30,
	2011			2010			2011			2010
Numerator for basic and diluted loss per share
Net loss	$	(2,294,832	)	$	(1,359,389	)	$	(2,275,100	)	$	(1,851,994	)
Denominator for basic loss per share - weighted average shares outstanding		60,605,140			62,333,929			61,515,979			62,450,722
Dilutive effect of shares issuable under stock options outstanding		—			—			—			—
Denominator for diluted loss per share - adjusted weighted average shares outstanding		60,605,140			62,333,929			61,515,979			62,450,722
Net loss per common share
Basic	$	(0.04	)	$	(0.02	)	$	(0.04	)	$	(0.03	)
Diluted	$	(0.04	)	$	(0.02	)	$	(0.04	)	$	(0.03	)

As a result of the net loss per share for the three months and six months ended June 30, 2011, the effects of 7,031,017 and 7,015,738 stock options, respectively, were excluded from the calculation as their effect would have been to reduce net loss per share. As a result of the net loss for the three and six months ended June 30, 2010, the effects of 6,335,522 and 4,753,281 stock options, respectively, were excluded from the calculation as their effect would have been to reduce the net loss per share.

d. Warranty costs

The Company warrants its X2 ECDs, X3 ECDs, X26 ECDs, M26 ECDs, XREP, TASER CAM, Shockwave, AXON Tactical Computer, Com Hub user interface, Synapse Evidence Transfer Manager (ETM), and HeadCam products from manufacturing defects on a limited basis for a period of one year after purchase, and thereafter will replace any defective unit for a fee. The TASER C2 product is warranted for a period of 90 days after purchase. The Company also sells extended warranties for periods of up to four years after the expiration of the limited one year warranty. After the one year standard warranty expires, if the device fails to operate properly for any reason, the Company will replace the TASER X26 for a prorated discounted price depending on when the product was placed into service. These fees are intended to cover the handling and repair costs and include a profit. Management tracks historical data related to returns and warranty costs on a quarterly basis, and estimates future warranty claims by applying the estimated weighted average return rate to the product sales for the period. If management becomes aware of a component failure that could result in larger than anticipated returns from its customers, the reserve would be increased. The reserve for warranty returns is included in accrued liabilities on the consolidated balance sheet. The following table summarizes the changes in the estimated product warranty liabilities for the six months ended June 30, 2011 and 2010.

	2011			2010
Balance at January 1,	$	646,113		$	369,311
Utilization of accrual		(395,911	)		(264,291	)
Warranty expense		79,886			321,137
Balance at June 30,	$	330,088		$	426,157

e. Capitalized software development costs

For development costs related to EVIDENCE.com, the Company’s Software as a Service (SaaS) product, the Company capitalizes qualifying computer software costs that are incurred during the application development stage. Costs related to preliminary project planning activities and post-implementation activities are expensed as incurred. For the three and six months ended June 30, 2011, the Company did not capitalize any such costs. For the three and six months ended June 30, 2010, the Company capitalized $528,000 and $1,320,000, respectively, of qualifying software development costs.

f. Fair value of financial instruments

The Company uses the fair value framework for measuring financial assets and liabilities measured on a recurring basis and for non-financial assets and liabilities when these items are remeasured. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The Company categorizes each of its fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

• Level 1 — Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.

• Level 2 — Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.

• Level 3 — Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company has cash equivalents which at June 30, 2011 and December 31, 2010 are comprised of money market mutual funds, valued using Level 1 valuation techniques. At June 30, 2011, the Company held some short term investments consisting of commercial paper. Based on management’s ability and intent to hold these investments to maturity, they are recorded at amortized cost on the balance sheet. Refer to note 2 for additional fair value disclosures for these short term investments. The Company’s financial instruments also include accounts receivable, accounts payable and accrued liabilities. Due to the short-term nature of these instruments, their fair value approximates their carrying value on the balance sheet.

g. Valuation of Long-lived Assets

We review long-lived assets, such as property and equipment and intangible assets subject to and not subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We utilize a two-step approach to testing long-lived assets for impairment. The first step tests for possible impairment indicators. If an impairment indicator is present, the second step measures whether the asset is recoverable based on a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Our review requires the use of judgment and estimates.

In the three and six months ended June 30, 2011, the Company recognized $1,350,504 in impairment charges associated with its Protector product line following the Company’s decision to abandon ongoing operations relating to this line. No impairment charges were recorded in 2010.

