AXON ENTERPRISE, INC. - Annual Report: 2011 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

For the fiscal year ended December 31, 2011

or

For the transition period from                    to                    

Commission File Number: 001-16391

TASER International, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(480) 991-0797

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

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.

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

The aggregate market value of the common stock held by non-affiliates of the registrant, based on the last sales price of the issuer’s common stock on June 30, 2011, which was the last business day of the registrant’s most recently completed second fiscal quarter, as reported by NASDAQ, was $264,945,572

The number of shares of the registrant’s common stock outstanding as of March 1, 2012 was 65,253,641.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the registrant’s definitive proxy statement to be prepared and filed with the Securities and Exchange Commission not later than 120 days after December 31, 2011 are incorporated by reference into Part III of this Form 10-K.

TASER INTERNATIONAL, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2011

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PART I

The statements contained in this report that are not historical are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions or strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things:

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These statements are qualified by important factors that could cause our actual results to differ materially from those reflected by the forward-looking statements. Such factors include but are not limited to those factors detailed in ITEM 1A of this annual report entitled “Risk Factors.” The risks included in the foregoing list are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. New risk factors emerge from time to time, and it is not possible for management to predict all such factors, nor can it assess the impact of all such risk factors or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to expectations over time.

We own the following trademarks: ADVANCED TASER^®, CHECKLOK^®, TASER^®, XREP^®, C2^®, X2^®, X3^®, the bolt on West Hemisphere logo, the bolt on ball logo, the bolt on circle logo, and the bolt within circle logo, all registered in the United States. All other trademarks and service marks including M18™, M26™, X26™, X26C™, AXON™, AXON Flex™, EVIDENCE.COM™, Shockwave™, PROTECTOR™, TASER CAM™ and designs belong to TASER International, Inc., except as expressly indicated as belonging to another.

Overview

TASER International, Inc.’s (the Company or TASER or we or our) core mission is to protect life, prevent conflict and resolve disputes through technologies that make communities safer. We are the market leader in the development, manufacture and sale of advanced Electronic Control Devices (ECDs) designed for use in law enforcement, military, corrections, private security and personal defense. Since our inception in 1993, we have remained committed to providing solutions to violent confrontation by developing devices with proprietary technology to incapacitate dangerous, combative, or high-risk subjects who pose a risk to law enforcement officers, innocent citizens, or themselves in a manner that is generally recognized as a safer alternative to other uses of force.

TASER solutions deliver significant results to our customers and to communities in which they are deployed. There are over 100 published studies on the effects of TASER ECDs. Just as importantly, there are eight published independent epidemiological studies covering a total of 48,228 subjects. The 2008 Eastman study found that 5.4% of conductive electronic weapons uses “clearly prevented the use of lethal force by police.” The largest epidemiological study was the 2009 MacDonald study of 24,380 uses of force. In addition, the papers of Taylor (13,983 subjects), Mesloh (4,303 subjects), Mumola (2,686 subjects), Smith (1,645 subjects), Butler (562 subjects), and White (243 subjects) show a significant reduction in both officer and suspect injuries with TASER ECD usage. 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, and ultimately taxpayers.

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 optimal situation is to prevent 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.

Central to our strategy, we conduct research and develop advanced technologies for both the creation of new, and the enhancement of existing, hardware and software products and services. We believe that delivering breakthrough innovation and high-value solutions through our various product platforms is the key to delivering compelling value propositions to meet our customers’ needs and to drive our future growth. We place the highest level of importance on the safety and appropriate use of our products and have established industry leading training services to provide our users a comprehensive overview of the legal, policy, medical information and risk mitigation issues relating to our ECDs and the use of force. Our products are sold through a network of distribution channels developed for selling and marketing our products and services to law enforcement agencies, primarily in North America, with continued focus and effort placed on expanding these programs in international, military and other markets. In order to facilitate sales and provide customer service to certain European customers, we established TASER International Europe SE, a wholly owned subsidiary, in 2009.

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In the fourth quarter of 2011, the investment in the AXON portion of the Video business began to be truly reviewed and analyzed as a stand-alone operation, whereas in prior years the business primarily consisted of research and development in anticipation of eventual product launch. In discussions with the Chief Operating Decision Maker (CODM), in our case the CEO, it was determined that understanding the contribution and profitability of the video business was important to his management of the entire enterprise. Senior management talked at length on the best way to look at the video business as it continued to iterate on different ways to separate the business into distinct product segments. As the Company analyzed the business in that manner, it became apparent that due to the support that the software business had to give to the video hardware to make sure the seamless integration of hardware and software occurred, it made sense to include AXON hardware in the video segment and not just the EVIDENCE.COM software-as-a-service revenue. Further, because TASER Cam uses EVIDENCE.COM to store videos and the developers of EVIDENCE.COM had to put effort into the upload and storage of TASER Cam videos, we concluded that the video segment should ultimately include sales and expenses for AXON hardware and accessories, EVIDENCE.COM software-as-a-service and TASER Cam. Based on this evaluation, during the fourth quarter of 2011 management determined that its operations are comprised of two reportable segments, the sale of ECDs, accessories and other products and services (the “ECD segment”) and the Video business, which includes the TASER Cam, AXON Video products and EVIDENCE.COM (the “Video segment”).

Only those costs directly attributable to the Video segment are included in that segment. The CODM does not see any value in allocating costs for items not directly attributable to the Video segment for several reasons. The first is that the Company’s base business is the ECD segment, and the majority of the expenses of the Company would continue even if the Company was not in the video business. If the Company were to allocate general expenses to the video business based on some allocation method (e.g. on sales), it would not improve the value of the segment reporting, it would only serve to make the ECD business look better and give investors a false sense of the profitability of the ECD business without the Video segment. The CODM wants to understand the true investment in the video business and that result is delivered by allocating only costs directly associated with the Video segment. By leaving the remainder of costs not associated with the Video segment in the ECD segment, the Company is able to compare the ECD segment to historical figures where the bulk of the business was only that segment of operations to gauge relative efficiency of the ECD operation vs. historical norms. Further information about our reportable segments and sales by geographic region is included in footnotes 1(p) and 15 of the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

Products

We make Electronic Control Devices (ECDs) that use our proprietary Neuro Muscular Incapacitation (NMI) effects for two main types of market segments: (i) the law enforcement, military, corrections and professional security markets; and (ii) the consumer market. Our products use a replaceable cartridge containing compressed nitrogen to deploy and propel two small probes that are attached to the ECD by insulated conductive wires with lengths ranging from 15 to 35 feet. Our ECDs transmit electrical pulses along the wires and into the body affecting the sensory and motor functions of the peripheral nervous system. The electric current can penetrate up to two cumulative inches of clothing or approximately one inch per probe. The basic design is to provide time cycles that provide incapacitating effects that last in cycles of five seconds for our law enforcement, military and corrections products and up to thirty seconds for our consumer market models. This effect can be extended, if necessary, by the operator.

The benefits of using ECDs in the field have been undeniable and powerful. By some studies, TASER ECDs have prevented death or serious injury over 80,000 times from the first deployment to the end of 2011. In addition to protecting life, the use of these devices instead of other force options has substantially reduced injuries for suspects and officers with substantial liability and workers’ compensation savings to agencies around the world.

Law Enforcement, Military, Corrections and Professional Security Products

For the law enforcement, military, corrections and professional security markets, we manufacture four hand-held ECD product lines and have also incorporated our technology into several other product line extensions.

Our most popular product is the TASER^® X26™ with Shaped Pulse Technology™, which we introduced in 2003. Shaped Pulse Technology is a refined energy pulse that concentrates a small portion of energy to first penetrate any barriers while the majority of the energy flows into the target freely after the barrier has been penetrated. The TASER X26 product line consists of the TASER X26, various cartridges (described below), a digital power magazine (DPM™)—the replaceable battery power supply, data download software and equipment, extended warranties, and a number of holstering options and accessories. The TASER X26 product line (excluding sales of the consumer TASER^® X26C™ and individual cartridge sales) accounted for $36.6 million, $40.8 million and $53.4 million, or 41%, 47% and 51% of our net sales, for the years ended December 31, 2011, 2010 and 2009, respectively.

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In the second quarter of 2011, we began our first shipments of the TASER^® X2™. The TASER X2 is cost efficient, simple to use, and similar in size to the current TASER flagship product, the TASER X26. The TASER X2 features a second shot for instant miss recovery, dual lasers for improved accuracy, enhanced power magazine with more than 500 firings, and a warning arc that helps prevent conflicts from escalating, all in a small, compact size and competitively priced. The X2 also seamlessly integrates with EVIDENCE.COM to enable easier, electronic and more automated management of the device. The TASER X2 product line accounted for $8.1 million, or 9.0%, of our net sales for the year ended December 31, 2011. In addition to the $8.1 million of X2 ECD sales for 2011, the Company also sold $2.1 million in smart cartridges for the X2 ECD.

In 2009, we introduced the TASER^® X3™, a new multi-shot ECD that can engage three separate targets, display warning arcs while loaded, deliver a calibrated NMI pulse that results in improved safety characteristics and enhanced data port logs known as the Trilogy Logs that include event, pulse, and engineering logs. While the TASER X3 offers enhanced firepower over existing ECDs, it also represents a significant leap in sensor and computation power, making it the most intelligent hand-held force option ever developed. The TASER X3 product line (excluding individual cartridge sales) accounted for $0.3 million, $2.3 million and $0.7 million, or less than 1%, 3% and less than 1%, of our net sales for the years ended December 31, 2011, 2010 and 2009, respectively. Because the TASER X2 delivered many of the same advanced features as the X3 with a smaller form factor and a lower price, the Company expects that most of the future sales of the TASER X3 will be to tactical response teams and animal control officers using a variant of the TASER X3, the TASER X3W wildlife ECD.

Our fourth law enforcement product line is the ADVANCED TASER^® M26™, which we originally launched in November 1999 and was the first TASER ECD featuring the NMI capability. The ADVANCED TASER M26 product line consists of the ADVANCED TASER M26, various cartridges (described below), rechargeable batteries, a battery charging system, data download software and equipment, extended warranties, and a number of holstering options and accessories. We discontinued the sale of this product to law enforcement in North America beginning in 2011; however, it will continue to be available and will be supported for emerging international markets who wish to introduce our technology with a lower cost option. The ADVANCED TASER M26 product line (excluding sales of the consumer ADVANCED TASER^® M26C and individual cartridge sales) accounted for $2.4 million, $2.2 million and $3.3 million, or 3%, of our net sales for the years ended December 31, 2011, 2010 and 2009.

