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TASER INTERNATIONAL INC
0001069183
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<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 1 - tasr:CompanyAndSummaryOfSignificantAccountingPoliciesTextBlock-->
<!-- xbrl,ns -->
<!-- xbrl,nx -->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="left">
</div>
<div align="center" style="font-size: 10pt; margin-top: 0pt"><b></b>
</div>
<div align="left">
</div>
<div align="center" style="font-size: 10pt"><b>
</b></div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>1. The Company and Summary of Significant Accounting Policies</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">TASER International, Inc. (“TASER” or the “Company”) is a developer and manufacturer of
advanced electronic control devices (“ECDs”) designed for use in law enforcement, military,
corrections, private security and personal defense. In addition, the Company has developed full
technology solutions for the capture, storage and management of video/audio evidence as well as
other tactical capabilities for use in law enforcement. The Company sells its products worldwide
through its direct sales force, distribution partners, online store and third party resellers. The
Company was incorporated in Arizona in September 1993 and reincorporated in Delaware in January
2001. The Company’s corporate headquarters and manufacturing facilities are located in Scottsdale,
Arizona. The Company’s internet services and software development division facilities are located
in Carpenteria, California.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The accompanying consolidated financial statements include the accounts of the Company, and
its wholly owned subsidiary, TASER International Europe SE (“TASER Europe”). TASER Europe was
established in 2010 to facilitate sales and provide customer service to our customers in the
European region. All material intercompany accounts, transactions, and profits have been
eliminated.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>a. Basis of presentation, preparation and use of estimates</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The accompanying unaudited consolidated financial statements of TASER include all adjustments
(consisting only of normal recurring accruals) that in the opinion of management are necessary for
the fair presentation of the Company’s operating results, financial position and cash flows as of
June 30, 2011, and for the three and six months ended June 30, 2011 and 2010. The preparation of
these consolidated financial statements in conformity with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions
that affect the amounts reported in these consolidated financial statements and accompanying notes.
Actual results could differ materially from those estimates.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Certain information and note disclosures normally included in consolidated financial
statements prepared in accordance with U.S. GAAP have been omitted from these unaudited
consolidated financial statements in accordance with applicable rules. The results of operations
for the three and six months ended June 30, 2011 and 2010, are not necessarily indicative of the
results to be expected for the full year (or any other period) and all results of operations
included herein should be read in conjunction with the financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>b. Segment information and major customers</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Management has determined that its operations presently are comprised of one reportable
segment, the sale of ECDs, accessories and other products and services. Based on the introduction
of new product offerings in 2010, management will evaluate how the operating results of the Company
will be reviewed internally on a go forward basis in order to improve the level of resource
decision making and assessment of segment performance. Based on this evaluation, management will
make the necessary changes to its internal management reporting system and subsequently, will
perform a review to determine if the Company will redefine its reportable operating segments in
accordance with U.S. GAAP. For the three and six months ended June 30, 2011 and 2010, sales by
geographic area were as follows:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Three Months Ended June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Six Months Ended June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">United States
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">77</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">84</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">77</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">79</td>
<td nowrap="nowrap">%</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Other Countries
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">23</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">16</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">23</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">21</td>
<td nowrap="nowrap">%</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Total
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">100</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">100</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">100</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">100</td>
<td nowrap="nowrap">%</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Sales to customers outside of the United States are typically denominated in U.S.
dollars and are attributed to each country based on the billing address of the distributor or
customer. For the three months ended June 30, 2011, sales to Australia represented approximately
10% of net sales. For the three months ended June 30, 2010, no individual country outside of the
U.S. represented a material amount of total net sales. For the six months ended June 30, 2011 and
2010, no individual country outside of the U.S. represented a material amount of total net sales.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In the three months ended June 30, 2011, two distributors represented approximately 15% and
11% of total net sales. In the three months ended June 30, 2010, one distributor represented
approximately 10% of total net sales. In the six months
ended June 30, 2011, one distributor represented approximately 12% of total net sales. In the
six months ended June 30, 2010,
one distributor represented approximately 10% of total net sales. At June 30, 2011, the Company had
receivables from two distributors comprising 19% and 14% of its aggregate accounts receivable
balance. At December 31, 2010, the Company had receivables from three customers comprising 19%, 11%
and 10% of its aggregate accounts receivable balance. These customers are unaffiliated distributors
of the Company’s products.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="center" style="font-size: 10pt; margin-top: 0pt">
<b>
</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>c. Loss per common share</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Basic loss per share is computed by dividing net loss by the weighted average number of common
shares outstanding during the periods presented. Diluted loss per share reflects the potential
dilution that could occur if such options were exercised using the treasury stock method. The
calculation of the weighted average number of shares outstanding and loss per share are as follows:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>For the Three Months Ended June 30</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>For the Six Months Ended June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Numerator for basic and diluted loss per share
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Net loss
</div></td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(2,294,832</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(1,359,389</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(2,275,100</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(1,851,994</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Denominator for basic loss per share -
weighted average shares outstanding
</div></td>
<td> </td>
<td> </td>
<td align="right">60,605,140</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">62,333,929</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">61,515,979</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">62,450,722</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Dilutive effect of shares issuable under
stock options outstanding
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Denominator for diluted loss per share -
adjusted weighted average shares outstanding
</div></td>
<td> </td>
<td> </td>
<td align="right">60,605,140</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">62,333,929</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">61,515,979</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">62,450,722</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Net loss per common share
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Basic
</div></td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(0.04</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(0.02</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(0.04</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(0.03</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Diluted
</div></td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(0.04</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(0.02</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(0.04</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(0.03</td>
<td nowrap="nowrap">)</td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">As a result of the net loss per share for the three months and six months ended June 30,
2011, the effects of 7,031,017 and 7,015,738 stock options, respectively, were excluded from the
calculation as their effect would have been to reduce net loss per share. As a result of the net
loss for the three and six months ended June 30, 2010, the effects of 6,335,522 and 4,753,281 stock
options, respectively, were excluded from the calculation as their effect would have been to reduce
the net loss per share.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>d. Warranty costs</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The Company warrants its X2 ECDs, X3 ECDs, X26 ECDs, M26 ECDs, XREP, TASER CAM, Shockwave,
AXON Tactical Computer, Com Hub user interface, Synapse Evidence Transfer Manager (ETM), and
HeadCam products from manufacturing defects on a limited basis for a period of one year after
purchase, and thereafter will replace any defective unit for a fee. The TASER C2 product is
warranted for a period of 90 days after purchase. The Company also sells extended warranties for
periods of up to four years after the expiration of the limited one year warranty. After the one
year standard warranty expires, if the device fails to operate properly for any reason, the Company
will replace the TASER X26 for a prorated discounted price depending on when the product was placed
into service. These fees are intended to cover the handling and repair costs and include a profit.
Management tracks historical data related to returns and warranty costs on a quarterly basis, and
estimates future warranty claims by applying the estimated weighted average return rate to the
product sales for the period. If management becomes aware of a component failure that could result
in larger than anticipated returns from its customers, the reserve would be increased. The reserve
for warranty returns is included in accrued liabilities on the consolidated balance sheet. The
following table summarizes the changes in the estimated product warranty liabilities for the six
months ended June 30, 2011 and 2010.
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance at January 1,
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">646,113</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">369,311</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Utilization of accrual
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(395,911</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(264,291</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Warranty expense
</div></td>
<td> </td>
<td> </td>
<td align="right">79,886</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">321,137</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance at June 30,
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">330,088</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">426,157</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
</div>
<div align="center" style="font-size: 10pt; margin-top: 0pt">
<b>
</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>e. Capitalized software development costs</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">For development costs related to EVIDENCE.com, the Company’s Software as a Service (SaaS)
product, the Company capitalizes qualifying computer software costs that are incurred during the
application development stage. Costs related to preliminary project planning activities and
post-implementation activities are expensed as incurred. For the three and six months ended June
30, 2011, the Company did not capitalize any such costs. For the three and six months ended June
30, 2010, the Company capitalized $528,000 and $1,320,000, respectively, of qualifying software
development costs.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>f. Fair value of financial instruments</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The Company uses the fair value framework for measuring financial assets and liabilities
measured on a recurring basis and for non-financial assets and liabilities when these items are
remeasured. The hierarchy below lists three levels of fair value based on the extent to which
inputs used in measuring fair value are observable in the market. The Company categorizes each of
its fair value measurements in one of these three levels based on the lowest level input that is
significant to the fair value measurement in its entirety. These levels are:
</div>
<div style="margin-top: 10pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td>
<div style="text-align: justify">Level 1 — Valuation techniques in which all significant inputs are
unadjusted quoted prices from active markets for assets or liabilities
that are identical to the assets or liabilities being measured.