In the three and six months ended June 30, 2011, the Company incurred a loss on write down/disposal of property and equipment of $747,000 and $757,000, respectively following a decision to dispose of surplus equipment for Evidence.com options. Loss on write down/disposal of equipment for the three and six months ended June 30, 2010 was $23,000 and $34,000, respectively.

h. Recently adopted accounting guidance

In October 2009, the FASB issued authoritative guidance on revenue recognition that became effective for the Company beginning January 1, 2011. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued authoritative guidance on business combinations concerning the disclosure of supplementary pro forma information which will be effective for the Company prospectively for business combinations for which the acquisition date is on or after January 1, 2011. The new guidance clarifies the acquisition date that should be used for reporting the pro forma financial information disclosures when comparative financial statements are presented. The amendments are also designed to improve the usefulness of the pro forma revenue and earnings disclosures by requiring a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination. Management does not expect adoption of this new guidance to have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued guidance to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. The guidance became effective for the Company effective January 1, 2011 and its adoption did not have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued guidance to require presentation of the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This guidance will be effective for the Company on January 1, 2012, and management does not believe its adoption will have a material impact on the Company’s consolidated financial statements.

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Intangible assets

6 Months Ended

Jun. 30, 2011

Intangible assets [Abstract]

Intangible assets

4. Intangible assets

Intangible assets consisted of the following at June 30, 2011 and December 31, 2010:

		June 30, 2011						December 31, 2010
		Gross				Net		Gross				Net
		Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Useful Life	Amount		Amortization		Amount		Amount		Amortization		Amount
Amortized intangible assets:
Domain names	5 Years	$	168,428	$	88,894	$	79,534	$	237,911	$	66,006	$	171,905
Issued patents	4 to 15 Years		1,370,969		299,476		1,071,493		1,040,148		264,716		775,432
Issued trademarks	9 to 11 Years		235,600		50,056		185,544		207,721		37,659		170,062
Non compete agreements	5 to 7 Years		150,000		140,000		10,000		150,000		130,000		20,000
			1,924,997		578,426		1,346,571		1,635,780		498,381		1,137,399
Unamortized intangible assets:
TASER Trademark			900,000				900,000		900,000				900,000
Patents and trademarks pending			899,340				899,340		1,053,477				1,053,477
			1,799,340				1,799,340		1,953,477				1,953,477
		$	3,724,337	$	578,426	$	3,145,911	$	3,589,257	$	498,381	$	3,090,876

Amortization expense for the three and six months ended June 30, 2011, was approximately $41,000 and $80,000, respectively. Amortization expense for the three and six months ended June 30, 2010, was approximately $24,000 and $48,000, respectively. Estimated amortization expense of intangible assets for the remaining six months of 2011, the next five years ended December 31, and thereafter is as follows:

2011 (remainder of year)	$	74,546
2012		129,093
2013		129,096
2014		128,179
2015		119,427
2016		106,556
Thereafter		659,674
	$	1,346,571

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Accrued liabilities

6 Months Ended

Jun. 30, 2011

Accrued liabilities [Abstract]

Accrued liabilities

5. Accrued liabilities

Accrued liabilities consisted of the following at June 30, 2011 and December 31, 2010:

	June 30, 2011		December 31, 2010
Accrued salaries and benefits	$	1,620,218	$	1,411,716
Accrued litigation judgment expense		3,300,000		—
Accrued expenses		1,352,998		1,668,477
Accrued warranty expense		330,088		646,113
Accrued income tax		—		33,494
	$	6,603,304	$	3,759,800

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Income taxes

6 Months Ended

Jun. 30, 2011

Income taxes [Abstract]

Income taxes

6. Income taxes

Deferred Tax Assets

The net deferred income tax assets at June 30, 2011, include net operating loss and alternative minimum tax carryforwards, capitalized research and development costs, research and development tax credits, non-qualified stock-based compensation expense, deferred warranty revenue, warranty and inventory reserves and accrued vacation, partially offset by accelerated depreciation expense. The Company’s total current and long term deferred tax assets balance at June 30, 2011, is $21.9 million.

In preparing the Company’s consolidated financial statements, management assesses the likelihood that its deferred tax assets will be realized from future taxable income. In evaluating the Company’s ability to recover its deferred income tax assets, management considers all available positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Management exercises significant judgment in determining its provisions for income taxes, its deferred tax assets and liabilities, and its future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred tax assets. Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgment that could become subject to audit by tax authorities in the ordinary course of business, as well as the generation of sufficient future taxable income. Management believes that, as of June 30, 2011, based on an evaluation and projections of future sales and profitability for fiscal 2011, no valuation allowance is necessary. However, such deferred tax assets could be reduced in the future if projections of future taxable income during the carryforward period are reduced.