ECD Product Line Extensions

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

The TASER eXtended Range Electronic Projectile (XREP™) is a self-contained, wireless (non-tethered) ECD that deploys from a 12-gauge pump-action shotgun. It delivers an impact distraction to the suspect and a similar NMI bio-effect as our X26 handheld ECD, but can be delivered to a maximum effective range of 100 feet (30.48 meters). The battery supply is fully integrated into the chassis and provides the power to the XREP round. While the XREP can be fired from a pump-action shotgun, we also partnered with Mossberg^® to develop the TASER^® X12™ Less-Lethal Shotgun (LLS). The TASER X12 is a Mossberg 500 12-gauge shotgun modified for improved functioning with the XREP™. It is a fully integrated less-lethal platform. The TASER X12 includes Radial Key™ ammunition technology, which is a proprietary, patented design to prevent the TASER X12 from deploying lethal 12-gauge rounds, eliminating the possibility of an end user loading lethal ammunition during high-stress situations.

The TASER^® Shockwave™ security system is the first generation of TASER^® Remote Area Denial (TRAD™) technology allowing for both increased safety and stand-off capability during hostile situations through the use of our NMI technology. It is a manually activated TASER security system that simultaneously fires six TASER cartridges to saturate a 20-degree arc with 25-foot TASER cartridges. The Shockwave is designed as a fully modular system, allowing the end user complete flexibility to deploy as needed to achieve the desired objective. Multiple TASER Shockwave units can be stacked together either horizontally in order to extend area coverage, vertically to allow multiple salvo engagements, or vertically to maximize either area coverage or cartridge pattern density. These features provide the capability to project area denial from a secure location. The system minimizes risk as the system can be activated with the push of a button on a control box at a safe stand-off distance of up to 100 meters. The TASER Shockwave unit deploys its cartridges up to 25-feet to instantaneously incapacitate multiple personnel within the field of deployment coverage.

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Consumer Products

Our primary consumer product for the personal defense market is the TASER^® C2™ ECD, which we introduced in 2007. This device is a compact system that provides the same proven NMI effectiveness as our market leading TASER X26 but in a less intimidating, more compact form factor and at a price point more attractive to private citizens. Our sale and marketing of the TASER C2 promotes responsible ownership and aims to prevent misuse by keeping the device inactive until the owner has successfully completed identification verification. The primary benefit of the device is to help the average person deter and incapacitate a perpetrator at a distance as opposed to using lethal force or other less lethal options that require very close proximity in dangerous situations.

We also currently manufacture the TASER^® X26C™ and ADVANCED TASER^® M26C™, devices for use by consumers. The TASER X26C was developed in conjunction with the law enforcement TASER X26 version; however, its effect lasts longer allowing the owner more time to escape danger. The ADVANCED TASER M26C was designed after the law enforcement ADVANCED TASER M26 version. We previously manufactured the ADVANCED TASER M18 and ADVANCED TASER M18L, which were discontinued as of 2011. The M18 and M18L were designed after the law enforcement ADVANCED TASER M26, however, the electrical pulse rate is lower. The M18 and M18L are identical, except that the M18L has an integrated laser aiming device. These four product lines consist of the units themselves, cartridges, batteries and digital power magazines, and a number of holstering options and accessories.

Our total consumer products accounted for $4.6 million, $4.8 million and $5.9 million, or 5%, 6% and 6%, of our net sales for the years ended December 31, 2011, 2010 and 2009, respectively.

Cartridges and Other Accessories

We manufacture multiple cartridge types: a 15’ cartridge, a 21’ cartridge, a 25’ XP cartridge, a 35’ cartridge, a 21’ training cartridge, a 15’ cartridge for the TASER C2, and in 2009, we introduced the new range of Smart Cartridges for use with the TASER X2 and X3 devices. The 15’ cartridge is capable of firing a distance of 15 feet and is sold primarily to the law enforcement market for training and the consumer market for use in the ADVANCED TASER M18, ADVANCED TASER M18L, ADVANCED TASER M26C, and TASER X26C devices. The TASER C2 15’ cartridge is designed specifically for use in the TASER C2. The 21’, 25’ XP, 35’, and 21’ training cartridges are sold only to the law enforcement, military, and corrections markets. The 25’ XP cartridge is different from the 21’ cartridge in that it has a longer range and its probes are longer and heavier, which allows it to penetrate a thicker clothing barrier. The training cartridge contains non-conductive wiring, which allows law enforcement, military, and corrections trainers to use the cartridge during training role-playing scenarios. The Smart Cartridges designed for the TASER X2 and X3 come in a more compact profile to accommodate the 2-in-1 and 3-in-1 multi-shot capabilities of the TASER X2 and X3, with ranges of 15’, 25’ and 35’. The Smart Cartridge communicates with the fire control system within the TASER X2 and X3 indicating the type of cartridge loaded in each bay and its deployment status. The new static resistant propulsion system allows the TASER X2 and X3 to display NMI arcs without firing the cartridge, which also reduces the risk of accidental static discharge misfires.

All of our cartridges, with the exception of the training cartridge, contain numerous colored, confetti-like tags bearing the cartridge’s serial number. These tags, referred to as Anti-Felon Identification tags, or AFIDs, are scattered when one of our cartridges is deployed. We require sellers of our products to participate in the AFID program by registering buyers of our cartridges. In many cases, we can use AFIDs to identify the registered owner of cartridges deployed. AFIDs provide an additional level of accountability in using TASER ECD devices.

Individual cartridge sales accounted for approximately $25.3 million, $22.0 million and $27.9 million, or approximately 28%, 25% and 27%, of our net sales for the years ended December 31, 2011, 2010 and 2009, respectively.

In 2011, the Company introduced the Auto Shut-Down Performance Power Magazine (APPM). The APPM is a modified TASER ECD battery which shuts down the high voltage output of the ECD after 5 seconds and which also contains a built in speaker that alerts the user to the impending shut down. The APPM provides an audible alert for the last two seconds of a trigger activated firing cycle before automatically shutting down the device.

The APPM is available for use in the TASER X2 ECD only and is also available as an option for the new TASER Cam HD. The APPM feature of the TASER Cam HD Auto Shutdown (AS) has no impact on video and audio recording; however, the audio alert will be captured on the recording and may distort any audio captured from the incident during the duration of the audio alert. As long as the safety switch is in the up (armed) position, the TASER Cam HD AS will continue to capture the event.

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In 2009, we introduced the TASER^® Controlled Digital Power Magazine (CDPM™), a new accessory for the TASER X26 ECD. The CDPM has the same functionality as a regular DPM; however, the CDPM features a disabling safety key and wrist strap lanyard designed to secure the device to the officer. If a prisoner or suspect attempts to take the TASER X26 device away, the lanyard pulls the safety key connection away from the unit. If the key is separated for more than two seconds, the system instantly deactivates the TASER X26 and requires a password to reactivate it.

In 2006, we launched an accessory to the TASER X26 called the TASER^® Cam™ recorder. The TASER Cam is a video recording device that captures both video and audio of potential and actual TASER use incidents. The device can capture video and audio before, during and after a TASER deployment, which provides law enforcement with a greater level of accountability to support their use of TASER devices against a resistant subject. The TASER Cam is capable of recording in zero light conditions through the use of an infrared illuminator. A non-audio version of the device is also available for agencies operating in states where legislation prohibits the use of audio recordings. The TASER Cam has become the leading on-officer video capability around the world with over 50,000 units deployed.

In 2004, we introduced the X-Rail™ mount as an accessory designed to attach an X26 ECD to a Picatinny rail (MIL-STD-1913 rail) providing law enforcement and military the ability to combine TASER technology with their firearms giving the user lethal and non-lethal options on the same weapon.

AXON and EVIDENCE.COM

In 2008 and 2009, we devoted significant resources to the design and development of TASER AXON™ tactical computer and EVIDENCE.COM™, our end-to-end on-officer video and digital evidence management solution.

The AXON tactical computer (ATC) combines advanced audio-video record/capture capabilities worn by first responders. An audio-video earpiece, imager, speaker and microphone integrates into the communications loop between existing radios and the communications headset, recording video of critical incidents from the visual perspective of the officer. AXON significantly reduces liability risk for individual police officers and for law enforcement agencies as it captures the ‘truth’ of what actually happened in every incident. With greater than $2 billion in annual cost to United States taxpayers in payment of law enforcement frivolous and sustained complaints alone, and many years of research by the International Association of Chiefs of Police (IACP) and other law enforcement organizations on the benefits of video, AXON is well positioned to save agencies money and time. AXON improves officer efficiency by reducing report documentation workload while increasing accuracy and accountability.

EVIDENCE.COM is a virtual evidence management system and warehouse, offering digital evidence management, sharing, analysis and storage in a highly secure, easily accessible environment. The service is designed so that an agency can manage all of its digital evidence in one place and currently accommodates video from many sources including AXON, TASER Cam, audio files, digital pictures, fixed cameras including interview rooms, trilogy logs from our X2 and X3 devices and more. From EVIDENCE.COM, both agencies and legal professionals may quickly and securely access key evidence data without the difficult and sometimes impossible inventory searches common to existing evidence management and storage methods. Further, EVIDENCE.COM automates key workflows from evidence collection to review, taking out expensive and manual steps in the production and movement of evidence among law enforcement and legal professionals.

While our cloud-based solution provides much lower implementation risk and lower total cost of ownership than agency-managed systems, market feedback in 2011 led to a key decision to offer agencies the ability to have a robust local evidence management capability or to use EVIDENCE.COM with the ability to move between the two depending upon agency preference. This decision has further enabled international field trials for the AXON and EVIDENCE.COM capabilities.

We launched initial field trials of the AXON and EVIDENCE.COM in the fourth quarter of 2009, and completed a number of trials in 2010 which resulted in several agency deployments. In 2011, we closed the year with over $1 million in orders, closing greater than 50% of those deals in the fourth quarter of 2011, providing the agencies that purchased in the fourth quarter of 2011 with the option to upgrade to AXON Flex when available in 2012. We anticipate an increasing volume of similar field trial programs in 2012 and believe these trial programs are the best way for our customers to see the powerful capabilities, benefits and strong return on investment of the value proposition of this technology for themselves.

