AXON ENTERPRISE, INC. - Quarter Report: 2008 June (Form 10-Q)

 

 

United States Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2008

or

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

For the transition period from          to

TASER INTERNATIONAL, INC.

(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)

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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

There were 61,711,712 shares of the issuer’s common stock, par value $0.00001 per share, outstanding as of August 6, 2008.

 

 

TASER INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 2008
TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance sheets as of June 30, 2008 and December 31, 2007			3
Statements of operations for the three and six months ended June 30, 2008 and 2007			4
Statements of cash flows for the six months ended June 30, 2008 and 2007			5
Notes to financial statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			28
Item 4. Controls and Procedures			28
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			29
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 4. Submission of Matters to a Vote of Security Holders			35
Item 6. Exhibits			35
SIGNATURES			36
INDEX TO EXHIBITS			37
EX-31.1
EX-31.2
EX-32

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BALANCE SHEETS
(UNAUDITED)

		June 30, 2008				December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents		$	33,026,135			$	42,801,461
Short-term investments			—				8,499,978
Accounts receivable, net of allowance of $200,000 and $190,000 at June 30, 2008 and December 31, 2007, respectively			10,750,184				11,691,553
Inventory			20,554,202				13,506,804
Prepaids and other assets			1,479,015				4,318,661
Deferred income tax assets, net			7,474,738				15,608,325
Total current assets			73,284,274				96,426,782
Long-term investments			10,503,668				9,006,493
Property and equipment, net			26,238,383				23,599,680
Deferred income tax assets, net			13,711,148				6,724,104
Intangible assets, net			2,112,752				1,925,139
Other long-term assets			62,135				81,203
Total assets		$	125,912,360			$	137,763,401
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	7,094,830			$	10,088,139
Litigation judgment accrual			5,200,000				—
Current deferred revenue			2,014,217				1,694,644
Customer deposits			259,353				266,728
Current portion of capital lease obligations			—				19,257
Deferred insurance settlement proceeds			—				404,848
Total current liabilities			14,568,400				12,473,616
Capital lease obligations, net of current portion			—				11,695
Deferred revenue, net of current portion			3,821,466				3,541,267
Liability for unrecorded tax benefits			1,208,811				1,100,073
Total liabilities			19,598,677				17,126,651
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, 2008 and December 31, 2007			—				—
Common stock, $0.00001 par value per share; 200 million shares authorized; 61,710,478 and 63,263,903 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively			638				635
Additional paid-in capital			85,886,740				86,911,381
Treasury stock, 2,091,600 and 300,000 shares at June 30, 2008 and December 31, 2007, respectively			(14,708,237	)			(2,208,957	)
Retained earnings			35,134,542				35,933,691
Total stockholders’ equity			106,313,683				120,636,750
Total liabilities and stockholders’ equity		$	125,912,360			$	137,763,401

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

STATEMENTS OF OPERATIONS
(UNAUDITED)

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2008				2007				2008				2007
Net Sales		$	21,101,309			$	25,863,376			$	43,587,813			$	41,165,191
Cost of products sold:
Direct manufacturing expense			6,019,957				7,338,890				13,591,454				11,947,459
Indirect manufacturing expense			1,476,329				2,993,227				3,628,767				4,797,444
Total cost of products sold			7,496,286				10,332,117				17,220,221				16,744,903
Gross margin			13,605,023				15,531,259				26,367,592				24,420,288
Sales, general and administrative expenses			9,710,804				8,344,927				18,870,644				15,926,835
Research and development expenses			3,019,886				1,262,849				5,131,534				2,233,635
Legal judgment expense			5,200,000				—				5,200,000				—
Income (loss) from operations			(4,325,667	)			5,923,483				(2,834,586	)			6,259,818
Interest and other income, net			721,366				427,033				1,222,730				933,402
Income (loss) before provision (benefit) for income taxes			(3,604,301	)			6,350,516				(1,611,856	)			7,193,220
Provision (benefit) for income taxes			(1,588,565	)			2,651,308				(812,707	)			2,999,458
Net income (loss)		$	(2,015,736	)		$	3,699,208			$	(799,149	)		$	4,193,762
Income (loss) per common and common equivalent shares		$	(0.03	)		$	0.06			$	(0.01	)		$	0.07
Basic
Diluted		$	(0.03	)			0.06				(0.01	)		$	0.06
Weighted average number of common and common equivalent shares outstanding
Basic			62,642,618				62,374,946				62,983,446				62,192,193
Diluted			62,642,618				65,214,726				62,983,446				64,928,190

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

STATEMENTS OF CASH FLOWS
(UNAUDITED)

		For the Six Months Ended June 30,
		2008				2007
Cash Flows from Operating Activities:
Net income (loss)		$	(799,149	)		$	4,193,762
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Depreciation and amortization			1,298,750				1,171,102
Loss on disposal of fixed assets			61,790				4,930
Provision for excess and obsolete inventory			49,418				56,690
Provision for warranty			515,651				548,229
Stock-based compensation expense			730,857				591,307
Deferred insurance settlement proceeds recognized			(404,848	)			(953	)
Provision (benefit) for deferred income taxes			(759,674	)			3,110,916
Litigation judgment expense			5,200,000				—
Change in assets and liabilities:
Accounts receivable			941,369				(4,828,753	)
Inventory			(7,096,816	)			(746,021	)
Prepaids and other assets			2,858,714				278,374
Accounts payable and accrued liabilities			(3,508,960	)			(577,720	)
Deferred revenue			599,772				918,335
Customer deposits			(7,375	)			361,927
Accrued litigation settlement			—				(8,000,000	)
Net cash used for operating activities			(320,501	)			(2,917,875	)
Cash Flows from Investing Activities:
Purchases of investments			(38,901,411	)			(64,647,257	)
Proceeds from maturity of investments			45,904,214				69,713,027
Purchases of property and equipment			(3,950,353	)			(1,592,988	)
Purchases of intangible assets			(267,455	)			(231,658	)
Net cash provided by investing activities			2,784,995				3,241,124
Cash Flows from Financing Activities:
Repurchase of common stock			(12,499,280	)			—
Payments under capital leases			—				(22,332	)
Proceeds from options exercised			259,460				1,458,594
Net cash provided (used) by financing activities			(12,239,820	)			1,436,262
Net increase (decrease) in Cash and Cash Equivalents			(9,775,326	)			1,759,511
Cash and Cash Equivalents, beginning of period			42,801,461				18,773,685
Cash and Cash Equivalents, end of period		$	33,026,135			$	20,533,196
Supplemental Disclosure:
Cash paid for interest		$	—			$	2,865
Cash paid for income taxes		$	484,200			$	281,000
Non Cash Transactions:
Deferred tax asset correction		$	2,014,955			$	—
Shareholder derivative lawsuit settlement		$	—			$	1,750,000

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

NOTES TO FINANCIAL STATEMENTS (unaudited)

1. Organization and Summary of Significant Accounting Policies

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

a. Basis of presentation

     The accompanying unaudited financial statements of TASER International, Inc. include all adjustments (consisting only of normal recurring accruals) which management considers necessary for the fair presentation of the Company’s operating results, financial position and cash flows as of June 30, 2008 and for the periods ended June 30, 2008 and 2007. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from these unaudited financial statements in accordance with applicable rules.