</div></td>
</tr>
<tr>
<td style="font-size: 8pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td>
<div style="text-align: justify">Level 2 — Valuation techniques in which significant inputs include
quoted prices from active markets for assets or liabilities that are
similar to the assets or liabilities being measured and/or quoted
prices for assets or liabilities that are identical or similar to the
assets or liabilities being measured from markets that are not active.
Also, model-derived valuations in which all significant inputs and
significant value drivers are observable in active markets are Level 2
valuation techniques.
</div></td>
</tr>
<tr>
<td style="font-size: 8pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td>
<div style="text-align: justify">Level 3 — Valuation techniques in which one or more significant
inputs or significant value drivers are unobservable. Unobservable
inputs are valuation technique inputs that reflect our own assumptions
about the assumptions that market participants would use in pricing an
asset or liability.
</div></td>
</tr>
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The Company has cash equivalents which at June 30, 2011 and December 31, 2010 are comprised of
money market mutual funds, valued using Level 1 valuation techniques. At June 30, 2011, the Company
held some short term investments consisting of commercial paper. Based on management’s ability and
intent to hold these investments to maturity, they are recorded at amortized cost on the balance
sheet. Refer to note 2 for additional fair value disclosures for these short term investments. The
Company’s financial instruments also include accounts receivable, accounts payable and accrued
liabilities. Due to the short-term nature of these instruments, their fair value approximates their
carrying value on the balance sheet.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>g. Valuation of Long-lived Assets</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We review long-lived assets, such as property and equipment and intangible assets subject to
and not subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. We utilize a two-step approach to testing long-lived assets for
impairment. The first step tests for possible impairment indicators. If an impairment indicator is
present, the second step measures whether the asset is recoverable based on a comparison of the
carrying amount of the asset to the estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows,
an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. Our review requires the use of judgment and estimates.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In the three and six months ended June 30, 2011, the Company recognized $1,350,504 in
impairment charges associated with its Protector product line following the Company’s decision to
abandon ongoing operations relating to this line. No impairment charges were recorded in 2010.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In the three and six months ended June 30, 2011, the Company incurred a loss on write down/disposal
of property and equipment of $747,000 and $757,000, respectively following a decision to dispose of surplus equipment for Evidence.com options. Loss on write down/disposal of equipment for the three and
six months ended June 30, 2010 was $23,000 and $34,000, respectively.
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="center" style="font-size: 10pt; margin-top: 0pt">
<b>
</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>h. Recently adopted accounting guidance</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In October 2009, the FASB issued authoritative guidance on revenue recognition that became
effective for the Company beginning January 1, 2011. Under the new guidance on arrangements that
include software elements, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of the software
revenue recognition guidance, and software-enabled products will now be subject to other relevant
revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue
arrangements with multiple deliverables that are outside the scope of the software revenue
recognition guidance. Under the new guidance, when vendor specific objective evidence or third
party evidence for deliverables in an arrangement cannot be determined, a best estimate of the
selling price is required to separate deliverables and allocate arrangement consideration using the
relative selling price method. The new guidance includes new disclosure requirements on how the
application of the relative selling price method affects the timing and amount of revenue
recognition. The adoption of this new guidance did not have a material impact on the Company’s
consolidated financial statements.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In December 2010, the FASB issued authoritative guidance on business combinations concerning
the disclosure of supplementary pro forma information which will be effective for the Company
prospectively for business combinations for which the acquisition date is on or after January 1,
2011. The new guidance clarifies the acquisition date that should be used for reporting the pro
forma financial information disclosures when comparative financial statements are presented. The
amendments are also designed to improve the usefulness of the pro forma revenue and earnings
disclosures by requiring a description of the nature and amount of material, nonrecurring pro forma
adjustments that are directly attributable to the business combination. Management does not expect
adoption of this new guidance to have a material impact on the Company’s consolidated financial
statements.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In December 2010, the FASB issued guidance to improve the disclosures that an entity provides
about the credit quality of its financing receivables and the related allowance for credit losses.
As a result of these amendments, an entity is required to disaggregate by portfolio segment or
class certain existing disclosures and provide certain new disclosures about its financing
receivables and related allowance for credit losses. The guidance became effective for the Company
effective January 1, 2011 and its adoption did not have a material impact on the Company’s
consolidated financial statements.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In June 2011, the FASB issued guidance to require presentation of the total of comprehensive
income, the components of net income, and the components of other comprehensive income either in a
single continuous statement of comprehensive income or in two separate but consecutive statements.
This guidance eliminates the option to present the components of other comprehensive income as part
of the statement of changes in stockholders’ equity. This guidance will be effective for the
Company on January 1, 2012, and management does not believe its adoption will have a material
impact on the Company’s consolidated financial statements.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 2 - us-gaap:CashAndCashEquivalentsDisclosureTextBlock-->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>2. Cash, cash equivalents, and investments</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Cash and cash equivalents include funds on hand and short-term investments with original
maturities of three months or less. Short-term investments include securities generally having
maturities of 90 days to one year. The Company’s short-term investments are invested in commercial
paper, which, based on management’s intent and ability, are classified as held to maturity
investments, recorded at amortized cost.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="center" style="font-size: 10pt; margin-top: 0pt">
<b>
</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The following is a summary of cash, cash equivalents and held-to-maturity investments by type
at June 30, 2011 and December 31, 2010:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="20%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="14" style="border-bottom: 1px solid #000000"><b>June 30, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="14" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Gross</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Gross</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Gross</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Gross</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Unrealized</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Unrealized</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Unrealized</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Unrealized</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Cost</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Gains</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Losses</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Fair Value</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Cost</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Gains</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Losses</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Fair Value</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Cash and money market funds
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">27,719,405</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">27,719,405</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">42,684,241</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">42,684,241</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Commercial paper
</div></td>
<td> </td>
<td> </td>
<td align="right">10,675,112</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">84</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">15,251</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">10,659,945</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Certificate of Deposit
</div></td>
<td> </td>
<td> </td>
<td align="right">100,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">319</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">99,681</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Total cash, cash
equivalents and
investments
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">38,494,517</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">84</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">15,570</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">38,479,031</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">42,684,241</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">42,684,241</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The following table summarizes the classification of cash, cash equivalents and investments in
the accompanying balance sheet:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>December 31,</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Cash
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">8,231,945</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">12,282,389</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Cash equivalents
</div></td>
<td> </td>
<td> </td>
<td align="right">19,487,460</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">30,401,852</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Total cash and cash equivalents
</div></td>
<td> </td>
<td> </td>
<td align="right">27,719,405</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">42,684,241</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Short term investments
</div></td>
<td> </td>
<td> </td>
<td align="right">10,775,112</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Long term investments
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">38,494,517</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">42,684,241</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The commercial paper investments, identified above as short-term investments at June 30,
2011, have contractual maturities of less than one year. At June 30, 2011, held-to-maturity
short-term investments have gross unrealized losses of $15,570, which have been in a continuous
unrealized loss position for less than 12 months. The unrealized losses on the Company’s
investments in commercial paper are due to interest rate fluctuations. As these investments were
originally purchased at a premium, are short-term in nature, are expected to be redeemed at par
value and because the Company has the ability and intent to hold these investments to maturity, the
Company does not consider these investments to be other than temporarily impaired at June 30, 2011.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 3 - us-gaap:InventoryDisclosureTextBlock-->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>3. Inventory</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Inventories are stated at the lower of cost or market. Cost is determined using the weighted
average cost of raw materials, which approximates the first-in, first-out (FIFO) method, and
includes allocations of manufacturing labor and overhead. Provisions are made to reduce potentially
excess, obsolete or slow-moving inventories to their net realizable value. Inventories as of June
30, 2011 and December 31, 2010 consisted of the following:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>June 30, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Raw materials and work-in-process
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">12,430,725</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">11,817,579</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Finished goods
</div></td>
<td> </td>
<td> </td>