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Market feedback in 2011 led to development efforts of another AXON product called AXON Flex, which was introduced in early 2012. TASER’s AXON Flex is a breakthrough point of view video system that improves transparency between law enforcement agencies and their communities, while protecting officers from false claims. AXON Flex provides complete flexibility in how an officer chooses to wear the device, including an option to deploy as an attachment to Oakley Flak Jacket eyewear. AXON Flex will also provide the flexibility for officers to use Android or iOS devices to review and tag evidence without the requirement to do so, eliminating the need for the ATC used in first generation AXON. AXON Flex has followed the same market-driven development methodology used for X2 and has had significant interest from many agencies around the world. Thousands of law enforcement officers assisted in the development of AXON Flex, making it the most customer-driven officer worn camera solution ever produced.

Product Warranties

We offer a one year limited warranty on the TASER X2, X3, TASER X26, ADVANCED TASER, AXON ATC, headcam, communications hub, and TASER Cam devices. After the warranty expires, if the device fails to operate properly for any reason, we will replace the X26 at a discounted price depending on when the product was placed in service. These fees are intended to cover the handling and repair costs and include a profit. We believe this policy is attractive to our law enforcement, military and corrections agency customers. In particular, this policy avoids disputes regarding the source or cause of any defect. Extended warranties, which provide additional coverage beyond the limited warranty, ranging from one to four years, are also offered at specified fees.

We offer a 90-day limited warranty on the TASER C2 and the X26C devices. Our TASER C2 and the X26C are designed to disable an attacker for up to 30 seconds. We encourage private citizens to leave the units and flee after firing them. As a result, we also provide free replacement units to private citizens who follow this suggested procedure. To qualify for the replacement unit, users must file a police report that describes the incident and confirms the use of the TASER C2 or the X26C.

Markets

Law Enforcement and Corrections

Federal, state and local law enforcement agencies in the United States and throughout the world currently represent the primary target market for our TASER ECDs. In the law enforcement market, more than 16,000 law enforcement agencies in more than 100 countries have made initial purchases of our TASER brand devices for testing or deployment.

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

Military Forces, both United States and Foreign Allies

TASER devices continue to be deployed in support of key strategic military operations in locations around the world. We continue our focus initiative on supporting our military customers. The former head of the Military Joint Non-Lethal Weapons Directorate is our Vice President of Government and Military Programs, and we meet quarterly with our Senior Executive Advisory Board (SEAB) comprised of a team of professionals with extensive military, homeland defense and law enforcement experience with the purpose of advising on business models in support of military users. The business group (Federal Programs) has concentrated on supporting military and other federal use of our existing products as well as developing new technology through government funded research and development. In 2008, we entered into a science and technology contract with the Joint Non-Lethal Weapons Directorate (JNLWD) of the United States Department of Defense to develop a 40mm projectile, compatible with already fielded weapons, which allows for extension and improvement of our existing eXtended Range Electronic Projectile (XREP) technology. The development contract was comprised of three phases, each of which were successfully completed between 2008 and 2010.

Private Security

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

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Private Citizen / Personal Protection

In July 2007, we introduced the TASER C2 personal protection device, specifically designed for the private citizen market. This consumer product combined with other consumer offerings, contributed 5%, 6% and 6% of our total net sales in 2011, 2010 and 2009, respectively. While it has been a challenge generating product traction in a difficult economic climate for consumers, we believe private citizen sales will continue to be a steady contributor to our business in 2012 as a result of various distribution relationships and marketing strategies we have put in place to continue to promote awareness of the TASER C2 in the consumer market.

Wildlife Management

While the focus of our core technology has been protecting human life in the law enforcement and civilian markets, through a multi-year research partnership with the Alaska Department of Fish and Game (ADFG), we have determined that our core technology may offer wildlife professionals a tool to protect both human and animal life during wildlife management activities. The TASER X3W Wildlife ECD has been optimized for wildlife professionals and sales efforts started in 2011.

Our research partnership has suggested that the X3W may be useful for animal hazing, aversive conditioning, brief capture, injury assessment, and human safety. While TASER believes that the key to decreasing human-wildlife conflict is a broad, conservation-based strategy focusing on human behavior modification, we believe that our devices offer a great tool to supplement current wildlife management tools.

Through our research partnership with ADFG, our devices have been used on Alaskan Brown Bear and Alaskan Moose in both research and field use. The research and field use has suggested that the devices are safe and effective to use on these animals. There have also been anecdotal reports of field use on white tail deer and Arizona javelina with no reports of morbidity or mortality. TASER is actively involved in ongoing research for the application of TASER technology in the area of wildlife management.

Sales and Marketing

Law enforcement, federal/military, corrections and security agencies represent our primary target markets. In each of these markets, the decision to purchase TASER ECDs is normally made by a group of people, including the agency head, the agency’s training staff and agency weapons experts. Depending on the size and cost of the device deployment and local procurement rules and customs, the decision may involve political decision-makers such as city council members or the federal government. The decision-making process can take as little as a few weeks or as long as several years. Although we have focused on three primary markets, we have been able to expand our customer base to thousands of end users within these markets. We currently sell our products to more than 16,000 law enforcement agencies.

Since the introduction of the ADVANCED TASER M26 in 1999, we have used multiple types of media to communicate the benefits of acquiring and deploying our products. These campaigns have included the development of personalized CD/DVD packages geared toward law enforcement leaders in the community, web and print advertisements in law enforcement publications, and the use of more than 2,600 training classes conducted around the world, and more recently in the case of the TASER X2, an integrated online media launch including a dedicated website. We also target key regional and national law enforcement trade shows where we can demonstrate the TASER devices to leading departments. In 2011, we attended and exhibited at many of the major regional, national and international law enforcement trade shows. We also held our annual TASER Conference as part of our certified master instructor school, the continued focus of which was to train the officers in the use of all of the latest ECDs and other new products.

In 2011, TASER launched its corporate website to deliver more benefit-driven messages and to drive follow up by TASER or one of our distribution partners. The new website has already improved TASER search engine optimization and lead capture and has led to improvements in visits, time on site and other important web statistics. We also launched our first foreign-language site for French speakers around the world (www.taser.fr) with the same goals to provide information and education on our products and services in a local language. We plan to continue investment in web activities (search, advertising and social media), public relations and law enforcement trade shows and conferences in 2012, as it provides us the ability to market our products to our target audience. We believe these types of activities accelerate penetration of our TASER product lines in each market, which should lead to increased visibility in both the private security and private citizen markets and reinforce the value of these devices for self-defense.

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United States Distribution

With the exception of several accounts and states to which we sell directly, the vast majority of our law enforcement agency sales in the United States are made through our network of law enforcement distributors. In addition, we have one military and federal government contracting distributor. These distributors were selected based upon their reputation within their respective industries, their contacts and their distribution network. Our regional managers work closely with the distributors in their territory to inform and educate the law enforcement communities. We continue to monitor our law enforcement distributors closely to help ensure that our service standards are achieved. We also reserve the right to take any large agency order directly to secure the agency’s account balance with us.

Sales in the private citizen market are primarily made through our commercial distributors and our website, iTASER.com. We have also established relationships selling to sporting goods retail chains. We have implemented a variety of marketing initiatives to support sales of the TASER C2 personal protection device, with a focus on web, public relations and consumer trade shows. We continue to sell all other TASER citizen devices and products through internet sales and our established commercial distributors.

International Distribution

We market and distribute our products to foreign markets through a network of distributors. For geographical and cultural reasons, our distributors usually have a territory defined by their country’s borders. These distributors market both our law enforcement, military, and corrections products, and our consumer products where allowed by law.

Our distributors work with local law enforcement, military and corrections agencies in the same manner as our domestic market distributors. For example, they perform demonstrations, attend industry tradeshows, maintain country specific websites, engage in print advertising and arrange training classes. The company established a wholly owned subsidiary in Europe, TASER International Europe SE (“TASER Europe”), in 2009 to facilitate sales and provide customer service to our customers in the European region.

Training Programs

Most law enforcement, military, security and corrections agencies will not purchase new weapons until a training program is in place to instruct and certify personnel in their proper use. We offer a 20 hour class that certifies law enforcement, military, corrections and security agency trainers as instructors in the use of TASER ECDs. We have partnered with the Northeast Wisconsin Technical College (NWTC) to provide an online learning opportunity for new and re-certifying TASER instructors. As of December 31, 2011, over 49,556 law enforcement officers around the world have been trained and certified as instructors in the proper use of TASER brand devices. This includes 44,468 officers in the United States and 5,088 in other countries.

Currently, 2,050 of our certified instructors have undergone further training and become certified as master instructors, of which 1,472 were certified in the United States and 578 were international. We authorize these individuals to train and certify other law enforcement, military, corrections and professional security agency trainers as TASER instructors, not just end users within their own organization. The Master Instructors are independent professional trainers, serve as local area TASER experts, and assist in conducting TASER demonstrations at other police departments within their regions. In addition, 221 of our certified instructors have completed the same training and were certified as Advanced Instructors. Advanced Instructors are authorized to certify others within their own agency as TASER instructors. From 2001 to 2008, TASER held one Master Instructor School per year. Due to increased demand, in 2009 we started scheduling two Master Instructor Schools each year in the United States, one in the East and one in the West, to accommodate customer requests. The fee for attending the Master Instructor School is $695. Military personnel are trained by our Chief Instructor. One hundred seventy of our Master Instructors have agreed to conduct TASER device training classes on a regular basis. We provide logistical support for the training classes. We charge a fee of $350 for each training attendee who is being certified for the first time and $175 for recertification. We pay Master Instructors a per-session training fee for each session they conduct. We conducted 396 instructor courses in 2011 and certified 11,019 instructors. As of December 31, 2011, we have conducted a cumulative 3,007 training courses during which we have trained more than 58,307 individuals as instructors for TASER ECDs.