     The results of operations for the three and six month period ended June 30, 2008 are not necessarily indicative of the results to be expected for the full year (or any other period) and 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, 2007.

b. Segment information and major customers

     Management has determined that its operations are comprised of one reportable segment. For the three and six months ended June 30, 2008 and 2007, sales by geographic area were as follows:

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2007				2006
United States			88	%			79	%			87	%			82	%
Other Countries			12	%			21	%			13	%			18	%
Total			100	%			100	%			100	%			100	%

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

     There were no customers exceeding 10% of total net sales in the second quarter of 2008. In the second quarter of 2007 there were two distributors each comprising approximately 12% of total net sales. In the six months ended June 30, 2008 and 2007 one distributor represented approximately 13% and 11%, respectively, of total net sales. At June 30, 2008, the Company had receivables from one customer comprising 11% of the aggregate accounts receivable balance. At December 31, 2007, the Company had receivables from two customers comprising 20% and 10% of the aggregate accounts receivable balance.

c. Stock-Based compensation

     The Company applies the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), “Share Based Payment” (“SFAS No. 123(R)”) using the modified prospective transition method. Under that transition method, compensation cost recognized in the three and six months ended June 30, 2008 and 2007 includes: (a) compensation cost for all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).

     Total stock-based compensation expense recognized in the income statement for the three and six months ended June 30, 2008 was $410,000 and $731,000 before income taxes, respectively, $295,000 and $564,000 of which was related to Incentive Stock Options (“ISOs”) for which no tax benefit is recognized. Total stock-based compensation expense recognized in the income statement for the three and six months ended June 30, 2007 was $329,000 and $591,000 before income taxes, respectively, $256,000 and $480,000 of which was related to ISOs for which no tax benefit is recognized. During the three and six months ended June 30, 2008 and 2007, the Company did not tax effect the stock based compensation expense for tax purposes related to the exercise of stock options as a result of SFAS No. 123(R). The tax benefit will be recorded when the Company realizes the benefit in cash or 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, 2008 was approximately $45,000 and $66,000, respectively. The total unrecognized tax benefit related to the non-qualified disposition of stock options in the three and six months ended June 30, 2007 was approximately $106,000 and $221,000 respectively.

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

     SFAS No. 123(R) requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use 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, 2008 and 2007 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,
		2008				2007				2008				2007
Expected life of options		4.0 years				4.0 years				4.0 years				4.0 years
Weighted average volatility			69.8	%			58.5	%			69.9	%			58.6	%
Weighted average risk-free interest rate			3.1	%			4.8	%			3.1	%			4.7	%
Dividend rate			0.0	%			0.0	%			0.0	%			0.0	%
Weighted average fair value of options granted		$	3.84			$	5.06			$	4.04			$	4.98

     The expected life of the 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 future 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 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. As stock-based compensation expense is recognized on awards ultimately expected to vest, it should be reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company forfeiture rate was calculated based on its historical experience of awards which ultimately vested.

d. Income (loss) per common share

     The Company accounts for income (loss) per share in accordance with SFAS No. 128, “Earnings per Share.” Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. Diluted income per share reflects the potential dilution that could occur if outstanding stock options were exercised. The calculation of the weighted average number of shares outstanding and earnings per share are as follows:

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2008				2007				2008				2007
Numerator for basic and diluted earnings per share
Net income (loss)		$	(2,015,736	)		$	3,699,208			$	(799,149	)		$	4,193,762
Denominator for basic earnings per share — weighted average shares outstanding			62,642,618				62,374,946				62,983,446				62,192,193
Dilutive effect of shares issuable under stock options outstanding			—				2,839,780				—				2,735,997
Denominator for diluted earnings per share — adjusted weighted average shares			62,642,618				65,214,726				62,983,446				64,928,190
Net income (loss) per common share
Net income (loss) per common share
Basic		$	(0.03	)		$	0.06			$	(0.01	)		$	0.07
Diluted		$	(0.03	)		$	0.06			$	(0.01	)		$	0.06

     Basic net income per share is based upon the weighted average number of common shares outstanding during the period. Diluted net income per share includes the dilutive effect of potential stock option exercises, calculated using the treasury stock method. As a result of the net loss for the three and six months ended June 30, 2008, we have excluded 3,947,353 and 3,094,283 stock options, respectively, from the calculation as their effect would have been to reduce the net loss per share. For the three months and six months ended June 30, 2007, the effects of 666,423 and 639,267 stock options, respectively, were excluded from the calculation of diluted net income per share as their exercise prices were greater than the closing price of our common stock on June 30, 2007.

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

e. Warranty costs

          The Company warrants its X26 products from manufacturing defects on a limited basis for a period of one year after purchase, and thereafter will replace any defective unit for a fee. The C2 product is warranted for a period of 90 days after purchase. The Company also sells extended warranties for periods of up to four years after the expiration of the limited one year warranty. Management tracks historical data related to returns and warranty costs on a quarterly basis, and estimates future warranty claims by applying an estimated weighted average rolling four quarter return rate to the product sales for the period. In the fourth quarter of 2007, management made a revision to the basis of calculating the four quarter return rate as the result of being able to more accurately capture data relating to the number of units replaced under standard warranty versus extended warranty terms. In addition, given the trend of sales growth experienced in 2007, particularly in the second half of the year, the estimated four quarter return rate is weighted to account for the higher return rate experienced in those periods. If management becomes aware of a component failure that could result in larger than anticipated returns from its customers, the reserve would be increased. After the one year warranty expires, if the device fails to operate properly for any reason, the Company will replace the TASER X26 for a prorated discounted price depending on when the product was placed into service and replace the ADVANCED TASER device for a fee of $75. These fees are intended to cover the handling and repair costs and include a profit. The following table summarizes the changes in the estimated product warranty liabilities for the six months ended June 30, 2008 and 2007:

		June 30, 2008				June 30, 2007
Balance at Beginning of Period		$	919,254			$	713,135
Utilization of Accrual			(456,539	)			(376,018	)
Warranty Expense			515,651				548,229
Balance at End of the Period		$	978,366			$	885,346

f. Recent accounting pronouncements

          In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised) (“SFAS 141(R)”), Business Combinations. The standard changes the accounting for business combinations by requiring that an acquiring entity measure and recognize identifiable assets acquired and liabilities assumed at the acquisition date fair value with limited exceptions. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. Management does not expect the adoption of SFAS 141(R) to have an impact on the Company’s financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of acquisitions, if any, the Company consummates after the effective date.

          In December 2007, the Emerging issues Task Force (“EITF”) reached a consensus on EITF issue No. 07-1 “Accounting for Collaborative Arrangements” (“EITF 07-1”). EITF 07-1 establishes the accounting and disclosure requirements for participants in collaborative arrangements conducted without the creation of a separate legal entity. EITF 07-1 will be effective for annual periods beginning after December 15, 2007. The adoption of EITF 07-1 did not have a material impact on the Company’s financial position.

          In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once made. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, and early application is allowed under certain circumstances. Management adopted SFAS No. 159 beginning in the first quarter of 2008. The adoption of SFAS No. 159 did not have a material impact on the Company’s financial position.

          In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. Management adopted SFAS No. 157 beginning in the first quarter of fiscal 2008. The adoption of SFAS No. 157 did not have a material impact on the Company’s financial position.

g. Reclassifications

          Certain reclassifications have been made to 2007 financial information to conform to 2008 financial statement presentation.

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

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. Long-term investments include securities having maturities of more than one year. The Company’s long-term investments are invested in federal agency mortgage-backed securities, and are classified as held to maturity. These investments are recorded at amortized cost. The Company intends to hold these securities until maturity.