<td align="right">4,158,460</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">6,348,490</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Reserve for excess and obsolete inventory
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(539,976</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(350,664</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">16,049,209</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">17,815,405</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="center" style="font-size: 10pt; margin-top: 0pt">
<b>
</b>
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 4 - us-gaap:IntangibleAssetsDisclosureTextBlock-->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>4. Intangible assets</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Intangible assets consisted of the following at June 30, 2011 and December 31, 2010:
</div>
<div align="center">
<table style="font-size: 8pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="23%"> </td>
<td width="3%"> </td>
<td width="8%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="6%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="6%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="6%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="6%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="6%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="6%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="10" style="border-bottom: 1px solid #000000"><b>June 30, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="10" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Gross</b></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Net</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Gross</b></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Net</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Carrying</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Accumulated</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Carrying</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Carrying</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Accumulated</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Carrying</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" style="border-bottom: 1px solid #000000"><b>Useful Life</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Amount</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Amortization</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Amount</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Amount</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Amortization</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Amount</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Amortized intangible assets:
</div></td>
<td> </td>
<td align="center" valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Domain names
</div></td>
<td> </td>
<td align="center" valign="top">5 Years</td>
<td> </td>
<td align="left" valign="top">$</td>
<td align="right" valign="top">168,428</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top">$</td>
<td align="right" valign="top">88,894</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top">$</td>
<td align="right" valign="top">79,534</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top">$</td>
<td align="right" valign="top">237,911</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top">$</td>
<td align="right" valign="top">66,006</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top">$</td>
<td align="right" valign="top">171,905</td>
<td valign="top"> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Issued patents
</div></td>
<td> </td>
<td align="center" valign="top" nowrap="nowrap">4 to 15 Years</td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">1,370,969</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">299,476</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">1,071,493</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">1,040,148</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">264,716</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">775,432</td>
<td valign="top"> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Issued trademarks
</div></td>
<td> </td>
<td align="center" valign="top">9 to 11 Years</td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">235,600</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">50,056</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">185,544</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">207,721</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">37,659</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">170,062</td>
<td valign="top"> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Non compete agreements
</div></td>
<td> </td>
<td align="center" valign="top">5 to 7 Years</td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">150,000</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">140,000</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">10,000</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">150,000</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">130,000</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">20,000</td>
<td valign="top"> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="center" valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="center" valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">1,924,997</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">578,426</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">1,346,571</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">1,635,780</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">498,381</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">1,137,399</td>
<td valign="top"> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="center" valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Unamortized intangible assets:
</div></td>
<td> </td>
<td align="center" valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">TASER Trademark
</div></td>
<td> </td>
<td align="center" valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">900,000</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">900,000</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">900,000</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">900,000</td>
<td valign="top"> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Patents and trademarks pending
</div></td>
<td> </td>
<td align="center" valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">899,340</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">899,340</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">1,053,477</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">1,053,477</td>
<td valign="top"> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="center" valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="center" valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">1,799,340</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">1,799,340</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">1,953,477</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top">1,953,477</td>
<td valign="top"> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="center" valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 1px solid #000000"> </td>
<td valign="top"> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="center" valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
<td align="right" valign="top"> </td>
<td valign="top"> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="center" valign="top"> </td>
<td> </td>
<td align="left" valign="top">$</td>
<td align="right" valign="top">3,724,337</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top">$</td>
<td align="right" valign="top">578,426</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top">$</td>
<td align="right" valign="top">3,145,911</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top">$</td>
<td align="right" valign="top">3,589,257</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top">$</td>
<td align="right" valign="top">498,381</td>
<td valign="top"> </td>
<td> </td>
<td align="left" valign="top">$</td>
<td align="right" valign="top">3,090,876</td>
<td valign="top"> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="center" valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 3px double #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 3px double #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 3px double #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 3px double #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 3px double #000000"> </td>
<td valign="top"> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" valign="top" style="border-top: 3px double #000000"> </td>
<td valign="top"> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Amortization expense for the three and six months ended June 30, 2011, was approximately
$41,000 and $80,000, respectively. Amortization expense for the three and six months ended June
30, 2010, was approximately $24,000 and $48,000, respectively. Estimated amortization expense of
intangible assets for the remaining six months of 2011, the next five years ended December 31, and
thereafter is as follows:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="86%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">2011 (remainder of year)
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">74,546</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">2012
</div></td>
<td> </td>
<td> </td>
<td align="right">129,093</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">2013
</div></td>
<td> </td>
<td> </td>
<td align="right">129,096</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">2014
</div></td>
<td> </td>
<td> </td>
<td align="right">128,179</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">2015
</div></td>
<td> </td>
<td> </td>
<td align="right">119,427</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">2016
</div></td>
<td> </td>
<td> </td>
<td align="right">106,556</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Thereafter
</div></td>
<td> </td>
<td> </td>
<td align="right">659,674</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">1,346,571</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 5 - us-gaap:AccountsPayableAndAccruedLiabilitiesDisclosureTextBlock-->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>5. Accrued liabilities</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Accrued liabilities consisted of the following at June 30, 2011 and December 31, 2010:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>June 30, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Accrued salaries and benefits
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">1,620,218</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,411,716</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Accrued litigation judgment expense
</div></td>
<td> </td>
<td> </td>
<td align="right">3,300,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Accrued expenses
</div></td>
<td> </td>
<td> </td>
<td align="right">1,352,998</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,668,477</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Accrued warranty expense
</div></td>
<td> </td>
<td> </td>
<td align="right">330,088</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">646,113</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Accrued income tax
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">33,494</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">6,603,304</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">3,759,800</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="center" style="font-size: 10pt; margin-top: 0pt">
<b>
</b>
</div>
</div>
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<!-- Begin Block Tagged Note 6 - us-gaap:IncomeTaxDisclosureTextBlock-->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>6. Income taxes</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b><i>Deferred Tax Assets</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The net deferred income tax assets at June 30, 2011, include net operating loss and
alternative minimum tax carryforwards, capitalized research and development costs, research and
development tax credits, non-qualified stock-based compensation expense, deferred warranty revenue,
warranty and inventory reserves and accrued vacation, partially offset by accelerated depreciation
expense. The Company’s total current and long term deferred tax assets balance at June 30, 2011, is
$21.9 million.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In preparing the Company’s consolidated financial statements, management assesses the
likelihood that its deferred tax assets will be realized from future taxable income. In evaluating
the Company’s ability to recover its deferred income tax assets, management considers all available
positive and negative evidence, including its operating results, ongoing tax planning and forecasts
of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is
established if it is determined that it is more likely than not that some portion or all of the net
deferred tax assets will not be realized. Management exercises significant judgment in determining
its provisions for income taxes, its deferred tax assets and liabilities, and its future taxable
income for purposes of assessing its ability to utilize any future tax benefit from its deferred
tax assets. Although management believes that its tax estimates are reasonable, the ultimate tax
determination involves significant judgment that could become subject to audit by tax authorities
in the ordinary course of business, as well as the generation of sufficient future taxable income.