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In 2005, we started a TASER Technician course to train agencies on proper care and preventative maintenance of TASER devices. We charge a fee of $275 to each attendee. In 2011, we hosted 43 Technician courses, including 40 in the United States and 3 internationally. A total of 510 students attended the Technician course in the United States and 32 attended in other countries. As of December 31, 2011, 2,843 people have been trained and certified as TASER Technicians in 174 courses.

In 2008, we began offering a TASER Evidence Collection and Analysis (ECA) course to teach investigators how to collect and analyze TASER ECD related evidence at a crime scene. In 2011 we conducted 29 such ECA courses in the United States and trained 240 people, and conducted three courses internationally for 23 people. As of December 31, 2011, we have conducted a total of 73 ECA courses and trained 618 people. The fee for the ECA course is $150 per student.

We have also designed a training course for private citizen customers. Customers who purchase an X26C device receive a certificate good for a one hour, one-on-one training session with an X26C certified instructor. We have 836 instructors certified to give the X26C training. In 2011 we launched a new online training course for consumer instructors. This course focuses on non-law enforcement private self-defense training schools that have expressed a desire to include TASER consumer products in their courses. The course fee is $99. As of December 31, 2011, 46 people have completed the online consumer instructor course.

In 2010 we launched an online TASER ECD End User course through NWTC. The course fee is $30 per student. In 2011, 1190 people completed the online user course for the X26. From July through December, 2011, 333 people completed the online user course for the X2 as part of a promotional program.

To coordinate the growing demands of our training programs, we created a Training Advisory Board. This board annually reviews the qualifications of the master instructors, and provides retraining or certification as required. In addition, the Training Advisory Board oversees the trainers and curriculum to ensure that new information is properly communicated and implemented. The Training Advisory Board also gives input into new product development. We also created the position of Senior Master Instructor. Twenty four experienced Master Instructors have been promoted to this position based on their exemplary performance as Master Instructors. Their primary duties are to perform quality control checks on Master Instructors during an instructor course and to help instruct at the Master Instructor School. Additionally, we employ one staff instructor who is a full-time employee responsible for coordinating course delivery and development. We also employ a Director of Training Operations who oversees the day to day operation of the department, coordinates major training events, assists with course development and delivery, and supervises the clerical staff.

Manufacturing

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

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

We continuously seek opportunities to invest in automated equipment for the continuous improvement of product quality and reduction of manufacturing costs. As a result, we have implemented a number of equipment initiatives including the purchase and integration of robotic equipment, computerized laboratory and medical testing equipment, machining and tooling equipment, as well as sophisticated modeling equipment for our Research and Development department. In 2009, we completed an ambitious undertaking with the final installation of our highly automated cartridge assembly line which, in 2010, has improved both our production capacity and yields, while significantly improving efficiency over what was previously a very labor-intensive manufacturing process.

In 2011, we began a program to automate the gathering of our test data. We now have the ability to review real-time test data from our in-process test equipment as well as from equipment located at our suppliers. This allows us to recognize and correct processing issues before they move out of control limits. This has also reduced rework and scrap costs, as well as improving supplier quality and internal productivity.

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Supply chain management has, and will continue to be, a focus of ours. We presently purchase completed Printed Circuit Board Assemblies (PCBAs) and components primarily from suppliers located in the United States, along with selective strategic relationships internationally. Although we currently obtain plastic components from an outside supplier base, we own all the designs and tooling. We believe there are readily available qualified alternative suppliers in most cases who can consistently meet our needs for these components. We continue to develop and implement policies to mitigate supply chain risk and ensure continuity of supply, while maintaining efficiencies at all levels within the organization.

Competition

Law Enforcement, Corrections and Private Security Markets

The primary competitive factors in the law enforcement and corrections market include a weapon’s accuracy, effectiveness, safety, cost and ease of use. Stinger Systems introduced an electronic device in 2007 to compete with the TASER X26; however, they had limited success before going out of business in 2010. Stinger Systems subsequently sold its assets to Karbon Arms. We are not aware of any significant sales to date by Karbon Arms. We were granted summary judgment in a patent infringement claim against Stinger Systems in 2010 and an injunction was issued against Stinger Systems in August 2010. In July of 2011, we filed a complaint against Karbon Arms, LLC for infringement of United States patent numbers 7,800,855 (the 855 patent) and 7,782,592 (the 592 patent) in United States District Court for the District of Delaware seeking damages, injunctive relief and an award of attorney’s fees. Karbon Arms filed a counter suit on July 18, 2011 alleging invalidity and non-infringement of four of TASER’s patents, tortuous interference with prospective contractual relations and for false advertising under the Lanham Act. This lawsuit is in the discovery phase and trial has been set for January 2014. We believe that our strong relationship with customers, our large installed base of products, and the significant amount of medical and safety testing already performed on our products will provide us with a strong competitive advantage over our competition.

We also believe the ADVANCED TASER, TASER X26, TASER X2 and TASER X3 devices compete indirectly with a variety of non-lethal alternatives. These alternatives include, but are not limited to, pepper spray and impact weapons sold by companies such as Defense Technology and PepperBall Technologies, Inc. We believe our TASER brand devices’ advanced technology, versatility, effectiveness, built-in accountability systems, and low injury rate enable it to compete effectively against these other less-lethal alternatives.

Military Market

In the military markets, both in the United States and abroad, a wide variety of weapon systems are utilized to accomplish the mission at hand. Conducted energy devices have gained increased acceptance as a result of the policing role of military personnel in the conflicts in both Iraq and Afghanistan. There has also been an increased awareness of the use of non-lethal weapons to preserve human intelligence. TASER ECDs give our armed forces one means to capture or immobilize targets without using lethal force. We are the only supplier providing ECDs to these military agencies. However, there is indirect competition from pepper spray and impact weapons sold by companies such as Defense Technology and PepperBall Technologies, Inc.

Private Citizen Market

Electronic control devices have gained limited acceptance in the private citizen market. These devices compete with other less lethal weapons such as batons, clubs and chemical sprays as well as lethal force options. The primary competitive factors in the private citizen market include a weapon’s cost, effectiveness, safety and ease of use. We believe the widespread adoption of our TASER devices by prominent law enforcement agencies will help us to further penetrate the private citizen market.

Video Evidence Market

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

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Regulation

United States Regulation

The TASER X26, TASER X2, TASER X3, ADVANCED TASER, TASER C2, SHOCKWAVE and AIR TASER 34000™ devices, as well as the cartridges used by these devices, are subject to regulations; however, none are considered to be a “firearm” by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives. The TASER XREP, however, does use a propellant system which falls under the definition of a “firearm” and is, therefore, subject to Federal firearms-related regulations specifically applying to the sale and distribution of these devices within the United States. In the 1980s many states adopted regulations restricting the sale and use of stun guns, inexpensive hand-held shock devices and electronic weapons. We believe existing stun gun laws and regulations also apply to our devices.

In 2009, New Jersey’s Attorney General approved a supplemental use of force policy that allows law enforcement officers in New Jersey to use electronic stun devices in limited circumstances involving emotionally disturbed individuals. This policy also limits the number of patrol officers per agency who carry electronic control devices. Prior to 2009, New Jersey was the only state to prohibit the use of ECDs and stun devices by law enforcement. From 2002 through 2004, we worked with several law enforcement agencies, government agencies and distributors to overturn prior legislation preventing the sale of TASER devices to law enforcement agencies in certain regions of the United States. These combined efforts were successful in changing the legislation in the states of Hawaii, Massachusetts and Michigan with a significant additional change in New Jersey allowing all law enforcement officers to carry TASER devices if accompanied by a TASER Cam capability.

In many cases, the law enforcement and corrections market is subject to different regulations than the private citizen market. Where different regulations exist, we assume the regulations affecting the private citizen market also apply to the private security markets except as the applicable regulations otherwise specifically provide.

As of December 31, 2011, state and local codes prohibit the possession of stun guns, including TASER ECDs, by the general public in seven states: District of Columbia, Hawaii, Massachusetts, Michigan, New Jersey, New York, and Rhode Island. Some cities and municipalities also prohibit private citizen possession or use of our products. With regard to Michigan, in an April 21, 2011 decision, a Circuit Court Judge in the 18^th Circuit Court for the County of Bay, in the matter of People of the State of Michigan v. Dean Scott Yanna, Case No. 10-10536-FH, found that the state statute prohibiting stun devices (MCA 750.224a) is unconstitutional under the Second Amendment of the United States Constitution.

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

Our EVIDENCE.COM Software-as-a-Service (SaaS) online offering is subject to government regulation of the internet in many areas, including telecommunications, data protection, user privacy and online content.

United States Export Regulation

Our ECDs are considered a crime control product by the United States government. Accordingly, the export of our devices is regulated under export administration regulations. As a result, we must obtain export licenses from the Department of Commerce for all shipments to foreign countries other than Canada. Most of our requests for export licenses have been granted, and the need to obtain these licenses has not caused a material delay in our shipments. The need to obtain licenses, however, has limited or impeded our ability to ship to certain foreign markets. Export regulations also prohibit the further shipment of our products from foreign markets in which we hold a valid export license to foreign markets in which we do not hold an export license for our products.

In addition, in 2000, the Department of Commerce adopted regulations restricting the export of technology used in our devices. These regulations apply to both the technology incorporated in our device systems and in the processes used to produce them. The technology export regulations do not apply to production that takes place within the United States but is applicable to all sub-assemblies and controlled items manufactured outside the United States.

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Foreign Regulation

Foreign regulations, which may affect our devices, are numerous and often unclear. We prefer to work with a distributor who is familiar with the applicable import regulations in each of our foreign markets. Experience with foreign distributors in the past indicates that restrictions may prohibit certain sales of our products in a number of countries. The vast majority of countries permit TASER devices to be sold and used by law enforcement. We rely on our distributors to inform us of those countries where the TASER device is prohibited or restricted.

Intellectual Property

We protect our intellectual property with United States and foreign patents and trademarks. Our patents and pending patent applications relate to technology used by us in connection with our products. We also rely on international treaties, organizations and foreign laws to protect our intellectual property. As of December 31, 2011, we hold 64 United States patents and 85 foreign patents and also have numerous patents and trademarks pending. Our patents expire at varying dates ranging between 2014 and 2029. The earliest expiring United States patent covers an aiming system having two angled laser light sources, one for the top dart and one for the lower dart. This technology is used in the X2 and X3 ECDs. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as the commercial significance of our operations and our competitors’ operations in particular countries and regions, our strategic technology or product directions in different countries and the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions.