          The following is a summary of cash, cash equivalents and held-to-maturity investments by type at June 30, 2008 and December 31, 2007:

		June 30, 2008																December 31, 2007
																										Gross
						Gross Unrealized				Gross Unrealized												Gross Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value				Cost				Gains				Losses				Fair Value
Cash and money market funds		$	27,033,261			$	—			$	—			$	27,033,261			$	29,687,138			$	—			$	—			$	29,687,138
Commercial paper			5,992,874				—				(13,832	)			5,979,042				13,114,323				—				(37,838	)			13,076,485
Government sponsored entity securities			10,503,668				28,522				—				10,532,190				17,506,471				14,238				(12,022	)			17,508,687
Total cash, cash equivalents and investments		$	43,529,803			$	28,522			$	(13,832	)		$	43,544,493			$	60,307,932			$	14,238			$	(49,860	)		$	60,272,310

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

		June 30,				December 31,
		2008				2007
Cash		$	27,033,261			$	29,687,138
Cash equivalents			5,992,874				13,114,323
Total cash and cash equivalents			33,026,135				42,801,461
Short term investments			—				8,499,978
Long term investments			10,503,668				9,006,493
		$	43,529,803			$	60,307,932

     The following table summarizes the contractual maturities of commercial paper and government sponsored entity securities, identified above as cash equivalents, short term and long term investments at June 30, 2008 and December 31, 2007:

		June 30,				December 31,
		2008				2007
Less than 1 year		$	5,992,874			$	21,614,301
1-3 years			10,503,668				9,006,493
		$	16,496,542			$	30,620,794

          The following table provides information about held-to-maturity investments with gross unrealized losses and the length of time that individual investments have been in a continuous unrealized loss position at June 30, 2008:

		Less than 12 months								12 months or more								Total
						Gross								Gross								Gross
						Unrealized								Unrealized								Unrealized
Description of Securities		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
Commercial Paper		$	5,992,874			$	(13,832	)		$	—			$	—			$	5,992,874			$	(13,832	)
Total		$	5,992,874			$	(13,832	)		$	—			$	—			$	5,992,874			$	(13,832	)

          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 discount, are extremely short term in nature with terms no longer than 45 days, are expected to be redeemed at par value and because management 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, 2008.

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

3. Inventory

     Inventory is 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 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, 2008 and December 31, 2007 consisted of the following:

		June 30, 2008				December 31, 2007
Raw materials and work-in-process		$	10,178,910			$	8,475,055
Finished goods			10,554,204				5,352,304
Reserve for excess and obsolete inventory			(178,912	)			(320,555	)
Total Inventory		$	20,554,202			$	13,506,804

4. Intangible assets

     Intangible assets consisted of the following at June 30, 2008 and December 31, 2007:

				June 30, 2008												December 31, 2007
				Gross												Gross
				Carrying				Accumulated				Net Carrying				Carrying				Accumulated				Net Carrying
		Useful Life		Amount				Amortization				Amount				Amount				Amortization				Amount
Amortized intangible assets:
TASER.com domain name		5 Years		$	60,000			$	60,000			$	—			$	60,000			$	60,000			$	—
Issued patents		4 to 15 Years			512,698				137,501				375,197				402,058				115,863				286,195
Issued trademarks		9 to 11 Years			38,409				7,394				31,015				36,466				5,206				31,260
Non compete agreements		5 to 7 Years			150,000				65,714				84,286				150,000				52,143				97,857
					761,107				270,609				490,498				648,524				233,212				415,312
Unamortized intangible assets:
TASER Trademark					900,000								900,000				900,000								900,000
Patents and trademarks pending					722,254								722,254				609,827								609,827
					1,622,254								1,622,254				1,509,827								1,509,827
Total intangible assets				$	2,383,361			$	270,609			$	2,112,752			$	2,158,351			$	233,212			$	1,925,139

     Amortization expense for the three and six months ended June 30, 2008 was $19,000 and $37,000, respectively. Amortization expense for the three and six months ended June 30, 2007 was $14,000 and $28,000, respectively. Estimated amortization expense of intangible assets for the remaining six months of 2008, the next five years ended December 31, and thereafter is as follows:

2008		$	39,418
2009			66,861
2010			58,787
2011			51,074
2012			31,075
2013			31,075
Thereafter			212,208
		$	490,498

5. Accounts payable and accrued liabilities

     Accounts payable and accrued liabilities consisted of the following at June 30, 2008 and December 31, 2007:

		June 30, 2008				December 31, 2007
Accounts payable		$	3,652,440			$	7,304,112
Accrued salaries and benefits			942,471				1,046,534
Accrued expenses			1,521,553				818,239
Accrued warranty expense			978,366				919,254
Total		$	7,094,830			$	10,088,139

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

6. Income taxes

     The deferred income tax assets at June 30, 2008 are comprised primarily of a net operating loss carryforward, which resulted from the compensation expense the Company recorded for income tax purposes when employees exercised stock options in 2004. For the three and six months ended June 30, 2008, the Company did not recognize additional tax benefits related to stock options exercised. Additionally, capitalized research and development, research and development tax credits, warranty and inventory reserves, accrued vacation and other items have contributed to the deferred income tax assets.

     The Company’s total current and long term deferred tax asset balance at June 30, 2008 is $21.2 million. In preparing the Company’s interim financial statements, management has assessed 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 judgments that could become subject to audit by tax authorities in the ordinary course of business. Primarily as a result of the shareholder litigation settlement expense recorded in the second quarter of 2006 and the litigation judgment expense recorded in the second quarter of 2008, management has determined that it is more likely than not that its net operating loss carryforwards for the state of Arizona, which expire in 2009, will not be fully realized. Accordingly, the Company has a valuation allowance of $500,000 against its deferred tax assets as of June 30, 2008, $250,000 of which was recognized as a reduction to the net income tax benefit for the three and six months ended June 30, 2008. Management believes that, other than as previously described, as of June 30, 2008 based on an evaluation and projections of future sales and profitability, no other valuation allowance was deemed necessary as management concluded that it is more likely than not that the Company’s net deferred tax assets will be realized. However, the deferred tax asset could be reduced in the near-term if estimates of future taxable income during the carryforward period are reduced. In addition, due to the litigation judgment expense recorded in the second quarter of 2008 and revised forecasts of future taxable income, approximately $8.0 million was reclassified from current to non-current deferred income tax assets at June 30, 2008.

     In July 2000, the Company granted 136,364 warrants to acquire Company stock at an exercise price of $0.55 per share to a member of its Board of Directors as additional consideration for a $1.5 million loan. In October 2004, the stock warrants were exercised with an intrinsic value of $5,233,650 As a result of personnel changes a 1099 was issued to the Board member in error. The Company included the $5,233,650 as stock compensation expense in its 2004 tax return and because the Company had a net operating loss carryforward, recorded a $2,014,955 deferred tax asset on the balance sheet and a corresponding increase to additional paid in capital. The Company’s 2004 tax return was audited by the IRS in 2007 with no adjustment made to the stock compensation expense deduction recorded by the Company. During a tax examination of the Board members tax return it was determined that the exercise of the warrant should not have created taxable income and the inclusion of the intrinsic value of the warrant in the director’s 1099 was in fact an error. Accordingly, at June 30, 2008, the Company has reduced its deferred tax asset balance and additional paid in capital by $2,014,955. The adjusting entry is a balance sheet only adjustment with no impact on retained earnings and is not considered material to the associated account balances or the balance sheet as a whole.