Management believes that, as of June 30, 2011, based on an evaluation and projections of future
sales and profitability for fiscal 2011, no valuation allowance is necessary. However, such
deferred tax assets could be reduced in the future if projections of future taxable income during
the carryforward period are reduced.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The Company has completed research and development tax credit studies which identified
approximately $5.9 million in tax credits for Federal, Arizona and California income tax purposes
related to the 2003 through 2010 tax years, net of the federal benefit on the Arizona and
California research and development tax credits. Management has made the determination that it is
more likely than not that the full benefit of the research and development tax credit will not be
sustained on examination and accordingly has established a cumulative liability for unrecognized
tax benefits of $2.2 million as of June 30, 2011. In addition, management accrued approximately
$106,000 for estimated uncertain tax positions related to certain state income tax liabilities. As
of June 30, 2011, management does not expect the amount of the unrecognized tax benefit liability
to increase or decrease significantly within the next 12 months. Should the unrecognized tax
benefits of $2.3 million be recognized, the Company’s effective tax rate would be favorably
impacted.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The following presents a rollforward of our liability for unrecognized tax benefits as of June
30, 2011:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="86%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Unrecognized</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Tax Benefits</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance at January 1, 2011
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">2,281,840</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Decrease in prior year tax positions
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Increase in current year tax positions
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(1,989</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Decrease related to adjustment of previous estimates of activity
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Decrease related to settlements with taxing authorities
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Decrease related to lapse in statute of limitations
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance at June 30, 2011
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">2,279,851</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Effective Tax Rate</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Our estimated full year effective tax rate, before discrete period adjustments, is
approximately 48%, which is above the statutory rate due to the impact of non-deductible expenses
for items such as Incentive Stock Option (“ISO”) expense, meals and entertainment and lobbying
fees, which make our projected annual net income for tax purposes significantly higher than our
book pre-tax income. The overall effective tax rate of 38.9% and 37.1% for the three and six months
ended June 30, 2011, was below our estimated annual effective tax rate due to treating the
litigation judgment expense, asset impairment expense and the lawsuit settlement proceeds as
discrete items due to their significant and unusual nature and therefore taxeffecting them at the
statutory rate.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="center" style="font-size: 10pt; margin-top: 0pt">
<b>
</b>
</div>
</div>
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<!-- Begin Block Tagged Note 7 - us-gaap:StockholdersEquityNoteDisclosureTextBlock-->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>7. Stockholders’ equity</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b><i>Stock Repurchase</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In March 2011, TASER’s Board of Directors authorized a stock repurchase program to acquire up
to $12.5 million of the Company’s outstanding common stock subject to stock market conditions and
corporate considerations. Through June 30, 2011, the Company repurchased approximately 2.9 million
shares at a weighted average cost, including commissions, of $4.28 per share and a total cost of
$12.5 million. During July 2011, TASER’s Board of Directors authorized an additional repurchase
program to acquire up to $20 million of the Company’s outstanding common stock, subject to stock
market conditions and corporate considerations. Through August 4, 2011, the Company has repurchased a total of approximately 207,000 shares
at an average cost of $4.22 per share and a total cost of $0.9 million.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Stock Option Activity</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">At June 30, 2011, the Company had four stock-based compensation plans, three of which are
described more fully in Note 10 to the consolidated financial statements included in the Company’s
Annual Report on Form 10-K.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The following table summarizes the stock options available and outstanding as of June 30,
2011, as well as activity during the six months then ended:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="58%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Outstanding Options</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Options Available</b></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Weighted Average</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>for Grant</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Number of options</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Exercise Price</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance at December 31, 2010
</div></td>
<td> </td>
<td> </td>
<td align="right">2,478,768</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">7,507,286</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">5.71</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Granted
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(933,728</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">933,728</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">4.65</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Exercised
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(4,668</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td align="left">$</td>
<td align="right">0.84</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Expired/terminated
</div></td>
<td> </td>
<td> </td>
<td align="right">46,354</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(46,354</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td align="left">$</td>
<td align="right">5.46</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance at June 30, 2011
</div></td>
<td> </td>
<td> </td>
<td align="right">1,591,394</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">8,389,992</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">5.59</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The options outstanding as of June 30, 2011, have been segregated into five ranges for
additional disclosure as follows:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="30%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="10" style="border-bottom: 1px solid #000000"><b>Options Outstanding</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Options Exercisable</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Weighted</b></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Weighted</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Average</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Weighted Average</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b> </b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Average</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Exercise</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Remaining</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Number</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Exercise</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td nowrap="nowrap" align="left" style="border-bottom: 1px solid #000000"><b>Range of Exercise Price</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Number Outstanding</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Price</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Contractual Life</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Exercisable</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Price</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td align="center">
<div style="margin-left:15px; text-indent:-15px">$0.28 - $0.99
</div></td>
<td> </td>
<td> </td>
<td align="right">473,168</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">0.37</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1.7</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">473,168</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">0.37</td>
<td> </td>
</tr>
<tr valign="bottom">
<td align="center">
<div style="margin-left:15px; text-indent:-15px">$1.03 - $2.41
</div></td>
<td> </td>
<td> </td>
<td align="right">650,379</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1.62</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1.3</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">650,379</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1.62</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td align="center">
<div style="margin-left:15px; text-indent:-15px">$3.53 - $9.93
</div></td>
<td> </td>
<td> </td>
<td align="right">6,708,332</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">5.78</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">6.8</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">5,099,926</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">6.28</td>
<td> </td>
</tr>
<tr valign="bottom">
<td align="center">
<div style="margin-left:15px; text-indent:-15px">$10.07 - $19.76
</div></td>
<td> </td>
<td> </td>
<td align="right">533,413</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">11.94</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">4.4</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">533,413</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">11.94</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td align="center">
<div style="margin-left:15px; text-indent:-15px">$20.12 - $29.98
</div></td>
<td> </td>
<td> </td>
<td align="right">24,700</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">22.91</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2.9</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">24,700</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">22.91</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td align="center">
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td align="center">
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td align="right">8,389,992</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">5.59</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">6.0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">6,781,586</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">5.87</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td align="center">
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The total fair value of options exercisable at June 30, 2011 and 2010 was $20.9 million
and $19.7 million, respectively. The aggregate intrinsic value of options outstanding and options
exercisable at June 30, 2011, was $4.2 million and $4.1 million, respectively. Aggregate intrinsic
value represents the difference between the Company’s closing stock price on the last trading day
of the fiscal period, which was $4.55 per share, and the exercise price multiplied by the number of
options outstanding. Total intrinsic value of options exercised for the three and six month periods
ended June 30, 2011, was $0 and approximately $13,000, respectively. Total intrinsic value of
options exercised for the three and six month periods ended June 30, 2010 was approximately $39,000
and $2,128,000, respectively.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">At June 30, 2011, the Company had approximately 1.6 million unvested options outstanding with
a weighted average exercise price of $4.76 per share, weighted average grant date fair value of
$2.19 per share and a weighted average remaining contractual life of 8.7 years. Of these unvested
options outstanding, management estimates that approximately 1.5 million options will ultimately
vest based on its historical experience.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="center" style="font-size: 10pt; margin-top: 0pt">
<b>
</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">As of June 30, 2011, total unrecognized stock-based compensation expense related to unvested
stock options was approximately $4.2 million, which is expected to be recognized over a remaining
weighted average period of approximately 15 months.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Stock-Based Compensation Expense</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The Company calculates the fair value of stock-based awards using the Black-Scholes-Merton
option valuation model, which incorporates various assumptions including volatility, expected life,