Confidentiality agreements are used with employees, consultants and key suppliers to help ensure the confidentiality of our trade secrets.

TASER has the exclusive rights to many internet domain names primarily including ‘TASER.com’ and ‘EVIDENCE.COM’.

Research and Development

Our research and development initiatives are conducted in two separate categories. The first is internally funded research and development, and the second is research externally funded by customers having requirements for specific capabilities. Both categories focus on next generation technology, yet are differentiated by the anticipated breadth of the market opportunity, the time to project completion and accounting treatment. Internally funded research has been primarily focused on improvements to existing TASER products, or the development of new applications for TASER technology that we believe generally will have broad market appeal. Externally funded work focuses on specific packaging or delivery requirements of existing TASER technology that is of high value to particular customers but may not be viable product solutions to other customers. These projects generally represent product developments which are long-term in nature and require external resources, development using outside companies or expert consulting.

Research and development initiatives include bio-medical research and electrical, mechanical and software engineering. We expect that future development projects will focus on extending the range, improving the functionality and developing new delivery options for our ECD products. In addition, during 2009, 2010 and 2011, we devoted significant resources to the development of AXON and EVIDENCE.COM and have established a dedicated software development team in Carpenteria, California to plan, develop, test and support the operation of our Software-as-a-Service product.

Our investment in internally funded research and development totaled $10.0 million, $11.4 million and $20.0 million in 2011, 2010 and 2009, respectively. Our investment in research and development staff and equipment during 2009 and 2010 represented a significant increase from previous years but has tapered down significantly in 2011 as a result of an extensive revamp of the development process, which has led to an overall reduction of headcount. Our return on that investment is intended to be realized over the long term although new systems and technologies often have a more immediate impact on our business.

Employees

As of December 31, 2011, we had 313 full-time employees and 81 temporary employees. The breakdown of our full-time employees by department is as follows: 125 direct manufacturing employees and 188 administrative and manufacturing support employees. Of the 188 administrative and manufacturing support employees, 52 were involved in sales, marketing, communications and training; 60 were employed in research, development, TASER Virtual Systems and engineering; 28 were employed in administrative functions inclusive of executive management, legal, finance and accounting; 9 were employed in information systems technologies; 9 were employed in quality control and 30 were employed in manufacturing support functions. Our employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage. We believe that our relations with our employees are good.

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Available Information

We were incorporated in Arizona in September 1993 as an ICER Corporation. We changed our name to AIR TASER, Inc. in December 1993 and to TASER International, Incorporated in April 1998. In January 2001, we reincorporated in Delaware as TASER International, Inc. Our website is located at www.TASER.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on our website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. Other information that is not part of this Annual Report on Form 10-K can be accessed through our website at www.TASER.com.

Because of the following factors, as well as other variables affecting our operating results, our past financial performance may not be a reliable indicator of our future performance and historical trends should not be used to anticipate our results or trends in future periods.

We are materially dependent on acceptance of our products by the law enforcement, both domestic and international, and federal markets. If law enforcement agencies do not continue to purchase our products, our revenues will be adversely affected.

A substantial number of law enforcement and corrections agencies may not purchase our electronic control devices (ECDs). Law enforcement and corrections agencies may be influenced by claims or perceptions that ECDs, such as our products, are unsafe or may be used in an abusive manner. In addition, earlier generation conducted energy devices may have been perceived as ineffective. Sales of our products to these agencies may also be delayed or limited by these claims or perceptions.

Most of our end-user customers are subject to budgetary and political constraints, particularly in the currently challenging economic environment, that may delay or prevent sales.

Most of our end-user customers are government agencies. These agencies often do not set their own budgets and therefore, have limited control over the amount of money they can spend. In addition, these agencies experience political pressure that may dictate the manner in which they spend money. As a result, even if an agency wants to acquire our products, it may be unable to purchase them due to budgetary or political constraints. Currently, many governmental agencies are continuing to experience severe budgetary constraints. There can be no assurance that the economic and budgeting issues will not worsen and adversely impact sales of our products. Some government agency orders may also be canceled or substantially delayed due to budgetary, political or other scheduling delays which frequently occur in connection with the acquisition of products by such agencies and such cancellations may accelerate or be more severe than we have experienced historically as a result of the current economic environment.

We may face personal injury, wrongful death and other liability claims that harm our reputation and adversely affect our sales and financial condition.

Our ECD products are often used in aggressive confrontations that may result in serious, permanent bodily injury or death to those involved. Our ECD products may be associated with these injuries. A person injured in a confrontation or otherwise in connection with the use of our products may bring legal action against us to recover damages on the basis of theories including personal injury, wrongful death, negligent design, defective product or inadequate warning. We are currently subject to a number of such lawsuits. We may also be subject to lawsuits involving allegations of misuse of our products. If successful, personal injury, misuse and other claims could have a material adverse effect on our operating results and financial condition and could result in negative publicity about our products. Although we carry product liability insurance, we do incur significant legal expenses within our self-insured retention in defending these lawsuits and significant litigation could also result in a diversion of management’s attention and resources, negative publicity and a potential award of monetary damages in excess of our insurance coverage. The outcome of any litigation is inherently uncertain and there can be no assurance that our existing or any future litigation will not have a material adverse effect on our revenues, our financial condition or financial results.

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We substantially depend on sales of our TASER X26 and X2 ECDs, and if these products do not continue to be widely accepted, our growth prospects will be diminished.

In the years ended December 31, 2011, 2010 and 2009, we derived our revenues predominantly from sales of the TASER X26 brand devices and related cartridges, and expect to depend on sales of these products for the foreseeable future. In addition, we introduced the TASER X2 device in 2011 and we are seeing a large number of customers upgrade their X26 devices to the X2 device and we expect this trend to continue. A decrease in the prices of or demand for these products, or their failure to achieve broad market acceptance, would significantly harm our growth prospects, operating results and financial condition.

If we are unable to manage our growth, our prospects may be limited and our future profitability may be adversely affected.

We intend to expand our product and service lines and our manufacturing capacity as needed to meet future demand. Any significant expansion may strain our managerial, financial and other resources. If we are unable to manage our growth, our business, operating results and financial condition could be adversely affected. We will need to continually improve our operations, financial and other internal systems to manage our growth effectively, and any failure to do so may lead to inefficiencies and redundancies, and result in reduced growth prospects and profitability.

To the extent demand for our products increases, our future success will be dependent upon our ability to ramp manufacturing production capacity, which may be accomplished by the implementation of customized manufacturing automation equipment.

To the extent demand for our products increases significantly in future periods, one of our key challenges will be to ramp our production capacity to meet sales demand while maintaining product quality. Our primary strategies to accomplish this include introducing additional shifts, increasing the physical size of our assembly facilities, the hiring of additional production staff, and the implementation of customized automation equipment. The investments we make in this equipment may not yield the anticipated labor and material efficiencies. Our inability to meet any future increase in sales demand or effectively manage our expansion could have a material adverse effect on our revenues, financial results and financial condition.

Pending litigation may subject us to significant litigation costs, judgments, fines and penalties in excess of insurance coverage, and divert management attention from our business.

We are involved in numerous litigation matters relating to our products or the use of such products, litigation against persons who we believe have infringed on our intellectual property, litigation against a competitor and litigation with a former distributor. Such matters have resulted, and are expected to continue to result in, substantial costs to us and some diversion of our management’s attention, which could adversely affect our business, financial condition or operating results.

Our future success is dependent on our ability to expand sales through distributors and direct sales and our inability to recruit new distributors or increase direct sales would negatively affect our sales.

Our distribution strategy is to pursue sales through multiple channels with an emphasis on independent distributors and direct sales. Our inability to establish relationships with, and retain law enforcement equipment distributors, who we believe can successfully sell our products, would adversely affect our sales. In addition, our arrangements with our distributors are generally short-term. We are also focusing on direct sales to larger agencies through our regional sales managers and our inability to grow sales to these agencies in this manner could adversely affect our sales. If we do not competitively price our products, meet the requirements of our distributors or end-users, provide adequate marketing support, or comply with the terms of our distribution arrangements, our distributors may fail to aggressively market our products or may terminate their relationships with us. These developments would likely have a material adverse effect on our sales. Our reliance on the sales of our products by others also makes it more difficult to predict our revenues, cash flow and operating results.

The success of our EVIDENCE.COM Software-as-a-Service delivery model is materially dependent on acceptance of this business model by our law enforcement customers. Delayed or lengthy time to adoption by law enforcement agencies will negatively impact our sales and profitability.

A substantial number of law enforcement agencies may be slow to adopt our EVIDENCE.COM digital data evidence management and storage solution, requiring extended periods of trial and evaluation. The hosted service delivery business model is not presently widely adopted by our law enforcement customer base. As such the sales cycle has additional complexity with the need to educate our customers and address issues regarding agency bandwidth requirements, data retention policies, data security and chain of custody. Delays in successfully securing widespread adoption of EVIDENCE.COM services could adversely affect our revenues, profitability and financial condition.

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If our security measures are breached and unauthorized access is obtained to a customers’ data or our data, our service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities.

Our service involves the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. These security measures may be breached as a result of third-party action, employee error, and malfeasance or otherwise, during transfer of data to additional data centers or at any time, and result in someone obtaining unauthorized access to our data or our customers’ data. Third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our data or our customers’ data. Additionally, hackers may develop and deploy viruses, worms, and other malicious software programs that attack or gain access to our networks and data centers. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. We devote significant resources to engineer secure products and ensure security vulnerabilities are mitigated. Despite these efforts, any security breach could result in a loss of confidence in the security of our service, damage our reputation, lead to legal liability and negatively impact our future sales.

If we are unable to design, introduce and sell new products or new product features successfully, our business and financial results could be adversely affected.

Our future success will depend on our ability to develop new products or new product features that achieve market acceptance in a timely and cost-effective manner. The development of new products and new product features is complex, time consuming and expensive, and we may experience delays in completing the development and introduction of new products. We cannot provide any assurance that products that we may develop in the future will achieve market acceptance. If we fail to develop new products or new product features on a timely basis that achieve market acceptance, our business, financial results and competitive position could be adversely affected.