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

     In 2007, the Company completed a research and development tax credit study which identified $3.1 million in tax credits for Federal and Arizona income tax purposes related to the 2003 through 2006 tax years and an estimate for the 2007 tax year. As a result, the Company recognized $2.0 million in 2007 as a reduction in income tax expense. The Company made the determination that it was not more likely than not that the full benefit of the research and development tax credit would be sustained on examination and recorded a liability for unrecognized tax benefits of $1.1 million as of December 31, 2007. Additionally, management has estimated that an additional $244,000 of prorated tax credits are available for Arizona purposes for the first half of the 2008 tax year and increased the liability for unrecognized benefits to $1.2 million as of June 30, 2008. As of June 30, 2008, management does not expect the amount of the unrecognized tax benefit liability to increase or decrease within the next 12 months. Should the unrecognized tax benefit of $1.2 million be recognized, our effective tax rate would be favorably impacted.

     The following presents a rollforward of our liability for unrecognized tax benefits as of June 30, 2008:

		Unrecognized Tax
		Benefits
Balance at January 1, 2008		$	1,100,073
Increase in prior year tax positions			—
Increase in current year tax positions			108,738
Decrease related to settlements with taxing authorities			—
Decrease related to lapse in statute of limitations			—
Balance at March 31, 2008		$	1,208,811

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

     The effective income tax rate for the second quarter of 2008 was 44.1% compared to 41.7% for the second quarter of 2007. The effective income tax rate for the first half of 2008 was 50.4% compared to 41.7% for the second half of 2007. The effective tax rate for the three and six months ended June 30, 2008 increased compared to the same periods in the prior year due to the higher impact of certain non-deductible items such as lobbying expenses against a lower taxable income base expected for the year ended December 31, 2008. In addition the rate is impacted by the inclusion of the state research and development tax credit in the 2008 effective tax rate. Offsetting the credit provision and reducing the effective tax rate was the recording of the $250,000 valuation allowance against Arizona State NOL deferred tax assets discussed above.

     The Company is currently under audit by the United States Internal Revenue Service for its 2006 fiscal year. Management is unable to determine the outcome of the audit process at this time. There can be no assurance the outcome of this audit will not have an adverse effect on the Company’s future operating results.

7. Stockholders equity

Stock Repurchase

     In April 2008, 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. Subsequently, the Company repurchased 1.79 million shares at a weighted average cost of $6.98 and a total cost of $12.5 million.

Stock Option Award Activity

     At June 30, 2008, the Company had three stock-based compensation plans, which are described more fully in Note 10 to the 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, 2008 as well as activity during the six months then ended:

						Outstanding Options
		Shares Available for								Weighted Average
		Grant				Number of options				Exercise Price
Balance at December 31, 2007			4,900,947				5,234,072			$	6.06
Granted			(656,858	)			656,858			$	7.44
Exercised			—				(238,175	)		$	1.09
Expired/terminated			6,466				(6,466	)		$	16.86
Balance at June 30, 2008			4,250,555				5,646,289			$	6.41

     The options outstanding as of June 30, 2008 have been segregated into five ranges for additional disclosure as follows:

		Options Outstanding
										Weighted				Options Exercisable
						Weighted				Average								Weighted
		Number				Average				Remaining				Number				Average
Range of Exercise Price		Outstanding				Exercise Price				Contractual Life				Exercisable				Exercise Price
$0.28 – $0.99			1,014,886			$	0.36				4.5				1,014,886			$	0.36
$1.03 – $2.41			884,109			$	1.58				4.1				884,109			$	1.58
$5.75 – $9.93			2,774,995			$	7.89				6.6				2,084,500			$	8.04
$10.10 – $19.76			910,299			$	12.27				7.8				562,637			$	13.14
$20.12 – $29.98			62,000			$	23.91				6.0				62,000			$	23.91
$0.28 – $29.98			5,646,289			$	6.42				6.0				4,608,132			$	5.94

     The total fair value of options exercisable at June 30, 2008 and 2007 was $14.2 million and $13.8 million, respectively. Aggregate intrinsic value of options outstanding and options exercisable was $7.7 million at June 30, 2008. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $4.99 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, 2008 was $429,000 and $2.2 million, respectively. Total intrinsic value of options exercised for the three and six month periods ended June 30, 2007 was $4.3 million and $4.8 million, respectively.

     At June 30, 2008, the Company had 1,038,157 unvested options outstanding with a weighted average exercise price of $8.48 per share and weighted average remaining contractual life of 9.5 years. Of the unvested options outstanding, the management estimates that approximately 995,000 options will ultimately vest based on its historical experience.

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

A summary of the status of the Company’s unvested options as of June 30, 2008 and changes during the six months ended June 30, 2008, is presented below:

						Weighted Average
Unvested options		Options				Grant Date Fair Value
Unvested at January 1, 2008			551,006			$	5.12
Granted			656,858			$	4.04
Vested			(169,707	)		$	5.07
Forfeited			—			$	—
Unvested at June 30, 2008			1,038,157			$	4.44

     As of June 30, 2008, total unrecognized stock-based compensation expense related to unvested stock options was approximately $4.6 million, which is expected to be recognized over a remaining weighted average period of approximately 16.7 months.

8. Line of credit

     The Company has a line of credit agreement with a bank which provides for 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 of interest, ranging from LIBOR plus 1.5% to prime. The availability under this line is computed on a monthly borrowing base, which is based on the Company’s eligible accounts receivable and inventory. The line of credit matures on June 30, 2010 and requires monthly payments of interest only. At June 30, 2008 there was no amount outstanding under the line of credit and the available borrowing was $10.0 million. There have been no borrowings under the line of credit to date.

     The Company’s agreement with the bank requires the Company to comply with certain financial and other covenants including maintenance of minimum tangible net worth and fixed charge coverage ratios. At June 30, 2008, the Company was in compliance with all such covenants.

9. Commitments and Contingencies

Equipment purchase commitment

     On July 2, 2007, the Company entered into a contract with Automation Tooling Systems Inc. for the purchase of equipment at a cost of approximately $7.7 million. Subsequent to the initial order, the Company placed a $0.7 million change order to this agreement for additional equipment and modifications. The equipment is expected to be delivered to and installed at the Company’s facility in 2008. Payments will be made in installments, with an initial $1.5 million deposit paid in 2007, installments of $2.9 million paid in the first six months of 2008, and the balance of $4.0 million expected to be paid in 2008. The installments paid to date have been recorded in property, plant and equipment in the accompanying balance sheet.

Legal proceedings

Product Liability Litigation

     The Company is currently named as a defendant in 38 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 or during training exercises. Companion cases arising from the same incident have been combined into one for reporting purposes. Included in this number is the Heston lawsuit where a jury verdict was entered against the Company on June 7, 2008, but judgment has not yet been entered and post trial motions are pending. In addition, 72 other lawsuits that have been dismissed or judgments entered in favor of the Company are not included in this number. A petition for review by the Arizona Supreme Court has been filed by the plaintiff in the Gerdon (AZ) lawsuit where judgment was entered in favor of the Company, and an appeal was filed by the plaintiff in the Wilson (GA) where judgment was entered in favor of the Company. With respect to each of the pending 38 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. This table also lists those cases that were dismissed during the most recent fiscal quarter. Cases that were dismissed in prior fiscal quarters are not included in this table. In each of the pending lawsuits, the plaintiff is seeking monetary damages from the Company. 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 $500,000 in per incident deductibles. We are defending each of these lawsuits vigorously.