and interest rates. The assumptions used for the three and six month periods ended June 30, 2011
and 2010, and the resulting estimates of weighted-average fair value per share of options granted
during those periods, are as follows:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Three Months Ended June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Six Months Ended June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Expected life of options
</div></td>
<td> </td>
<td colspan="3" align="center">4.5 years</td>
<td> </td>
<td colspan="3" align="center">4.5 years</td>
<td> </td>
<td colspan="3" align="center">4.5 years</td>
<td> </td>
<td colspan="3" align="center">4.5 years</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Weighted average volatility
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">52.8</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">62.2</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">55.7</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">61.5</td>
<td nowrap="nowrap">%</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Weighted average risk-free interest rate
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">1.5</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">2.0</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">1.7</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">2.1</td>
<td nowrap="nowrap">%</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Dividend rate
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">0.0</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">0.0</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">0.0</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">0.0</td>
<td nowrap="nowrap">%</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Weighted average fair value of options granted
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">2.01</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">2.25</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">2.17</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">2.71</td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The expected life of options represents the estimated period of time until exercise and
is based on the Company’s historical experience of similar awards, giving consideration to the
contractual terms, vesting schedules and expectations of employee behavior. Expected stock price
volatility is based on a combination of historical volatility of the Company’s stock and the
one-year implied volatility of its publicly traded options for the related vesting periods. The
risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues
with an equivalent remaining term. The Company has not paid dividends in the past and does not plan
to pay any dividends in the near future. The estimated fair value of stock-based compensation
awards and other options is amortized to expense on a straight line basis over the relevant vesting
period. As share-based compensation expense is recognized on awards ultimately expected to vest, it
is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from those estimates. The
Company’s forfeiture rate was calculated based on its historical experience of awards which
ultimately vested.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Reported share-based compensation was classified as follows for the three and six months ended
June 30, 2011 and 2010:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Three Months Ended June 30</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Six Months Ended June 30</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Cost of Products Sold
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">51,976</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">80,476</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">104,980</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">151,985</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Sales, general and administrative expenses
</div></td>
<td> </td>
<td> </td>
<td align="right">649,566</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">724,464</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,372,745</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,522,591</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Research and development expenses
</div></td>
<td> </td>
<td> </td>
<td align="right">175,465</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">111,686</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">362,199</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">251,644</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">877,007</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">916,626</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,839,924</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,926,220</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Total share-based compensation expense recognized in the income statement for the three
and six months ended June 30, 2011, includes approximately $430,000 and $1.4 million, respectively,
related to Incentive Stock Options (“ISOs”) for which no tax benefit is recognized. Total
share-based compensation expense recognized in the income statement for the three and six months
ended June 30, 2010, includes approximately $503,000 and $1.3 million, respectively, related to
ISOs for which no tax benefit is recognized. The Company did not tax effect the share-based
compensation expense for tax purposes related to the non-qualified disposition of ISOs exercised
and sold as the benefit will be recorded when the Company is in a position to realize the benefit
with an offset to taxes payable in future periods. The total unrecognized tax benefit related to
the non-qualified disposition of stock options in the three and six months ended June 30, 2011, was
approximately $430,000 and $1.4 million, respectively. The total unrecognized tax benefit related
to the non-qualified disposition of stock options in the three and six months ended June 30, 2010,
was approximately $39,000 and $2.1 million, respectively.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The Company has granted a cumulative total of 950,800 performance-based stock options from
2008 through June 30, 2011, the vesting of which is contingent upon the achievement of certain
performance criteria related to the successful and timely development and market acceptance of
future product introductions, as well as the future sales and operating performance of the Company.
Compensation expense is recognized over the implicit service period (the date the performance
condition is expected to be achieved) based on management’s estimate of the probability of the
performance criteria being satisfied, adjusted at each balance sheet date. At June 30, 2011,
259,452 unvested performance options with a fair value of approximately $603,000 remain
outstanding. No options were forfeited during the three or six months ended June 30, 2011. During
the three and six months ended June 30, 2010, 25,000 and 225,000 of these options, respectively,
were forfeited, resulting in the reversal of approximately $52,000 and $346,000, respectively, of
previously recognized compensation expense.
</div>
<!-- Folio -->
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</div>
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<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="center" style="font-size: 10pt; margin-top: 0pt">
<b>
</b>
</div>
</div>
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<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>8. Line of credit</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The Company has a line of credit agreement with a total availability of $10.0 million. The
line is secured by the Company’s accounts receivable and inventory and bears interest at varying
rates of interest, currently LIBOR plus 1.25%. The line of credit which was amended and renewed in
June 2011, primarily to remove the borrowing base restriction, matures on June 30, 2013 and
requires monthly payments of interest only. At June 30, 2011, there was no amount outstanding under
the line of credit. There have been no borrowings under the line of credit to date. The Company’s
agreement with the bank requires compliance with certain financial and other covenants including
maintenance of minimum tangible net worth and a fixed charge coverage ratio. The ratio of total
liabilities to tangible net worth can be no greater than 1:1, and the fixed coverage charge ratio
can be no less than 1.25:1, based upon a trailing twelve-month period. At June 30, 2011, the
Company’s tangible net worth ratio
was 0.21:1 and its fixed charge coverage ratio was 2.65:1. Accordingly, the Company was in
compliance with those covenants.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
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<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>9. Commitments and Contingencies</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><b>Product Litigation</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The Company is currently named as a defendant in 52 lawsuits in which the plaintiffs allege
either wrongful death or personal injury in situations in which the TASER device was used (or
present) by law enforcement officers in connection with arrests or during training exercises.
Companion cases arising from the same incident have been combined into one for reporting purposes.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In addition, 132 other lawsuits have been dismissed or judgment entered in favor of the
Company which are not included in this number. An appeal was filed by the plaintiff in the Lee
(TN), Thompson (MI), Marquez (AZ), Oliver (FL) and Rosa (CA) cases where judgment was entered in
favor of the Company. In July 2011, the Court of Appeals affirmed the judgment in favor of the
Company in the Lee (TN) appeal and in August denied the plaintiff’s request for a rehearing. These cases are not included in this number or in the table below.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Also not included in the number of pending lawsuits or in the table below is the Heston
lawsuit in which a jury verdict was entered against the Company on June 6, 2008, and judgment was
entered against the Company on January 30, 2009 in the amount of $153,150 as compensatory damages,
$1,423,127 as attorney fees, and $182,000 as costs. These damages, fees and costs are covered by
the Company’s insurance policies. The jury found that Mr. Heston’s own actions were 85% responsible
for his death. The jury assigned 15% of the responsibility to TASER for a “negligent failure to
warn” that extended or multiple TASER ECD applications could cause muscle contractions that could
potentially contribute to acidosis to a degree that could cause cardiac arrest. The jury
inappropriately awarded $5,200,000 in punitive damages against TASER, which were subsequently
disallowed by the Court on October 24, 2008. The Court denied the balance of the Company’s motion
for judgment as a matter of law on all other grounds. The Company has filed a notice of appeal with
respect to the judgment and plaintiffs have filed a notice of cross appeal.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The Turner (NC) lawsuit was tried in July 2011 and resulted in a jury verdict of $10 million
against the Company. The Company has filed post trial motions seeking judgment as a matter of law
notwithstanding the verdict and in the alternative a new trial or alternatively a remittitur of
the jury award. The court has not yet entered judgment. The Company has recorded a litigation
judgment expense of $3.3 million in the second quarter of 2011, which represents management’s best
estimate of the Company’s uninsured portion of the judgment after consideration of available
insurance coverage.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">With respect to each of the pending 52 lawsuits, the following table lists the name of
plaintiff, the date the Company was served with process, the jurisdiction in which the case is
pending, the type of claim and the status of the matter. While the facts vary from case to case,
the product liability claims are typically based on an alleged product defect resulting in injury
or death, usually involving a failure to warn, and the plaintiffs are seeking monetary damages.
This table also lists those cases that were dismissed or judgment entered during the most recent
fiscal quarter. Cases that were dismissed or judgment entered in prior fiscal quarters are not
included in this table. The claims and in some instances, the defense of each of these lawsuits has
been submitted to our insurance carriers that maintained insurance coverage during these applicable
periods and we continue to maintain product liability insurance coverage with varying limits and
deductibles. Our product liability insurance coverage during these periods ranged from $5,000,000
to $10,000,000 in coverage limits and from $10,000 to $1,000,000 in per incident deductibles. For the 2010 insurance policy year, our product
liability insurance coverage was $10 million and, as noted above, in the Turner (NC) case the Company received an adverse $10 million jury verdict.
After consideration of remaining available insurance coverage, the Company's uninsured exposure related to this case is approximately $3.3 million.