Delays in product development schedules may adversely affect our revenues.

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

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

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

We expend significant resources in anticipation of a sale due to our lengthy sales cycle and may receive no revenue in return.

Generally, law enforcement and corrections agencies consider a wide range of issues before committing to purchase our products, including product benefits, training costs, the cost to use our products in addition to or in place of other products, budget constraints and product reliability, safety and efficacy. The length of our sales cycle may range from a few weeks to as long as several years. Adverse publicity surrounding our products or the safety of such products has in the past and could in the future lengthen our sales cycle with customers. In the past, we believe we have experienced revenue decreases in part as the result of adverse effects on our customers and potential customers of negative publicity surrounding our products or the use of our products. We may incur substantial selling costs and expend significant effort in connection with the evaluation of our products by potential customers before they place an order. If these potential customers do not purchase our products, we will have expended significant resources and received no revenue in return.

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Government regulation of our products may adversely affect sales.

Federal regulation of sales in the United States: With the exceptions of the TASER XREP, our ECDs are not firearms regulated by the United States Bureau of Alcohol, Tobacco, Firearms and Explosives, but our consumer products are regulated by the United States Consumer Product Safety Commission. Although there are currently no federal laws restricting sales of our core ECD products in the United States, future federal regulation could adversely affect sales of our products.

Federal regulation of international sales: Our ECD devices are considered a “crime control” product by the United States Department of Commerce, or DOC, for export directly from the United States. Consequently, we must obtain an export license from the DOC for the export of our ECD devices from the United States other than to Canada. In addition, certain of our camera and software products require classifications from the DOC before they may be shipped internationally. Our inability to obtain DOC export licenses or classifications on a timely basis for sales of our products to our international customers could significantly and adversely affect our international sales.

State and local regulation: Our devices are controlled, restricted or their use prohibited by a number of state and local governments. Our devices are banned from private citizen sale or use by statute in seven states: District of Columbia, Hawaii, Massachusetts, Michigan, New Jersey, New York, and Rhode Island. Some cities and municipalities also prohibit private citizen possession or use of our products. Other jurisdictions may ban or restrict the sale of our products and our product sales may be significantly affected by additional state, county and city governmental regulation. With regards to Michigan, in an April 21, 2011 decision, a Circuit Court Judge in the 18^th Circuit Court for the County of Bay, in the matter of People of the State of Michigan v. Dean Scott Yanna, Case No. 10-10536-FH, found that the state statute prohibiting stun devices (MCA 750.224a) is unconstitutional under the Second Amendment of the United States Constitution.

Foreign regulation: Certain foreign jurisdictions prohibit the sale, possession or use of ECDs, limiting our international sales opportunities.

Environmental laws and regulations subject us to a number of risks and could result in significant liabilities and costs.

We may be subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in our products and making producers for those products financially responsible for the collection, treatment, recycling and disposal. Environmental legislation within the European Union (EU) may increase our cost of doing business internationally and impact our revenues from EU countries as we comply with and implement these requirements.

The EU has published Directives on the restriction of certain hazardous substances in electronic and electrical equipment (the RoHS Directive) and on electronic and electrical waste management (the WEEE Directive). The RoHS Directive restricts the use of a number of substances, including lead. The WEEE Directive directs members of the European Union to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the EU. In addition, similar environmental legislation has been or may be enacted in other jurisdictions, including the U.S. (under federal and state laws) and other countries, the cumulative impact of which could be significant.

We continue to monitor the impact of specific registration and compliance activities required by the RoHS and WEEE Directives. We endeavor to comply with applicable environmental laws, yet compliance with such laws could increase our operations and product costs; increase the complexities of product design, procurement, and manufacturing; limit our ability to manage excess and obsolete non-compliant inventory; limit our sales activities; and impact our future financial results. Any violation of these laws can subject us to significant liability, including fines, penalties, and prohibiting sales of our products into one or more states or countries, and result in a material adverse effect on our financial condition.

If we are unable to protect our intellectual property, we may lose our competitive advantage or incur substantial litigation costs to protect our rights.

Our future success depends upon our proprietary technology. Our protective measures, including patents, trademarks, copyrights, trade secret protection, and internet identity registrations, may prove inadequate to protect our proprietary rights and market advantage. The right to stop others from misusing our trademarks and service marks in commerce depends to some extent on our ability to show evidence of enforcement of our rights against such misuse in commerce. Our efforts to stop improper use, if insufficient, may lead to loss of trademark and service mark rights, brand loyalty and notoriety among our customers and prospective customers. The scope of any patent to which we have or may obtain rights may not prevent others from developing and selling competing products. The validity and breadth of claims covered in technology patents involve complex legal and factual questions, and the resolution of such claims may be highly uncertain, lengthy and expensive. In addition, our patents may be held invalid upon challenge, or others may claim rights in or ownership of our patents.

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We have a judgment of patent infringement against Stinger Systems as to our U.S. patent 6,999,295, claims 2 and 40. The validity of claims 2 and 40 of U.S. patent 6,999,295 were upheld by the United States Patent and Trademark Office (USPTO) in an ex parte re-examination proceeding. Stinger Systems has sold its assets to Karbon Arms. The US District Court for the District of Arizona denied our motion to hold Karbon Arms in contempt for violating the injunction against Stinger Systems. We filed a patent infringement lawsuit in July of 2011 against Karbon Arms in the US District Court for the District of Delaware and this litigation is pending. Additional details concerning this patent infringement litigation can be found in the legal proceeding section of this Form 10-K.

We may be subject to intellectual property infringement claims, which could cause us to incur litigation costs and divert management attention from our business.

Any intellectual property infringement claims against us, with or without merit, could be costly and time-consuming to defend and divert our management’s attention from our business. If our products were found to infringe a third party’s proprietary rights, we could be forced to enter into costly royalty or licensing agreements in order to be able to sell our products or discontinue use of the protected technology. Such royalty and licensing agreements may not be available on terms acceptable to us or at all.

If we face competition in foreign countries, we can enforce patent rights only in the jurisdictions in which our patent applications have been granted.

Our United States patents protect us from imported infringing products coming into the United States from abroad. Applications for patents in a few foreign countries have been made; however, these may be inadequate to protect markets for our products in other foreign countries. Each foreign patent is examined and granted according to the law of the country where it was filed independent of whether a United States patent on similar technology was granted. A patent in a foreign country may be subject to cancellation if the claimed invention has not been sold in that country. Meeting the requirements of working the invention differs by country and ranges from sales in the country to manufacturing in the country. United States export law, or the laws of some foreign countries, may prohibit us from satisfying the requirements for working the invention, creating a risk that some of our foreign patents may become unenforceable.

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

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

Government regulations applied to our products may affect our markets for these products.

We rely on the opinions of The Bureau of Alcohol Tobacco and Firearms, including the determination that a device that has projectiles propelled by the release of compressed gas in place of the expanding gases from ignited gunpowder, are not classified as firearms. Changes in statutes, regulations, and interpretation outside of our control may result in our products being classified or reclassified as firearms. Our private citizen market could be substantially reduced if consumers are required to obtain a registration to own a firearm prior to purchasing our products.

Defects in our products could reduce demand for our products and result in a loss of sales, delay in market acceptance and injury to our reputation.

Complex components and assemblies used in our products may contain undetected defects that are subsequently discovered at any point in the life of the product. Defects in our products may result in a loss of sales, delay in market acceptance, and injury to our reputation and increased warranty costs, which could have a material adverse effect on profitability and financial condition.

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We face risks associated with rapid technological change and new competing products.

The technology associated with law enforcement devices is receiving significant attention and is rapidly evolving. While we have patent protection in key areas of our ECD technology, it is possible that new technology may result in competing products that operate outside our patents and could present significant competition for our products.

Our dependence on third-party suppliers for key components of our devices could delay shipment of our products and reduce our sales.

We depend on certain domestic and foreign suppliers for the delivery of components used in the assembly of our products. Our reliance on third-party suppliers creates risks related to our potential inability to obtain an adequate supply of components or sub-assemblies and reduced control over pricing and timing of delivery of components and sub-assemblies. Specifically, we depend on suppliers of sub-assemblies, machined parts, injection molded plastic parts, printed circuit boards, custom wire fabrications and other miscellaneous customer parts for our products. We do not have long-term agreements with any of our suppliers and there is no guarantee that supply will not be interrupted. Any interruption of supply for any material components of our products could significantly delay the shipment of our products and have a material adverse effect on our revenues, profitability and financial condition.

Component shortages could result in our inability to produce at a volume to adequately meet customer demand, which could result in a loss of sales, delay in deliveries and injury to our reputation.

Single or sole-source components used in the manufacture of our products may become unavailable or discontinued. Delays caused by industry allocations or obsolescence may take weeks or months to resolve. In some cases, parts obsolescence may require a product re-design to ensure quality replacement components. These delays could cause significant delays in manufacturing and loss of sales, leading to adverse effects significantly impacting our financial condition or results of operations.

Our dependence on foreign suppliers for key components of our products could delay shipment of our finished products and reduce our sales.

We depend on foreign suppliers for the delivery of certain components used in the assembly of our products. Due to changes imposed for imports of foreign products into the United States, as well as potential port closures and delays created by terrorist attacks or threats, public health issues or national disasters, we are exposed to risk of delays caused by freight carriers or customs clearance issues for our imported parts. Delays caused by our inability to obtain components for assembly could have a material adverse effect on our revenues, profitability and financial condition.

We may experience a decline in gross margins due to rising raw material and transportation costs associated with a future increase in petroleum prices.

A significant number of our raw materials are comprised of petroleum-based products, or incur some form of landed cost associated with transporting the raw materials or components to our facility. A significant rise in oil prices could adversely impact our ability to sustain current gross margins, by increasing component pricing.

Catastrophic events may disrupt our business.

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

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

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

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We may experience outages and disruptions of our EVIDENCE.COM service due to the migration of some of our data center operations to a third party cloud provider. We may face additional disruptions due to the migration of the remainder of our data center operations to a third party cloud provider.

Our revenues and operating results may fluctuate unexpectedly from quarter-to-quarter, which may cause our stock price to decline.