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

		Month
Plaintiff		Served		Jurisdiction		Claim Type		Status
City of Madera		Jun-03		CA Superior Court		Wrongful Death		Dismissed by Summary Judgment, Appeal
Glowczenski		Oct-04		US District Court, ED NY		Wrongful Death		Discovery Phase
Washington		May-05		US District Court, ED CA		Wrongful Death		Discovery Phase
Sanders		May-05		US District Court ED CA		Wrongful Death		Case Stayed
Graff		Sep-05		US District Court, AZ		Wrongful Death		Discovery Phase
Heston		Nov-05		US District Court, ND CA		Wrongful Death		Plaintiff Verdict; Post Trial Motions Pending; Appeal to be Filed
Rosa		Nov-05		US District Court, ND CA		Wrongful Death		Trial Scheduled July-09
Yeagley		Nov-05		Hillsborough County Circuit County, FL		Wrongful Death		Discovery Phase
Neal-Lomax		Dec-05		US District Court, NV		Wrongful Death		Discovery Phase
Yanga Williams		Dec-05		Gwinnett County State Court, GA		Wrongful Death		Dispositive Motions Pending
Mann		Dec-05		US District Court, ND GA, Rome Div		Wrongful Death		Trial Scheduled Dec-08
Robert Williams		Jan-06		US District Court, TX		Wrongful Death		Discovery Phase
Lee		Jan-06		Davidson County, TN Circuit Court		Wrongful Death		Trial Scheduled Apr-09
Zaragoza		Feb-06		CA Superior Court, Sacramento County		Wrongful Death		Discovery Phase
Bagnell		Jul-06		Supreme Court for British Columbia, Canada		Wrongful Death		Discovery Phase
Hollman		Aug-06		US District Court, ED NY		Wrongful Death		Discovery Phase
Oliver		Sep-06		US District Court, MD FL, Orlando		Wrongful Death		Trial Scheduled Nov-08
Teran/LiSaola		Oct-06		CA District Court		Wrongful Death		Trial Scheduled March-09
Short, Rhonda		Oct-06		US District Court, ND TX, Forth Worth		Wrongful Death		Discovery Phase
Augustine		Jan-07		11th Judicial Circuit Court, Miami-Dade		Wrongful Death		Discovery Phase
Toloskdo-Parker		May-07		US District Court ND, CA		Wrongful Death		Complaint Served
Bolander		Aug-07		17th Circuit Court Broward County, FL		Wrongful Death		Trial Scheduled Oct-08
Wendy Wilson, Estate of Ryan Wilson		Aug-07		District Court Boulder County, CO		Wrongful Death		Discovery Phase
Crawford, Estate of Russell Walker		Oct-07		District Court Clark County, NV		Wrongful Death		Complaint Served
Walker, Estate of Russell Walker (Companion to Crawford)		Oct-07		US District Court District of NV		Wrongful Death		Complaint Served
Jack Wilson, Estate of Ryan Wilson (Companion to Wendy Wilson)		Nov-07		District Court Boulder County, CO		Wrongful Death		Complaint Served
Cunningham		Nov-07		US District Court, ND, IL		Wrongful Death		Dismissed
Kasilyan		Feb-08		District Court Clark County, NV		Wrongful Death		Complaint Served
Gilliam		Apr-08		US District Court, MD, AL		Wrongful Death		Complaint Served
Romero		May-08		Dallas County District Court, TX		Wrongful Death		Complaint Served
Guerrero		Jun-08		US District Court, Central District CA		Wrongful Death		Complaint Served
Marquez		Jun-08		US District Court, Arizona		Wrongful Death		Complaint Served
Preyer		July-08		US District Court, Middle District, FL		Wrongful Death		Complaint Served
Powers		Nov-03		AZ Superior Court		Training Injury		Verdict for TASER, Appeal Decision For TASER, Plaintiff Petition for Review Denied by AZ Supreme Court
Gerdon		Aug-05		AZ Superior Court		Training Injury		Dismissed; Appeal Affirmed; Petition for Review filed
Stewart		Oct-05		Circuit Court for Broward County, FL		Training Injury		Discovery Phase
Lewandowski		Jan-06		US District Court, NV		Training Injury		Partial Motion to Dismiss Granted
Peterson		Jan-06		US District Court, NV		Training Injury		Discovery Phase
Husband		Mar-06		British Columbia Supreme Court, Canada		Training Injury		Discovery Phase
Wilson		Aug-06		US District Court, ND GA		Training Injury		Dismissed; Appeal Filed
Perry		Aug-07		US District Court CO		Training Injury		Dismissed
Perry		Jul-08		US District Court, CO		Training Injury		Complaint Filed
Bynum		Oct-05		US District Court SD NY		Injury During Arrest		Discovery Phase
Wieffenbach		Jun-06		Circuit Court of 12th Judicial District, Will County, II		Il Injury During Arrest		Discovery Phase
Molina		Sep-06		US District Court, ND West Virginia		Injury During Detention		Dismissed
Short, Harvey		Oct-06		US District Court, SD West Virginia		Injury During Arrest		Dismissed
Payne		Oct-06		Circuit Court of Cook County, Illinois		Injury During Arrest		Discovery Phase
Gomez		May-07		Circuit Court 11th Judicial Dist. FL		Injury During Arrest		Complaint Served
Kern / Banda		Feb-08		District Court, Tarrant County, TX		Injuty During Admittanc		Complaint Served

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

     In December 2005, the Company received a defense verdict in the Samuel Powers v. TASER International personal injury case. As part of its legal strategy to aggressively defend these cases, the Company entered into a settlement agreement with its own insurance provider in order to prevent its insurance provider from settling the case with the plaintiff. Under the terms of the settlement, the Company received $575,000 from its liability insurance provider associated with a settlement and release agreement and the Company assumed all future potential liability and costs from and after the date the settlement and release agreement was signed. After offsetting approximately $187,000 through June 30, 2008 in legal expenses to defend and win the trial and cover the subsequent costs of appeal, the Company had a remaining balance of approximately $388,000 which was recorded as “other income” in the second quarter of 2008 when the plaintiff’s petition for review to the Arizona Supreme Court was denied and final resolution was completed.

     The Company recorded a $5.2 million non-cash charge in the second quarter of 2008 for an adverse jury verdict received in the case of Betty Lou Heston, et al. v. City of Salinas, TASER International, Inc., et al. which found that extended TASER device application contributed 15 percent to the death of Robert C. Heston. While the jury attributed 85 percent of the cause of death to the actions of Mr. Heston, the jury awarded a total of $1.0 million in compensatory damages, (for which the damages will be covered by liability insurance), and $5.2 million in punitive damages against the Company based on alleged negligent failure to warn. The court has not yet entered an order of judgment, instead setting a schedule for post trial motions. The Company is pursuing all appropriate legal channels including filing an appeal in this matter at the appropriate time once a judgment is entered.

Other Litigation

     In December 2005, we filed a lawsuit in Vigo County, Indiana, Superior Court against Roland M. Kohr for defamation, product disparagement, Lanham Act violations, tortuously affecting the fairness and integrity of litigation as an adverse third-party witness, and intentional interference with a business relationship. Dr. Kohr was the medical examiner and expert witness in the James Borden wrongful death litigation, which litigation was dismissed with prejudice. This case is in the discovery phase and no trial date has been set.