While the Company will explore every possible legal channel to have this verdict overturned, in the event the verdict stands, the Company's insurance
coverage for the 2010 policy year will be exhausted and, for any other claims relating to the 2010 policy year, the Company will not have insurance coverage
for defense costs or any other adverse judgments, should they arise. We
are defending each of these lawsuits vigorously and do not expect these lawsuits to individually
and in the aggregate, materially affect our business, results of operations or financial condition.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
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<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="center" style="font-size: 10pt; margin-top: 0pt">
<b>
</b>
</div>
<div align="center">
<table style="font-size: 8pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="10%"> </td>
<td width="2%"> </td>
<td width="5%"> </td>
<td width="2%"> </td>
<td width="24%"> </td>
<td width="2%"> </td>
<td width="11%"> </td>
<td width="2%"> </td>
<td width="11%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td nowrap="nowrap" align="left" style="border-bottom: 1px solid #000000"><b>Plaintiff</b></td>
<td> </td>
<td nowrap="nowrap" align="center" style="border-bottom: 1px solid #000000"><b>Served</b></td>
<td> </td>
<td nowrap="nowrap" align="center" style="border-bottom: 1px solid #000000"><b>Jurisdiction</b></td>
<td> </td>
<td nowrap="nowrap" align="center" style="border-bottom: 1px solid #000000"><b>Claim Type</b></td>
<td> </td>
<td nowrap="nowrap" align="center" style="border-bottom: 1px solid #000000"><b>Status</b></td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Glowczenski
</div></td>
<td> </td>
<td align="right" valign="top">Oct-04
</td>
<td> </td>
<td align="left" valign="top">US District Court, ED NY
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Trial rescheduled, date to be determined</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Washington
</div></td>
<td> </td>
<td align="right" valign="top">May-05
</td>
<td> </td>
<td align="left" valign="top">US District Court, ED CA
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Bagnell
</div></td>
<td> </td>
<td align="right" valign="top">Jul-06
</td>
<td> </td>
<td align="left" valign="top">Supreme Court for British Columbia, Canada
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Dismissed</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Hollman
</div></td>
<td> </td>
<td align="right" valign="top">Aug-06
</td>
<td> </td>
<td align="left" valign="top">US District Court, ED NY
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Oliver
</div></td>
<td> </td>
<td align="right" valign="top">Sep-06
</td>
<td> </td>
<td align="left" valign="top">US District Court, MD FL, Orlando Division
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Dismissed</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Augustine
</div></td>
<td> </td>
<td align="right" valign="top">Jan-07
</td>
<td> </td>
<td align="left" valign="top">11<sup style="font-size: 85%; vertical-align: text-top">th</sup> Judicial Circuit Court, Miami-Dade, FL
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Dismissed</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Wendy Wilson, Estate of Ryan Wilson
</div></td>
<td> </td>
<td align="right" valign="top">Aug-07
</td>
<td> </td>
<td align="left" valign="top">District Court Boulder County, CO
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Dismissal Pending</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Jack Wilson, Estate of Ryan Wilson (Companion to Wendy Wilson)
</div></td>
<td> </td>
<td align="right" valign="top">Nov-07
</td>
<td> </td>
<td align="left" valign="top">District Court Boulder County, CO
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Dismissal Pending</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Salinas
</div></td>
<td> </td>
<td align="right" valign="top">Aug-08
</td>
<td> </td>
<td align="left" valign="top">US District Court, ND CA
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Motion Phase,off trial calendar</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Thomas (Pike)
</div></td>
<td> </td>
<td align="right" valign="top">Oct-08
</td>
<td> </td>
<td align="left" valign="top">US District Court, WD Louisiana, Alexandria
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Carroll
</div></td>
<td> </td>
<td align="right" valign="top">Mar-09
</td>
<td> </td>
<td align="left" valign="top">US District Court, SD TX
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Dismissed</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Shrum
</div></td>
<td> </td>
<td align="right" valign="top">May-09
</td>
<td> </td>
<td align="left" valign="top">Allen County District Court, Iola, KS
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Trial Scheduled February 2012</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Athetis
</div></td>
<td> </td>
<td align="right" valign="top">May-09
</td>
<td> </td>
<td align="left" valign="top">US District Court, AZ
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Abrahams
</div></td>
<td> </td>
<td align="right" valign="top">Jul-09
</td>
<td> </td>
<td align="left" valign="top">CA Superior Court, Yolo County
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase-trial scheduled September 2012</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Humphreys
</div></td>
<td> </td>
<td align="right" valign="top">Oct-09
</td>
<td> </td>
<td align="left" valign="top">CA Superior Court, San Joaquin County
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Terriquez
</div></td>
<td> </td>
<td align="right" valign="top">Feb-10
</td>
<td> </td>
<td align="left" valign="top">Superior Court of CA, Orange County
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheuduled January 2012</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Rich
</div></td>
<td> </td>
<td align="right" valign="top">Feb-10
</td>
<td> </td>
<td align="left" valign="top">US District Court, NV
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">McKenzie
</div></td>
<td> </td>
<td align="right" valign="top">Feb-10
</td>
<td> </td>
<td align="left" valign="top">US Disctrict Court, ED CA
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Dismissed</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Turner
</div></td>
<td> </td>
<td align="right" valign="top">Feb-10
</td>
<td> </td>
<td align="left" valign="top">General Court of Justice, Superior Court Div, Mecklenburg County, NC
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Jury award for $10 million. Post trial motions filed, judgment not filed.</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Doan
</div></td>
<td> </td>
<td align="right" valign="top">Apr-10
</td>
<td> </td>
<td align="left" valign="top">Queens Bench Alberta, Red Deer Judicial Dist.
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Pleading Phase</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Piskkura
</div></td>
<td> </td>
<td align="right" valign="top">May-10
</td>
<td> </td>
<td align="left" valign="top">US District Court, OH
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheuduled March 2012</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Corbin
</div></td>
<td> </td>
<td align="right" valign="top">Jun-10
</td>
<td> </td>
<td align="left" valign="top">Houston County Court, MD AL
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheuduled October 2011</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Swayzer
</div></td>
<td> </td>
<td align="right" valign="top">Jun-10
</td>
<td> </td>
<td align="left" valign="top">US District Court, ND CA
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Dismissed</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">DuBoise
</div></td>
<td> </td>
<td align="right" valign="top">Aug-10
</td>
<td> </td>
<td align="left" valign="top">US District Court, ED MO
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheduled October 2011</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Vaugn
</div></td>
<td> </td>
<td align="right" valign="top">Sep-10
</td>
<td> </td>
<td align="left" valign="top">US District Court, ND CA
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Dismissed</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Kelly
</div></td>
<td> </td>
<td align="right" valign="top">Oct-10
</td>
<td> </td>
<td align="left" valign="top">District Court for Harris County, TX
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheduled October 2011</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Jacobs
</div></td>
<td> </td>
<td align="right" valign="top">Oct-10
</td>
<td> </td>
<td align="left" valign="top">District Court for Travis County, TX
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheduled October 2012</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Woodward
</div></td>
<td> </td>
<td align="right" valign="top">Nov-10
</td>
<td> </td>
<td align="left" valign="top">Sumner County TN Court, 18th Judicial District
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Dismissed</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Juran
</div></td>
<td> </td>
<td align="right" valign="top">Dec-10
</td>
<td> </td>
<td align="left" valign="top">Hennepin County District Court, 4th Judicial District
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Shymko
</div></td>
<td> </td>
<td align="right" valign="top">Dec-10
</td>
<td> </td>
<td align="left" valign="top">The Queens Bench, Winnipeg Centre, Manitoba