Our revenues and operating results have varied significantly in the past and may vary significantly in the future due to various factors, including, but not limited to:

As a result of these and other factors, we believe that period-to-period comparisons of our operating results may not be meaningful in the short term, and our performance in a particular period may not be indicative of our performance in any future period.

Foreign currency fluctuations may affect our competitiveness and sales in foreign markets.

The relative change in currency values creates fluctuations in our product pricing for potential international customers. These changes in foreign end-user costs may result in lost orders and reduce the competitiveness of our products in certain foreign markets. These changes may also negatively affect the financial condition of some existing or potential foreign customers and reduce or eliminate their future orders of our products. We also import selected components which are used in the manufacturing of some of our products. Although our purchase orders are in the United States dollar, weakness in the United States dollar could lead to price increases for the components.

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

We maintain the majority of our cash and cash equivalent accounts at four depository institutions. As of December 31, 2011, our aggregate balances in such accounts were $21.3 million. The Company’s balances with these institutions regularly exceed Federal Deposit Insurance Corporation (FDIC) insured limits; however, to manage the related credit exposure, we continually monitor the credit worthiness of the financial institutions where we have deposits.

We could suffer losses with respect to the uninsured balances if the depositary institutions failed and the institution’s assets were insufficient to cover its deposits and/or the Federal government did not take actions to support deposits in excess of existing FDIC insurance limits. Any such losses could have a material adverse effect on our liquidity, financial condition and results of operations.

We depend on our ability to attract and retain our key management and technical personnel.

Our success depends upon the continued service of our key management personnel. Our success also depends on our ability to continue to attract, retain and motivate qualified technical personnel. Although we have employment agreements with certain of our officers, the employment of such persons is “at-will” and either we or the employee can terminate the employment relationship at any time, subject to the applicable terms of the employment agreements. The competition for our key employees is intense. The loss of the service of one or more of our key personnel could harm our business.

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None.

Our corporate headquarters and manufacturing facilities are based in a 100,000 square foot facility in Scottsdale, Arizona, which we own. We also lease premises in Carpenteria, California, the Washington D.C. area and Frankfurt, Germany. We believe our existing facilities are well maintained and in good operating condition. We also believe we have adequate manufacturing capacity for our existing product lines for the foreseeable future. To the extent that we introduce new products in the future, we will likely need to acquire additional facilities to locate the associated production lines. However, we believe we can acquire or lease such facilities on reasonable terms. The Company continues to make investments in capital equipment as needed to meet anticipated demand for its products.

See discussion of litigation in Note 8(c) to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

None.

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PART II

Market Information

Our common stock is quoted under the symbol “TASR” on The NASDAQ Global Select Market. The closing price of our common stock on March 1, 2012 was $4.22 per share. The following table sets forth the high and low sales prices per share for our common stock as reported by NASDAQ for each quarter of the last two fiscal years.

Holders

As of March 1, 2012, there were 347 holders of record of our common stock.

Dividends

To date, we have not declared or paid cash dividends on our common stock. We do not intend to pay cash dividends in the foreseeable future and our revolving line of credit prohibits the payment of cash dividends.

Issuer Purchases of Equity Securities

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. In July 2011, TASER’s Board of Directors authorized an additional repurchase program to acquire up to $20.0 million of the Company’s outstanding common stock, subject to stock market conditions and corporate considerations. During the year ended December 31, 2011, we purchased 7,464,583 common shares under these programs for a total cost of $32.5 million, or a weighted average cost of $4.35 per share. The table below sets forth information regarding repurchases of our common stock by us during the three months ended December 31, 2011

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Recent Sales of Unregistered Securities

No unregistered securities were sold by us in 2011.

Stock Performance Graph

The following stock performance graph compares the performance of our common stock to the NASDAQ Stock Market (United States) and the Russell 3000 Index. The graph covers the period from December 31, 2006 to December 31, 2011. The graph assumes that the value of the investment in our stock and in each index was $100 at December 31, 2006 and that all dividends were reinvested. We do not pay dividends on our common stock.

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The following selected financial data should be read in conjunction with our consolidated financial statements and the notes thereto, and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The statement of operations data for the years ended December 31, 2011, 2010 and 2009, and the balance sheet data as of December 31, 2011 and 2010, have been derived from, and should be read in conjunction with, our audited consolidated financial statements and the notes thereto included herein. The statement of operations data for the years ended December 31, 2008 and 2007, and the balance sheet data as of December 31, 2009, 2008 and 2007, is derived from audited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with the other sections of this annual report on Form 10-K, including Part I, Item 1A: “Risk Factors” Part II, Item 6: “Selected Financial Data” and Part II, Item 8: “Financial Statements and Supplementary Data.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing.

Executive Overview and Key Strategic Initiatives

Our 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.

TASER solutions deliver significant results to our customers and to communities in which they are deployed. There are over 100 published studies on the effects of TASER ECDs. Just as importantly, there are eight published independent epidemiological studies covering a total of 48,228 subjects. The 2008 Eastman study found that 5.4% of conductive electronic weapon uses “clearly prevented the use of lethal force by police.” The largest epidemiological study was the 2009 MacDonald study of 24,380 uses of force. In addition, the papers of Taylor (13,983 subjects), Mesloh (4,303 subjects), Mumola (2,686 subjects), Smith (1,645 subjects), Butler (562 subjects), and White (243 subjects), show a significant reduction in both officer and suspect injuries with TASER ECD usage. 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, and ultimately 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 100 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.

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Our key strategies include:

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2011 Overview

Included in the Results of Operations are the following significant charges for 2011:

Results of Operations

The following table presents data from our statements of operations as well as the percentage relationship to total net revenues of items included in our statements of operations (dollars in thousands):

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Net Sales

Net sales by product line are as follows (dollars in thousands):

Net sales to the United States and other countries are summarized as follows:

Net sales were $90.0 million and $86.9 million for the years ended December 31, 2011 and 2010, respectively, an increase of $3.1 million or 4%.The increase in net sales for 2011 compared to 2010 was primarily driven by the growing demand and successful adoption of the TASER X2 as well as larger individually significant orders in both the international and Federal markets. Domestically, the launch of the TASER X2 partially replaced demand for other products within our ECD segment. The primary factors affecting our increased net sales for 2011 compared to 2010 were an increase in sales of single cartridges of $3.4 million, or 15% and the contribution of $8.1 million of TASER X2 sales. Offsetting these increases were decreased sales of our X26, X3, XREP and C2 ECD products by a combined $7.4 million, or 15%. Our Video Segment was adversely affected by declining sales of the TASER Cam of $1.8 million, or 45%, reflecting a large international order in 2010 that did not recur in 2011.

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Net sales were $86.9 million and $104.3 million for the years ended December 31, 2010 and 2009, respectively, a decrease of $17.3 million or 17%. The decrease for our ECD segment in 2010 was primarily volume driven with fewer individually significant international and Federal orders in 2010 as sales in 2009 included follow-on orders to larger customers in these market segments. Domestic law enforcement sales also declined over the prior year as agencies continued to operate with budget constraints in prevailing adverse economic conditions and did not have the level of stimulus funds that were available in 2009. This resulted in reduced sales of the TASER X26 product line which decreased by $12.7 million, or 24%, to $41.3 million in 2010 compared to $54.0 million in 2009. Single cartridge sales also decreased by $6.0 million, or 21% to $22.0 million in 2010 compared to $27.9 million in 2009. Sales of our TASER C2 consumer product also declined by $1.2 million, or 23%, due to the negative impact of the economic downturn on consumer spending. Offsetting these decreases were sales of new products, including XREP, X3 and Shockwave, contributing $3.7 million in sales in 2010. The Video segment also provided increased net sales in 2010 as TASER Cam sales increased $0.9 million, driven by a large international order in the first quarter of 2010 and the introduction of AXON and EVIDENCE.COM, which contributed $0.3 million in sales in 2010. Other sales, which include training, extended warranty, out of warranty repair revenues and government grant revenues decreased $0.1 million over the prior year.

Cost of Products Sold

Cost of products sold, before excess inventory charges of $3.7 million in 2011, were $41.8 million and $41.6 million for the years ended December 31, 2011 and 2010, respectively, an increase of $0.2 million or 0.5%. As a percentage of net sales, cost of products sold decreased to 46.4% in 2011 compared to 47.8% in 2010. The net decrease in costs as a percent of sales is driven by a combination of offsetting factors including: (i) manufacturing costs decreased 3.4% as a percentage of sales, attributable to a more favorable market segment mix with higher margin international sales; (ii) a more favorable product sales mix with a larger contribution to net sales from higher margin products, including the newly launched TASER X2, replacing products such as the TASER X3 and XREP, which had lower margins and initial production yields; (iii) improved production efficiency resulting from reductions in temporary labor and overtime, as well as a reduction in rework effort; (iv) improved leverage on indirect manufacturing costs following the 3.6% increase in sales; and (v) scrap charges have 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 were $4.8 million of EVIDENCE.COM datacenter operating and software maintenance costs, which relate to the Video segment and were included in cost of products sold in 2011, compared to $3.1 million in the prior year following the commercial availability of the service, representing a 1.7% increase in costs as a percentage of sales. A significant portion of these costs were included as part of research and development in 2010. In addition, the Company offered an upgrade program, which provides customers purchasing a new TASER X2 kit with a $300 trade-in credit to replace any existing ECD. This offer generated $2.1 million of trade-in credits during the second, third and fourth quarters of 2011, which reduced the average selling price on TASER X2 sales and consequently reducing gross margin.

Cost of products sold were $41.6 million and $40.8 million for the years ended December 31, 2010 and 2009, respectively, an increase of $0.8 million, or 1.7%. As a percentage of net sales, cost of products sold increased to 48% in 2010 compared to 39% in 2009. The increase in cost of products sold as a percentage of net sales in 2010 compared to 2009 was driven by a combination of factors. $3.2 million, representing a 4% increase in costs as a percentage of sales, of EVIDENCE.COM data center operating and software maintenance costs are included in cost of product sold in 2010 following the commercial availability of the service, whereas such costs were included in research and development expenses in 2009 while we were in the development phase. Direct manufacturing costs increased as a percentage of net sales due to a less favorable product and market segment sales mix, attributable to a reduction in sales of our higher margin X26 product and lower international sales. This was combined with lower initial margins on the AXON, XREP and X3 product lines, an increase in value engineering related rework costs and increases in packaging material costs. Direct labor also increased as a percentage of sales due to the overall higher cost of using temporary labor in 2010, partially offset by efficiencies gained from cartridge automation equipment, while leverage on relatively fixed indirect manufacturing expenses has been reduced as sales decreased 17% in 2010 compared to 2009. In addition to reduced leverage, the total pool of indirect manufacturing expenses increased in 2010 compared to the prior year due to a $2.4 million increase in depreciation expense for our automated cartridge and new product production equipment, $1.1 million in inventory write-off charges related to parts made obsolete from the move to automated cartridge production and some employee severance charges.