     In June 2006, we filed a lawsuit in U.S. District Court for the Central District of California against Bestex Company, Inc. for patent infringement, false patent marking, unfair competition and breach of written contract. Bestex filed a counterclaim for unfair competition and false advertising. Both parties filed motions for summary judgment to dismiss the other parties claims, both of which motions were granted and the matter was resolved on those motions before the Court in January 2007. An appeal has been filed by Bestex.

     In November 2006, we filed a lawsuit against the Chief Medical Examiner of Summit County, OH, in the Court of Common Pleas of Summit County, Ohio, to correct erroneous cause of death determinations relating to the autopsy reports prepared by medical examiner, Dr. Lisa Kohler, which identify the TASER device as being a contributing factor in the deaths of Richard Holcomb, Dennis Hyde and Mark McCullaugh. We asked the Court to order a hearing on the appropriate causes of death of Mr. Hyde, Mr. Holcomb and Mr. McCullaugh, and to order changes in the medical examiner’s cause of death determinations for Mr. Hyde, Mr. Holcomb and Mr. McCullaugh removing all references to any TASER device causing or contributing to the causes of death for Mr. Hyde, Mr. Holcomb and Mr. McCullaugh. Defendant filed a motion to dismiss for lack of standing and that motion was denied by the Court in January 2007. The City of Akron has joined this lawsuit as a co-plaintiff. This case went to trial in April 2008, and on May 2, 2008, the Court entered an order ruling in favor of TASER and the City of Akron and ordered the medical examiner to remove any reference to the TASER device as a cause of death and to change the manner of death for Holcomb and Hyde to accidental and for McCullaugh to undetermined.

     In January 2007, we filed a lawsuit in the U.S. District Court for the District of Arizona against Stinger Systems, Inc. alleging patent infringement, patent false marking, and false advertising. Defendant filed an answer and counterclaim for false advertising and punitive damages. Discovery has begun and no trial date has been set.

     In October 2007 we filed a lawsuit against Steve Ward and Mark Johnson, both former employees and VIEVU Corporation, for breach of duty of loyalty, breach of contract, breach of fiduciary duty, and conversion. This lawsuit does not involve our core business and we do not expect this litigation to have a material impact on our financial results. Defendants Ward and VIEVU Corporation filed an answer and counterclaim for declaration of non-infringement, tortious interference with contractual relations, tortious interference with business expectancy, abuse of process, injunctive relief and punitive damages. Discovery has begun and no trial date has been set.

     In July 2008 we filed a complaint against Morgan Stanley & Co., Inc., Goldman Sachs Group, Inc., Bear Stearns Securities Corp., Bear Stearns Capital Markets, Inc., Bear Stearns & Co, Inc., The Bear Stearns Companies, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., Deutsche Bank Securities, Inc., Credit Suisse USA, Inc., Banc Of America Securities, LLC, and UBS Securities, LLC. for Violation of Georgia’s RICO Statute, Violation of the Georgia Securities Act, Violation of the Georgia Computer Systems Protection Act and Conversion. An answer has not yet been filed, discovery has not started and no trial date has been set.

     In July 2008 we were served with a summons and complaint in the lawsuit entitled Proformance Vend USA vs. Taser International, Inc. alleging breach of contract of a vending machine contract. We will be filing an answer to this complaint.

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

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 management’s policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on the Company. We intend to defend and pursue any lawsuit filed against or by the Company vigorously. Although we do not expect the outcome in any 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 seven lawsuits where the costs of legal defense incurred are in excess of its liability insurance deductibles. As of June 30, 2008, the Company has recorded approximately $11,000 in other assets related to the receivable from its insurance company for reimbursement of 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 and dismissed in cases where the settlement economics to TASER International were significantly less than the cost of litigation. One of the training injury lawsuits brought by a law enforcement officer was settled in June 2007 for an amount in excess of nuisance value by our insurance company. Our insurance coverage at that time did not cover our costs of defense if we won at trial. However, our insurance coverage at that time provided for a pro-rata reimbursement of our costs of defense if the lawsuit was settled. Upon final settlement of this case, the Company was paid $241,000 by our insurance company as reimbursement of the Company’s costs of defense. 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, and Patrick W. Smith, the Company’s Chief Executive Officer, for business use of their personal aircraft. For the three and six months ended June 30, 2008, the Company incurred expenses of approximately $69,000 and $143,000, respectively, to Thomas P. Smith. For the three and six months ended June 30, 2007, the Company incurred expenses of approximately $123,000 and $217,000, respectively, to Thomas P. Smith. For both the three and six months ended June 30, 2008, the Company incurred expenses of $102,000 to Patrick W. Smith. For the three and six months ended June 30, 2007, the Company incurred expenses of $4,000 and $17,000, respectively, to Patrick W. Smith. At June 30, 2008 and December 31, 2007, the Company had outstanding payables of $0 and $27,000, respectively, due to Thomas P. Smith. At June 30, 2008 and December 31, 2007, the Company had outstanding payables of $102,000 and $0, respectively, due to Patrick W. Smith. Management believes that the rates charged by Thomas P. Smith and Patrick W. Smith are equal to or below commercial rates the Company would pay to charter similar aircraft from independent charter companies.

     In the first quarter of 2007, the Company also entered into a charter agreement for future use of an aircraft for business travel from Thundervolt, LLC, owned by Patrick W. Smith, should the need arise. For the three and six months ended June 30, 2008 and 2007, the Company did not incur any direct charter expenses pursuant to its relationship with Thundervolt, LLC. Management believes that the rates charged by Thundervolt, LLC are equal to or below commercial rates the Company would pay to charter similar aircraft from independent charter companies.

     The Company performed a review of the above relationship with Thundervolt, LLC, in accordance with the provisions of Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46R). The Company determined that the relationships did not meet the definition of a variable interest entity (VIE) as defined by FIN 46R as Thundervolt, LLC is adequately capitalized, its owners possess all of the essential characteristics of a controlling financial interest, and the Company does not have any voting rights in the entity. Therefore, the entity is not required to be consolidated into the Company’s results.

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

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 IRS. 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. Daniel M. Behrendt, an officer of the Company, serves on the Board of Directors of the TASER Foundation. 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, 2008, the Company incurred approximately $58,000 and $107,000, respectively, in such administrative costs. For the three and six months ended June 30, 2007, the Company incurred approximately $43,000 and $91,000, 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, 2008, the Company did not make a discretionary contribution to the TASER Foundation. For the three and six months ended June 30, 2007, the Company made discretionary contributions of $0 and $125,000, respectively.

Consulting services

     Beginning in August 2005, the Company agreed to pay Mark Kroll, a member of the Board of Directors, for consultancy services. The cumulative expenses for the three and six months ended June 30, 2008 were approximately $81,000 and $183,000, respectively. The cumulative expenses for the three and six months ended June 30, 2007 were approximately $76,000 and $124,000, respectively. At June 30, 2008 and December 31, 2007, the Company had accrued liabilities of approximately $58,000 and $20,000, respectively, related to these services.