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Pleading Phase</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Williams
</div></td>
<td> </td>
<td align="right" valign="top">Dec-10
</td>
<td> </td>
<td align="left" valign="top">US District Court, MS
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheduled April 2012</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">English
</div></td>
<td> </td>
<td align="right" valign="top">May-11
</td>
<td> </td>
<td align="left" valign="top">US District Court, WD, VA
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheduled April 2012</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Wilson (MO)
</div></td>
<td> </td>
<td align="right" valign="top">May-11
</td>
<td> </td>
<td align="left" valign="top">US District Court, ED, MO
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Pleading Phase</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Terrell (TX)
</div></td>
<td> </td>
<td align="right" valign="top">Jun-11
</td>
<td> </td>
<td align="left" valign="top">US District Court, SD, TX
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Pleading Phase</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Sylvester (CA)
</div></td>
<td> </td>
<td align="right" valign="top">Jun-11
</td>
<td> </td>
<td align="left" valign="top">US District Court, ND, CA
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Pleading Phase</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">La Day (TX)
</div></td>
<td> </td>
<td align="right" valign="top">Jun-11
</td>
<td> </td>
<td align="left" valign="top">US District Court, ED TX
</td>
<td> </td>
<td align="left" valign="top">Wrongful Death
</td>
<td> </td>
<td align="left" valign="top">Pleading Phase</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Stewart
</div></td>
<td> </td>
<td align="right" valign="top">Oct-05
</td>
<td> </td>
<td align="left" valign="top">Circuit Court for Broward County, FL
</td>
<td> </td>
<td align="left" valign="top">Training Injury
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Husband
</div></td>
<td> </td>
<td align="right" valign="top">Mar-06
</td>
<td> </td>
<td align="left" valign="top">British Columbia Supreme Court, Canada
</td>
<td> </td>
<td align="left" valign="top">Training Injury
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheduled March 2012</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Grable
</div></td>
<td> </td>
<td align="right" valign="top">Aug-08
</td>
<td> </td>
<td align="left" valign="top">FL 6th Judicial Circuit Court, Pinellas County
</td>
<td> </td>
<td align="left" valign="top">Training Injury
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Koon
</div></td>
<td> </td>
<td align="right" valign="top">Dec-08
</td>
<td> </td>
<td align="left" valign="top">17th Judicial Circuit Court, Broward County, FL
</td>
<td> </td>
<td align="left" valign="top">Training Injury
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Bickle
</div></td>
<td> </td>
<td align="right" valign="top">Mar-09
</td>
<td> </td>
<td align="left" valign="top">18th Judicial District Court, Gallatin County, MT
</td>
<td> </td>
<td align="left" valign="top">Training Injury
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheduled December 2011</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Foley
</div></td>
<td> </td>
<td align="right" valign="top">Mar-09
</td>
<td> </td>
<td align="left" valign="top">US District Court, MA
</td>
<td> </td>
<td align="left" valign="top">Training Injury
</td>
<td> </td>
<td align="left" valign="top">Dismissed</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Peppler
</div></td>
<td> </td>
<td align="right" valign="top">Apr-09
</td>
<td> </td>
<td align="left" valign="top">Circuit Court 5th Judicial Dist., Sumter City, FL
</td>
<td> </td>
<td align="left" valign="top">Training Injury
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Kandt
</div></td>
<td> </td>
<td align="right" valign="top">Jun-09
</td>
<td> </td>
<td align="left" valign="top">US District Court, ND NY
</td>
<td> </td>
<td align="left" valign="top">Training Injury
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Ginger
</div></td>
<td> </td>
<td align="right" valign="top">Apr-10
</td>
<td> </td>
<td align="left" valign="top">Iowa District Court, Marion County
</td>
<td> </td>
<td align="left" valign="top">Training Injury
</td>
<td> </td>
<td align="left" valign="top">Dismissed</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Maynard
</div></td>
<td> </td>
<td align="right" valign="top">Apr-10
</td>
<td> </td>
<td align="left" valign="top">Superior Court, Hartford Judicial District, CT
</td>
<td> </td>
<td align="left" valign="top">Training Injury
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Butler
</div></td>
<td> </td>
<td align="right" valign="top">Jan-11
</td>
<td> </td>
<td align="left" valign="top">US District Court, ND TX
</td>
<td> </td>
<td align="left" valign="top">Training Injury
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheduled April 2012</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Derbyshire
</div></td>
<td> </td>
<td align="right" valign="top">Nov-09
</td>
<td> </td>
<td align="left" valign="top">Ontario Superior Court of Justice
</td>
<td> </td>
<td align="left" valign="top">Officer Injury
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Hollenback
</div></td>
<td> </td>
<td align="right" valign="top">Dec-10
</td>
<td> </td>
<td align="left" valign="top">St. Louis County Circuit Court MO
</td>
<td> </td>
<td align="left" valign="top">Officer Injury
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheduled January 2012</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Strough
</div></td>
<td> </td>
<td align="right" valign="top">Feb-11
</td>
<td> </td>
<td align="left" valign="top">US District Court, ED MO
</td>
<td> </td>
<td align="left" valign="top">Officer Injury
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheduled December 2012</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Lucas
</div></td>
<td> </td>
<td align="right" valign="top">Jun-09
</td>
<td> </td>
<td align="left" valign="top">US District Court, ED CA
</td>
<td> </td>
<td align="left" valign="top">Suspect Injury During Arrest
</td>
<td> </td>
<td align="left" valign="top">Dismissed</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Wheat
</div></td>
<td> </td>
<td align="right" valign="top">Jul-09
</td>
<td> </td>
<td align="left" valign="top">CA Superior Court, Los Angeles County
</td>
<td> </td>
<td align="left" valign="top">Suspect Injury During Arrest
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheduled September 2011</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Fahy
</div></td>
<td> </td>
<td align="right" valign="top">Dec-09
</td>
<td> </td>
<td align="left" valign="top">Circuit Court of City of St. Louis
</td>
<td> </td>
<td align="left" valign="top">Suspect Injury During Arrest
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheduled August 2012</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Tylecki
</div></td>
<td> </td>
<td align="right" valign="top">Jan-10
</td>
<td> </td>
<td align="left" valign="top">US District Court, DE
</td>
<td> </td>
<td align="left" valign="top">Suspect Injury During Arrest
</td>
<td> </td>
<td align="left" valign="top">Dismissed</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Thompson
</div></td>
<td> </td>
<td align="right" valign="top">Mar-10
</td>
<td> </td>
<td align="left" valign="top">11th Judicial Circuit Court Miami-Dade County, FL
</td>
<td> </td>
<td align="left" valign="top">Suspect Injury During Arrest
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Wilson
</div></td>
<td> </td>
<td align="right" valign="top">Apr-10
</td>
<td> </td>
<td align="left" valign="top">US District Court, ND IL, ED
</td>
<td> </td>
<td align="left" valign="top">Suspect Injury During Arrest
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Patterson
</div></td>
<td> </td>
<td align="right" valign="top">Jun-10
</td>
<td> </td>
<td align="left" valign="top">Circuit Court Pontotoc County, MS
</td>
<td> </td>
<td align="left" valign="top">Suspect Injury During Arrest
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheduled April 2012</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Hadnot
</div></td>
<td> </td>
<td align="right" valign="top">Sep-10
</td>
<td> </td>
<td align="left" valign="top">US District Court, ED TX
</td>
<td> </td>
<td align="left" valign="top">Suspect Injury During Arrest
</td>
<td> </td>
<td align="left" valign="top">Dismissed</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Streeter
</div></td>
<td> </td>
<td align="right" valign="top">Dec-10
</td>
<td> </td>
<td align="left" valign="top">US District Court, OR
</td>
<td> </td>
<td align="left" valign="top">Suspect Injury During Arrest
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheduled April 2012</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Valkanet
</div></td>
<td> </td>
<td align="right" valign="top">Mar-11
</td>
<td> </td>
<td align="left" valign="top">US District Court, ND IL
</td>
<td> </td>
<td align="left" valign="top">Suspect Injury During Arrest
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Sanders
</div></td>
<td> </td>
<td align="right" valign="top">Mar-11
</td>
<td> </td>
<td align="left" valign="top">US District Court, ND IL
</td>
<td> </td>
<td align="left" valign="top">Suspect Injury During Arrest
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Payne
</div></td>
<td> </td>
<td align="right" valign="top">Mar-11
</td>
<td> </td>