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Excess Inventory Charges

Excess inventory charges specific to two of our product lines were $3.7 million for 2011 and nil for 2010 and 2009. The success of the new TASER X2 has led the Company to conclude that it will not sell through its current level of TASER X3 inventory, even though the Company will continue to sell and support the TASER X3 product line as part of its ECD segment. These factors resulted in an excess inventory charge of $1.7 million. Similarly, with the launch of the Company’s new AXON Flex system for our Video segment, the Company has concluded it will not sell through existing first generation AXON inventory. These factors resulted in an excess inventory charge of $2.0 million.

Gross Margin

Gross margin decreased $0.9 million to $44.5 million for 2011 compared to $45.4 million for 2010. The 2011 gross margin includes the excess inventory charge specific to our two product lines, which when excluded, would increase gross margin by $3.7 million to $48.3 million compared to 2010. As a percentage of net sales, gross margin decreased to 49% for 2011 compared to 52% for 2010. The decline in gross margin as a percentage of net sales for 2011 is primarily attributable to the excess inventory charges discussed above. After considering these excess inventory charges, gross margin improved slightly for 2011 compared to 2010, which reflects improved leverage on higher sales levels as well as the factors noted above under the discussion of cost of products sold.

Gross margin for the ECD segment was $50.7 million for 2011, compared to $47.4 million for 2010. As a percentage of net sales, gross margin on the ECD segment increased to 59%, up one percent from 58% in 2010, due to a change in the product mix from the lower margin X3 and XREP to X2. The Video segment had a negative gross margin of $6.2 million for 2011 compared to a negative gross margin of $2.0 million for 2010. The decline in the gross margin for the Video segment is mostly attributable to the inclusion of a full year of service delivery costs for EVIDENCE.COM in 2011, compared to only eight months in 2010 due to timing of product launch. The excess inventory charge of $2.0 million in 2011 also contributed to the decline in gross margin.

Gross margin decreased $18.0 million to $45.4 million for 2010 compared to $63.4 million for 2009. As a percentage of net sales, gross margins decreased to 52% for 2010 compared to 61% for 2009. The decline in gross margin as a percentage of net sales in 2010 reflects a decrease in leverage due to lower sales levels as well as the other factors noted above under the discussion of cost of products sold.

Gross margin for the ECD segment was $47.4 million for 2010, which decreased $14.8 million, or 23.7% when compared to 2009. As a percentage of net sales, gross margin declined to 58%, down from 61% in 2009. The decline in gross margin is attributed to decreased leverage on an $18.8 million decrease in sales, as well as less favorable product mix. The Video segment had a negative gross margin of $2.0 million for 2010, which declined $3.3 million compared to 2009 mostly due to the launch of AXON and EVIDENCE.COM, and the inclusion of $3.1 million of service delivery costs for EVIDENCE.COM, accompanied by service revenue of only $0.08 million.

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Sales, General and Administrative Expenses

Sales, general and administrative expenses were comprised as follows for 2011 and 2010 (dollars in thousands):

Sales, general and administrative expenses were $38.0 million and $39.0 million for the years ended December 31, 2011 and 2010, respectively, a decrease of $1.0 million or 3%. As a percentage of total net sales, sales, general and administrative expenses decreased to 42% for 2011 compared to 45% for 2010. The overall decrease for 2011 compared to 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 $0.7 million as we continue to focus on reducing discretionary spending, despite incurring TASER X2 product launch costs. In addition, $1.0 million relating to a litigation settlement for an officer injury during arrest claim was included in other expense in 2010, which is driving the decrease in other sales, general and administrative expenses. Offsetting these reductions, legal, professional and accounting fees increased, which was driven by the timing and volume of pending litigation, and an increase in directors and officers insurance and product liability insurance premiums over the prior year amounts.

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Sales, general and administrative expenses were comprised as follows for 2010 and 2009 (dollars in thousands):

Sales, general and administrative expenses were $39.0 million and $43.5 million for the years ended December 31, 2010 and 2009, respectively, a decrease of $4.5 million or 10%. As a percentage of total net sales, sales, general and administrative expenses increased to 45% in 2010 compared to 42% in 2009, a function of reduced leverage resulting from a 17% decrease in sales. The overall decrease in 2010 compared to 2009 is attributable to a number of cost control measures undertaken during the year, which resulted in a $1.0 million decrease in consulting and lobbying primarily related to strategic marketing and IT efforts incurred in the prior year; a $0.9 million decrease in legal, professional and accounting fees driven by the timing of outstanding litigation in progress and efforts to efficiently manage outside legal costs; and general reductions in discretionary spending in sales and marketing, including advertising and tradeshows, and travel as we increased our focus on controlling costs. Salaries, benefits and bonus were also decreased due to the impact of headcount reductions. These decreases in sales, general and administrative expenses were partially offset by a charge of $1.0 million relating to a litigation settlement for an officer injury during arrest claim, included in other expense, and $0.5 million of employee severance costs, included in salaries, benefits and bonuses, as we took measures to reduce our salaried headcount and fixed cost infrastructure. Other expense in 2009 included a $0.4 million settlement payment paid to a former board member as described in Note 12 to the accompanying consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K under the heading “Settlement Agreement”.

Research and Development Expenses

Research and development expenses were $10.0 million and $11.4 million for the years ended December 31, 2011 and 2010, respectively, a decrease of $1.4 million or 12%. The reduction for 2011 compared to 2010 is driven by the impact of cost-reduction measures including continued reductions in consulting costs, headcount reductions and associated severance expenses incurred in the prior year. Additionally, the launch of EVIDENCE.COM resulted in the Company including $4.8 million of expenses in cost of products sold for ongoing delivery and maintenance of the product, compared to $3.1 million in 2010, following the service launch in the second quarter of 2010. Prior to the launch of EVIDENCE.COM, the cost of service delivered expenses were included in research and development.

Research and development expenses were $11.4 million and $20.0 million for the years ended December 31, 2010 and 2009, respectively, a decrease of $8.6 million or 43%. The decrease is a combination of a $4.9 million reduction in indirect supplies and tooling attributable to the intensive hardware development for the TASER X3 and AXON conducted in 2009, which were needed in order to expedite development for product demonstrations at the TASER Conference and the IACP trade shows. $3.1 million of EVIDENCE.COM data center and software maintenance related costs, including salary related costs, consulting, equipment leasing, rent and other overheads, were included in cost of products sold in 2010 following the commercial availability of the platform. These costs were included in research and development in 2009 while the platform was in the development phase. Salary and stock-based compensation expense have also generally been reduced following headcount reductions and cancellation and forfeiture of performance-related stock options while consulting and travel expenses have decreased in line with cost containment efforts. Partially offsetting these reductions, capitalized internal salary and consulting costs for EVIDENCE.COM development decreased by $1.0 million, from $2.3 million in 2009 to $1.3 million in 2010, following the go-live of the service in 2010.

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Litigation Judgment Expense

Litigation judgment expense for 2011 represents a $3.3 million charge for an adverse jury verdict received in the Turner case and costs associated with post-trial motions. This charge represents management’s best estimate of the Company’s uninsured portion of the judgment after consideration of available insurance coverage. The range of loss in the Turner case is $0 to $3.8 million. 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

Loss on impairment for 2011 represents a $1.4 million asset impairment charge that was recorded in the second quarter of 2011 following our determination to abandon our Protector product line.

Loss on write down / disposal of property and equipment, net

Loss on write-down / disposal of property and equipment for 2011 was $2.8 million and consisted of $2.2 million related to the Video segment comprised of the following: (i) $1.4 million for tooling relative to the first generation AXON equipment; (ii) $0.8 million relative to the decision to dispose of surplus equipment and billing software for EVIDENCE.COM operations. The remaining $0.6 million related to tooling for the TASER X3, which is included in the ECD segment.

Interest and Other Income, Net

Interest and other income was $1.3 million and less than $0.1 million for the years ended December 31, 2011 and 2010, respectively. Other income for 2011 primarily consists of proceeds from a settlement agreement reached in our lawsuit against various brokerage firms involving the naked shorting of the Company’s stock.

Interest and other income in both 2010 and 2009 were minimal due to the significant reduction in available investment yields on our cash and investments.

Provision (Benefit) for Income Taxes

The benefit for income taxes was $2.6 million and $0.7 million for the years ended December 31, 2011 and 2010, respectively. The effective income tax rate for 2011 was 26.9% compared to 14.3% for 2010. The 2011 effective tax rate is driven by the established valuation allowance of $1.4 million for a portion of the Arizona R&D tax credit that management believes will not be realized before it fully expires in fifteen years as well as the impact of non-deductible expenses for items such as incentive stock option expense, meals and entertainment and lobbying expenses, making the income for tax purposes higher than the book pre-tax loss for 2011. Further, in 2011 we recorded a tax benefit related to a 2010 tax return to provision true-up adjustment, primarily driven by higher than expected research and development tax credits, which increased the total tax benefit and consequently the effective tax rate.

The 2010 effective tax rate of 14.3% is below the statutory rate primarily 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 loss for tax purposes significantly lower than our book pre-tax loss. Additionally, in 2010, we recorded a tax provision amount related to a 2009 tax return to provision adjustment, primarily driven by lower than expected research and development tax credits, which also reduced the net tax benefit and therefore, the effective tax rate.

The 2009 effective tax rate of 101% is higher than the statutory rate and is driven by the impact of non-deductible expenses for items such as ISO stock option expense, meals and entertainment and lobbying expenses, making the income for tax purposes higher than book pre-tax income. Additionally, we recorded a 2009 tax expense as a result of increasing our reserve for uncertain tax positions.

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Net Loss