11. Employee Benefit Plan

     In January 2006, the Company established 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 $15,500. 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. During 2007 the Company’s matching contributions cliff vested at 20% per annum and become fully vested after five years of service, at age 59 1/2 regardless of service, upon the death or permanent disability of the employee, or upon termination of the Plan. The Company’s matching contributions to the Plan for the three and six months ended June 30, 2008 were $96,000 and $196,000, respectively. The Company’s matching contributions to the Plan for the three and six months ended June 30, 2007 were $61,000 and $121,000, respectively. Future matching or profit sharing contributions to the Plan are at the Company’s sole discretion.

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, 2008 and results of operations for the three and six months ended June 30, 2008 and June 30, 2007. The following discussion may be understood more fully by reference to the financial statements, notes to the financial statements, and the 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 fiscal year ended December 31, 2007.

     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: expected revenue and earnings growth; estimates regarding the size of our target markets; successful penetration of the law enforcement market; expansion of product sales to the private security, military and consumer self-defense markets; growth expectations for new and existing accounts; expansion of production capability; new product introductions; our expectations that we will hold certain investments until maturity; our expectations about deferred income taxes; assumptions about the future vesting of outstanding stock options; the outcome of pending litigation; trends about our working capital and the sufficiency of our capital resources and our business model. 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; establishment and expansion of our direct and indirect distribution channels; attracting and retaining the endorsement of key opinion-leaders in the law enforcement community; the level of product technology and price competition for our products; the degree and rate of growth of the markets in which we compete and the accompanying demand for our products; potential delays in international and domestic orders; implementation risks of manufacturing automation; risks associated with rapid technological change; execution and implementation risks of new technology; new product introduction risks; ramping manufacturing production to meet demand; litigation resulting from alleged product- related injuries; risks related to government inquiries; media publicity concerning allegations of deaths occurring after use of the TASER device and the negative impact this publicity could have on sales; product quality risks; potential fluctuations in quarterly operating results; competition; financial and budgetary constraints of prospects and customers; dependence upon sole and limited source suppliers; fluctuations in component pricing; risks of governmental regulations; dependence on a single product; dependence upon key employees; employee retention risks; and other factors detailed in the Company’s filings with the Securities and Exchange Commission including in “Part II — Item 1A. Risk Factors” in this report on Form 10-Q.

Overview

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

     Our core expertise includes proprietary, patented technology which is capable of incapacitating highly focused and aggressive persons. Competing non-lethal weapons rely primarily on pain to dissuade subjects from continuing unwanted behavior. Our proprietary Neuro-Muscular Incapacitation (NMI) technology uses electrical impulses to interfere with a person’s neuron-muscular system, causing substantial incapacitation regardless of whether the person feels or responds to pain. Our NMI technology stimulates the motor nerves which control muscular movement.

Results of Operations

Three Months Ended June 30, 2008 Compared to the Three Months Ended June 30, 2007

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):

		Three Months Ended June 30,																Increase / (Decrease)
		2008								2007								$				%
Net sales		$	21,101				100.0	%		$	25,863				100.0	%		$	(4,762	)			-18.4	%
Cost of products sold			7,496				35.5	%			10,332				39.9	%			(2,836	)			-27.4	%
Gross margin			13,605				64.5	%			15,531				60.1	%			(1,926	)			-12.4	%
Sales, general and administrative expenses			9,710				46.0	%			8,345				32.3	%			1,365				16.4	%
Research and development expenses			3,020				14.3	%			1,263				4.9	%			1,757				139.1	%
Legal judgment expense			5,200				24.6	%			—				0.0	%			5,200				100.0	%
Income (loss) from operations			(4,325	)			-20.5	%			5,923				22.9	%			(10,248	)			-173.0	%
Interest and other income, net			721				3.4	%			427				1.7	%			294				68.9	%
Income (loss) before income taxes			(3,604	)			-17.1	%			6,350				24.6	%			(9,955	)			-156.8	%
Provision (benefit) for income taxes			(1,588	)			-7.5	%			2,651				10.3	%			(4,240	)			-159.9	%
Net income (loss)		$	(2,016	)			-9.6	%		$	3,699				14.3	%		$	(5,715	)			-154.5	%

Net Sales

     For the three months ended June 30, 2008 and 2007, sales by product line and by geography were as follows (dollars in thousands):

		Three Months Ended June 30,
		2008								2007
Sales by Product Line
TASER X26		$	11,464				54.3	%		$	16,656				64.4	%
TASER C2			1,521				7.2	%			—				0.0	%
TASER Cam			816				3.9	%			1,135				4.4	%
ADVANCED TASER			496				2.4	%			639				2.4	%
Single Cartridges			4,690				22.2	%			6,900				26.7	%
Other			2,114				10.0	%			533				2.1	%
Total		$	21,101				100.0	%		$	25,863				100.0	%

		Three Months Ended June 30,
		2008				2007
United States			88	%			79	%
Other Countries			12	%			21	%
Total			100	%			100	%

     Net sales decreased $4.8 million, or 18%, to $21.1 million for the second quarter of 2008 compared to $25.9 million for the second quarter of 2007. We believe the decline in sales versus the prior year was the result of lower municipal spending in the U.S. as agencies reassigned budget dollars due to economic constraints, including significantly higher than budgeted fuel costs. In addition, the Company reported several large non-recurring international orders in the second quarter of 2007. As a result, sales of the TASER X26 product line decreased by $5.2 million, or 31%, to $11.5 million for the second quarter of 2008 compared to $16.7 million for the second quarter of 2007. Single cartridge sales also decreased by $2.2 million, or 32%. Partially offsetting these decreases was the introduction of the TASER C2 Personal Protector product which began shipping in July 2007. Sales of the TASER C2 were $1.5 million for the second quarter of 2008. The increase in other sales is primarily driven by growth in out of warranty repairs and extended warranty revenues. Other sales also include government grant, training and shipping revenues and are net of distributor discounts.

     International sales for the second quarter of 2008 and 2007 represented approximately $2.4 million, or 12%, and $5.4 million or 21%, of total net sales, respectively. The decline is due to several large non-recurring orders received in the second quarter of 2007.

Cost of Products Sold

     Cost of products sold decreased by $2.8 million, or 27%, to $7.5 million for the second quarter of 2008 compared to $10.3 million for the second quarter of 2007. As a percentage of net sales, cost of products sold decreased to 35.5% in the second quarter of 2008 compared to 39.9% in the second quarter of 2007. The 440 basis point improvement for the second quarter of 2008 compared to the second quarter of 2007 was the result of a combination of factors. Direct labor decreased as a percentage of net sales due to lower overtime and temporary labor costs and indirect manufacturing costs decreased as a percentage of net sales resulting from lower production scrap expense and having a fixed indirect cost base spread over increased production volumes and production hours in inventory compared to the prior year. Offsetting these decreases was an increase in product costs driven by a change in mix with lower X26 sales as a percentage of net sales, 54% of total sales in the second quarter of 2008 compared to 64% in the comparable 2007 quarter, replaced with sales of our lower margin C2 product line.

Gross Margin

     Gross margin decreased $1.9 million, or 12%, to $13.6 million for the second quarter of 2008 compared to $15.5 million for the second quarter of 2007. As a percentage of net sales, gross margins increased to 64.5% for the second quarter of 2008 compared to 60.1% for the second quarter of 2007. The 4.4% increase in gross margin as a percentage of net sales for the second quarter of 2008 was attributable to the decreased direct labor and indirect costs as a percentage of net sales attributable to the reasons noted above under the discussion of cost of products sold.