The Company has completed research and development tax credit studies which identified approximately $5.9 million in tax credits for Federal, Arizona and California income tax purposes related to the 2003 through 2010 tax years, net of the federal benefit on the Arizona and California research and development tax credits. Management has made the determination that it is more likely than not that the full benefit of the research and development tax credit will not be sustained on examination and accordingly has established a cumulative liability for unrecognized tax benefits of $2.2 million as of June 30, 2011. In addition, management accrued approximately $106,000 for estimated uncertain tax positions related to certain state income tax liabilities. As of June 30, 2011, management does not expect the amount of the unrecognized tax benefit liability to increase or decrease significantly within the next 12 months. Should the unrecognized tax benefits of $2.3 million be recognized, the Company’s effective tax rate would be favorably impacted.

The following presents a rollforward of our liability for unrecognized tax benefits as of June 30, 2011:

	Unrecognized
	Tax Benefits
Balance at January 1, 2011	$	2,281,840
Decrease in prior year tax positions		—
Increase in current year tax positions		(1,989	)
Decrease related to adjustment of previous estimates of activity		—
Decrease related to settlements with taxing authorities		—
Decrease related to lapse in statute of limitations		—
Balance at June 30, 2011	$	2,279,851

Effective Tax Rate

Our estimated full year effective tax rate, before discrete period adjustments, is approximately 48%, which is above the statutory rate due to the impact of non-deductible expenses for items such as Incentive Stock Option (“ISO”) expense, meals and entertainment and lobbying fees, which make our projected annual net income for tax purposes significantly higher than our book pre-tax income. The overall effective tax rate of 38.9% and 37.1% for the three and six months ended June 30, 2011, was below our estimated annual effective tax rate due to treating the litigation judgment expense, asset impairment expense and the lawsuit settlement proceeds as discrete items due to their significant and unusual nature and therefore taxeffecting them at the statutory rate.

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Consolidated Statements of Cash flows (Unaudited) (USD $)	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Cash Flows from Operating Activities:
Net loss	$ (2,275,100)	$ (1,851,994)
Adjustments to reconcile net loss to net cash (used) provided by operating activities:
Loss on impairment	1,350,504
Depreciation and amortization	4,117,580	3,128,328
Loss on write down / disposal of property and equipment, net	757,038	34,442
Provision for doubtful accounts	14,580	2,764
Provision / write-off of excess and obsolete inventory	328,870	806,350
Provision for warranty	79,886	321,137
Stock-based compensation expense	1,839,924	1,926,220
Litigation judgment accrual	3,301,243
Deferred income taxes	(1,744,706)	(1,427,397)
Provision for unrecognized tax benefits	(1,989)	(65,159)
Change in assets and liabilities:
Accounts receivable	3,546,984	4,383,916
Inventory	1,044,680	(4,797,031)
Prepaids and other assets	(1,592,862)	(2,705,926)
Accounts payable and accrued liabilities	(599,996)	(2,159,154)
Deferred revenue	(915,816)	119,355
Customer deposits	(95,728)	(105,793)
Net cash provided (used) by operating activities	9,155,092	(2,389,942)
Cash Flows from Investing Activities:
Purchases of investments	(10,775,112)
Purchases of property and equipment	(659,872)	(3,193,856)
Purchases of intangible assets	(213,276)	(180,053)
Net cash used by investing activities	(11,648,260)	(3,373,909)
Cash Flows from Financing Activities:
Repurchase of common stock	(12,499,816)
Proceeds from stock options exercised	3,923	961,037
Net cash (used) provided by financing activities	(12,495,893)	961,037
Effect of exchange rate change on cash and cash equivalents	24,225	(102,981)
Net decrease in cash and cash equivalents	(14,989,061)	(4,802,814)
Cash and cash equivalents, beginning of period	42,684,241	45,505,049
Cash and cash equivalents, end of period	27,719,405	40,599,254
Supplemental Disclosure:
Cash paid for income taxes	36,000	528,532
Non-Cash Transactions:
Property and equipment purchases in accounts payable	$ 507,260	$ 39,134

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Cash, cash equivalents, and investments

6 Months Ended

Jun. 30, 2011

Cash, cash equivalents, and investments [Abstract]

Cash, cash equivalents, and investments

2. Cash, cash equivalents, and investments

Cash and cash equivalents include funds on hand and short-term investments with original maturities of three months or less. Short-term investments include securities generally having maturities of 90 days to one year. The Company’s short-term investments are invested in commercial paper, which, based on management’s intent and ability, are classified as held to maturity investments, recorded at amortized cost.