Sales, General and Administrative Expenses

     For the three months ended June 30, 2008 and 2007, sales, general and administrative expenses were comprised as follows (dollars in thousands):

		Three Months Ended June 30,
										$				%
		2008				2007				Change				Change
Salaries and benefits		$	2,228			$	1,679			$	549				32.7	%
Bonuses			71				355				(284	)			-80.0	%
Legal, professional and accounting fees			1,387				1,832				(445	)			-24.3	%
Consulting and lobbying services			711				590				121				20.5	%
Advertising			553				161				392				243.5	%
Travel and meals			1,096				769				327				42.5	%
D&O and liability insurance			557				479				78				16.3	%
Depreciation and amortization			451				444				7				1.6	%
Stock-based compensation			279				238				41				17.2	%
Other			2,378				1,798				580				32.3	%
Total		$	9,711			$	8,345			$	1,366				16.4	%
Sales, general and administrative as      % of net sales			46.0	%			32.3	%

     Sales, general and administrative expenses were $9.7 million and $8.3 million in the second quarter of 2008 and 2007, respectively, an increase of $1.4 million, or 16%. As a percentage of total net sales, sales, general and administrative expenses increased to 46% for the second quarter of 2008 compared to 32% for the second quarter of 2007, a function of higher expense and the decrease in net sales.

     The dollar increase for the second quarter of 2008 over the same period in 2007 is attributable to a $549,000 growth in salaries and benefits related to an increase in personnel (our headcount was 91 at June 30, 2008 compared to 70 at June 30, 2007) to support the expansion of our business infrastructure combined with an annual salary increase effective January 1, 2008. Advertising expense increased $392,000 due primarily to TASER C2 promotional efforts and infomercial costs. Travel and meal expense increased $327,000 due to higher tradeshow, and lobbying activity as well as the increased cost of air travel. The $580,000 increase in other expense is driven by higher tradeshow activity including the annual TASER tactical conference which occurred in the second quarter of 2008 but not until the third quarter of 2007, and higher recruiting and relocation costs. These increases were partially offset by a $445,000 decrease in legal, professional and accounting fees which is primarily attributable to the timing of proceedings of our outstanding litigation as well as seven cases where we have exceeded our insurance deductible, subsequent to which we are reimbursed for expenses incurred. Bonus expense also decreased $284,000 based on the pre-tax loss for the second quarter of 2008.

Research and Development Expenses

     Research and development expenses increased $1.7 million, or 139%, to $3.0 million for the second quarter of 2008 compared to $1.3 million for the second quarter of 2007. The increase is driven by a $1.1 million increase in third party consulting costs primarily associated with the development of AXON (Autonomous eXtended on-Officer Network). We expect to further increase research and development spending in 2008 as we accelerate development of new products. In addition, there was $243,000 growth in salary costs with headcount in our R&D department increasing 36% from 25 at June 30, 2007 to 34 at June 30, 2008, and an $81,000 increase in indirect supplies to support our continuing efforts to develop new products such as the XREP (Extended Range Electro-Muscular Projectile) and Shockwave.

Litigation judgment expense

     We recorded a $5.2 million non-cash charge in the second quarter of 2008 for an adverse jury verdict in the case of Betty Lou Heston, et al. v. City of Salinas, TASER International, Inc., et al. which found that extended TASER device application contributed 15 percent to the death of Robert C. Heston. While the jury attributed 85 percent of the cause of death to the actions of Mr. Heston, the jury awarded a total of $1.0 million in compensatory damages (for which damages will be covered by our liability insurance) and $5.2 million in punitive damages against TASER International based on alleged negligent failure to warn. The court has not yet entered an order of judgment, instead setting a schedule for post trial motions. We are pursuing all appropriate legal channels including filing an appeal in this matter at the appropriate time once a judgment is entered.

Interest and Other Income, Net

     Interest and other income increased by $294,000 or 69% to $721,000 for the second quarter of 2008 compared to $427,000 for the second quarter of 2007. The increase is attributable to other income of $387,000 related to the unused deferred insurance settlement proceeds recognized in the second quarter of 2008 upon the dismissal of all final appeals in the Samuel Powers v. TASER International personal injury case. This was partially offset by a $99,000 decrease in interest income due to lower average yields on our investments, partially offset by an $8.5 million increase in average funds invested in the second quarter of 2008 compared to the same period in 2007. Our cash and investment accounts earned interest at an average rate of 2.6% during the second quarter of 2008 compared to 4.0% during the second quarter of 2007.

Provision (benefit) for Income Taxes

     The provision for income taxes decreased by $4.3 million from a provision of $2.7 million for the second quarter of 2007 compared to a benefit of $1.6 million for the second quarter of 2008. The effective income tax rate for the second quarter of 2008 was 44.1% compared to 41.7% for the second quarter of 2007. The effective tax rate for the second quarter of 2008 has increased due to the higher impact of certain non-deductible items such as lobbying expenses against a lower taxable income base expected for the year ended December 31, 2008. In addition the rate is affected by the inclusion of the state research and development tax credit in the 2008 effective tax rate. No benefit for any federal research and development tax credit has been included in the 2008 effective tax rate. The effective tax rate for the second quarter of 2007 did not include any research and development tax credits. Offsetting the credit provision and reducing the effective tax rate in the second quarter of 2008 was the recording of a $250,000 valuation allowance against Arizona State NOL deferred tax assets.

Net Income (Loss)

     Net income decreased by $5.7 million to a net loss of $2.0 million for the second quarter of 2008 compared to net income of $3.7 million for the second quarter of 2007. Loss per basic and diluted share was $0.03 for the second quarter of 2008. This compares to income per basic and diluted share of $0.06 for the second quarter of 2007.

Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007

     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)
		2008								2007								$				%
Net sales		$	43,588				100.0	%		$	41,165				100.0	%		$	2,423				5.9	%
Cost of products sold			17,220				39.5	%			16,745				40.7	%			475				2.8	%
Gross margin			26,368				60.5	%			24,420				59.3	%			1,948				8.0	%
Sales, general and administrative expenses			18,871				43.3	%			15,927				38.7	%			2,944				18.5	%
Research and development expenses			5,132				11.8	%			2,233				5.4	%			2,899				129.8	%
Legal judgment expense			5,200				11.9	%			—				0.0	%			5,200				100.0	%
Income (loss) from operations			(2,835	)			-6.5	%			6,260				15.2	%			(9,095	)			-145.3	%
Interest and other income, net			1,223				2.8	%			933				2.3	%			290				30.9	%
Income (loss) before income taxes			(1,612	)			-3.7	%			7,193				17.5	%			(8,805	)			-122.4	%
Provision (benefit) for income taxes			(813	)			-1.9	%			2,999				7.3	%			(3,812	)			-127.1	%
Net income (loss)		$	(799	)			-1.8	%		$	4,194				10.2	%		$	(4,993	)			-119.1	%

Net Sales

     For the six months ended June 30, 2008 and 2007, sales by product line and by geography were as follows (dollars in thousands):

		Six Months Ended June 30,
		2008								2007
Sales by Product Line
TASER X26		$	22,638				51.9	%		$	25,938				63.1	%
TASER C2			3,368				7.7	%			—				0.0	%
TASER Cam			1,784				4.1	%			1,760				4.3	%
ADVANCED TASER			2,055				4.7	%			1,180				2.8	%
Single Cartridges			10,224				23.5	%			10,939				26.5	%
Other			3,519				8.1	%			1,348				3.3	%
Total		$	43,588				100.0	%		$	41,165				100.0	%