The following is a summary of cash, cash equivalents and held-to-maturity investments by type at June 30, 2011 and December 31, 2010:

	June 30, 2011								December 31, 2010
			Gross		Gross						Gross		Gross
			Unrealized		Unrealized						Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
Cash and money market funds	$	27,719,405	$	—	$	—	$	27,719,405	$	42,684,241	$	—	$	—	$	42,684,241
Commercial paper		10,675,112		84		15,251		10,659,945		—		—		—		—
Certificate of Deposit		100,000		—		319		99,681		—		—		—		—
Total cash, cash equivalents and investments	$	38,494,517	$	84	$	15,570	$	38,479,031	$	42,684,241	$	—	$	—	$	42,684,241

The following table summarizes the classification of cash, cash equivalents and investments in the accompanying balance sheet:

	June 30,		December 31,
	2011		2010
Cash	$	8,231,945	$	12,282,389
Cash equivalents		19,487,460		30,401,852
Total cash and cash equivalents		27,719,405		42,684,241
Short term investments		10,775,112		—
Long term investments		—		—
	$	38,494,517	$	42,684,241

The commercial paper investments, identified above as short-term investments at June 30, 2011, have contractual maturities of less than one year. At June 30, 2011, held-to-maturity short-term investments have gross unrealized losses of $15,570, which have been in a continuous unrealized loss position for less than 12 months. The unrealized losses on the Company’s investments in commercial paper are due to interest rate fluctuations. As these investments were originally purchased at a premium, are short-term in nature, are expected to be redeemed at par value and because the Company has the ability and intent to hold these investments to maturity, the Company does not consider these investments to be other than temporarily impaired at June 30, 2011.

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Employee Benefit Plan

6 Months Ended

Jun. 30, 2011

Employee Benefit Plan [Abstract]

Employee Benefit Plan

11. Employee Benefit Plan

The Company has a defined contribution profit sharing 401(k) plan (the “Plan”) for eligible employees, which is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Employees are entitled to make tax-deferred contributions of up to the maximum allowed by law of their eligible compensation, but not exceeding $16,500. The Company currently matches 100% of the first 3% of eligible compensation contributed to the Plan by each participant and 50% of the next 2% of eligible compensation contributed to the plan by each participant. Beginning January 1, 2008, the Company’s matching contributions are immediately vested. The Company’s matching contributions to the Plan for the three and six months ended June 30, 2011, were approximately $130,000 and $255,000, respectively. The Company’s matching contributions to the Plan for the three and six months ended June 30, 2010, were approximately $129,000 and $266,000, respectively. Future matching or profit sharing contributions to the Plan are at the Company’s sole discretion.

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Consolidated Balance Sheets (Unaudited) (USD $)	Jun. 30, 2011	Dec. 31, 2010
Current Assets:
Cash and cash equivalents	$ 27,719,405	$ 42,684,241
Short term investments	10,775,112	0
Accounts receivable, net of allowance of $200,000 at June 30, 2011 and December 31, 2010, respectively	9,978,838	13,542,535
Inventory	16,049,209	17,815,405
Prepaid expenses and other current assets	3,449,974	1,999,525
Deferred income tax assets, net	8,129,195	6,284,489
Total current assets	76,101,733	82,326,195
Property and equipment, net	31,768,928	35,905,765
Deferred income tax assets, net	13,819,753	13,919,753
Intangible assets, net	3,145,911	3,090,876
Other long-term assets	716,493	944,346
Total assets	125,552,818	136,186,935
Current Liabilities:
Accounts payable	4,995,678	4,550,789
Accrued liabilities	6,603,304	3,759,800
Current portion of deferred revenue	3,023,251	3,265,260
Customer deposits	276,417	372,145
Total current liabilities	14,898,650	11,947,994
Deferred revenue, net of current portion	3,719,053	4,392,860
Liability for unrecorded tax benefits	2,279,851	2,281,840
Total liabilities	20,897,554	18,622,694
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $0.00001 par value per share; 25 million shares authorized; no shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively	0	0
Common stock, $0.00001 par value per share; 200 million shares authorized; 59,704,086 and 62,621,268 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively	647	647
Additional paid-in capital	98,965,932	97,122,085
Treasury stock, 5,013,450 and 2,091,600 shares at June 30, 2011 and December 31, 2010, respectively	(27,208,053)	(14,708,237)
Retained earnings	32,910,091	35,185,191
Accumulated other comprehensive loss	(13,353)	(35,445)
Total stockholders' equity	104,655,264	117,564,241
Total liabilities and stockholders' equity	$ 125,552,818	$ 136,186,935