<td align="left" valign="top">Blount County Circuit Court, TN
</td>
<td> </td>
<td align="left" valign="top">Suspect Injury During Arrest
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Jefferson
</div></td>
<td> </td>
<td align="right" valign="top">Apr-11
</td>
<td> </td>
<td align="left" valign="top">US District Court, ED TX
</td>
<td> </td>
<td align="left" valign="top">Injury During Incarceration
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Fountain
</div></td>
<td> </td>
<td align="right" valign="top">May-11
</td>
<td> </td>
<td align="left" valign="top">US District Court, MD FL
</td>
<td> </td>
<td align="left" valign="top">Suspect Injury During Arrest
</td>
<td> </td>
<td align="left" valign="top">Discovery Phase, trial scheduled April 2013</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Alusa (UT)
</div></td>
<td> </td>
<td align="right" valign="top">May-11
</td>
<td> </td>
<td align="left" valign="top">US District Court, CD UT
</td>
<td> </td>
<td align="left" valign="top">Suspect Injury During Arrest
</td>
<td> </td>
<td align="left" valign="top">Pleading Phase</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px">Diehl (PA)
</div></td>
<td> </td>
<td align="right" valign="top">Jun-11
</td>
<td> </td>
<td align="left" valign="top">Court of Common Pleas, Blair County, PA
</td>
<td> </td>
<td align="left" valign="top">Unknown
</td>
<td> </td>
<td align="left" valign="top">Pleading Phase
</td>
</tr>
<!-- End Table Body -->
</table>
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<b>
</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 0pt; text-indent: 4%">
<b>Other Litigation</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In October 2007, we filed a lawsuit in Arizona Superior Court for Maricopa County against
Steve Ward and Mark Johnson, both former TASER employees and VIEVU LLC, et. al. for breach of duty
of loyalty, breach of contract, breach of fiduciary duty, and conversion. This lawsuit does not
involve our ECD business and we do not expect this litigation to have a material impact on our
financial results. Defendants Ward and VIEVU LLC filed an answer and counterclaim for declaration
of non-infringement, tortious interference with contractual relations, tortious interference with
business expectancy, and abuse of process. The lawsuit seeks compensatory damages, constructive
trust, exemplary damages, injunctive relief attorneys’ fees, costs and disbursements. Cross motions
for summary judgment were filed and on March 4, 2009, the Court denied Defendants’ motion for
summary judgment on the trade secret claim and on April 9, 2009, the Court granted TASER’s motion
for summary judgment against Ward on the breach of fiduciary duty and the breach of duty of loyalty
claims. We filed a Motion to Extend Discovery Period by and to reconvene the Deposition of Steve
Ward, and Defendants have filed Defendant’s Response in Opposition to this motion. In addition,
Defendants Steve Ward and VIEVU LLC have filed a Motion for Reconsideration or in the alternative
to make the Court’s Ruling a Final Judgment and Stay Proceeding Pending Outcome of Appeal. The
Court denied the Motion for Reconsideration, but granted the motion to make the Court’s Ruling a
Final Judgment and Stayed the Proceeding Pending Outcome of Appeal. An appeal has been filed by
Defendants Ward and VIEVU LLC to the Arizona State Court of Appeals. The appellate court reversed
the Superior Court and remanded the case back to Superior Court for trial. On June 14, 2010 TASER
filed a petition for review with the Arizona Supreme Court and Ward filed a cross petition for
review on June 29, 2010. The Arizona Supreme Court declined review of either petition and a trial
date has been set for August 2011.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In June 2008, we filed an amended complaint in the State Court of Fulton County, Georgia,
joining as a plaintiff in an existing lawsuit previously filed by certain current and former
stockholders of the Company against Morgan Stanley & Co., Inc., and ten other brokerage firms
alleging a conspiracy to unlawfully, deceptively, and fraudulently manipulate the price of the
Company’s common stock in the context of illegal naked shorting. Specifically, the amended
complaint alleges that the defendants committed conspiracy and endeavored to violate the Georgia
Racketeer Influenced and Corrupt Organization Act; Securities Fraud; Theft By Taking; Theft By
Deception; Violation of The Georgia Computer Systems Protection Act; Violation of the Georgia
Securities Act; Violation of the Georgia Computer Systems Protection Act; and Conversion. The
lawsuit seeks compensatory and punitive damages as well as expenses of litigation including
attorneys’ fees and costs. Defendants have filed motions to dismiss or alternatively a motion for a
more definite statement, and on July 29, 2009, the Court entered an order denying Defendants’
motion to dismiss and alternatively a motion for a more definite statement. Discovery has begun in
this litigation and no trial date has been set. Defendants removed the case to United States
District Court for the District of Georgia and Plaintiffs have filed a motion to remand the case
back to state court. The court has not yet ruled on this motion to remand. However, we have reached a
settlement with all of the Defendants and this litigation has been dismissed as of June 30, 2011. Settlement proceeds of approximately $1.3 million are recorded as other income
on the statement of operations for the three and six months ended June 30, 2011.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In February 2009, we filed a complaint in the United States District Court for the District of
Nevada against James F. McNulty, Jr., Robert Gruder, and Stinger Systems, Inc. alleging securities
fraud under 15 U.S.C. § 78j, trade libel, unfair competition under the Lanham Act, 15 U.S.C. §
1125, abuse of process, and deceptive trade practices. Our complaint seeks compensatory damages,
punitive damages, injunctive relief, attorneys’ fees and costs. Defendants filed motions to
dismiss and on March 25, 2010 the Court denied Defendants’ motion on all claims except the
securities fraud claim. Defendant McNulty filed a counterclaim on August 2, 2010 alleging that
TASER’s XREP product infringes U.S. Patents 5,831,199 and 6,877,434. The counterclaim seeks
declaratory and injunctive relief, compensatory, treble and punitive damages, and attorneys fees.
The court issued a ruling in July 2011 dismissing TASER’s claims for civil conspiracy and abuse of
process and affirming the magistrate’s order requiring defendants to disclose tax and stock
information to TASER and ruling that TASER’s counterclaim for declaratory judgment with respect to
the patent claims should not be dismissed. No trial date has been set.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In January 2011 we were served with a complaint in the matter of GEOTAG, Inc. v. TASER
International, et. al. that was filed in the United States District Court for the Eastern District
of Texas, Marshall Division which alleges that a dealer geographical locator feature on TASER’s
website infringes upon plaintiff’s US Patent No. 5,930,474. The complaint seeks a judgment of
infringement, a permanent injunction against infringement, an award for damages, costs, expenses
and prejudgment and post-judgment interest, and an award for enhanced damages and attorneys’ fees.
TASER has licensed this locator feature from a third party and has denied liability for
infringement. This lawsuit is at the pleading phase and no trial date has been set.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In July 2011 we were served with a complaint in the matter of Integrity Staffing Professionals
v. TASER International, Inc., et.al. that was filed in the Superior Court for the County of
Ventura, California which alleges that the Company owes Integrity Staffing Professionals a fee for
hiring 2 consultants. The complaint alleges breach of contract, breach of implied covenants,
intentional and negligent interference with contractual relationships, civil conspiracy and unfair
business practices. The complaint seeks compensatory, general, punitive damages, interest,
attorneys’ fees and costs. This lawsuit is at the
pleading phase and no trial date has been set.
</div>
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<b>
</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><b>General</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">From time to time, the Company is notified that it may be a party to a lawsuit or that a claim
is being made against it. It is the Company’s policy to not disclose the specifics of any claim or
threatened lawsuit until the summons and complaint are actually served on the Company. After
carefully assessing the claim, and assuming we determine that we are not at fault, we vigorously
defend and pursue any lawsuit filed against or by the Company. Although we do not expect the
outcome in any pending individual case to be material, the outcome of any litigation is inherently
uncertain and there can be no assurance that any expense, liability or damages that may ultimately
result from the resolution of these matters will be covered by our insurance or will not be in
excess of amounts provided by insurance coverage and will not have a material adverse effect on our
business, operating results or financial condition. In addition, the Company has one lawsuit where
the costs of legal defense incurred are in excess of its liability insurance deductibles. As of
June 30, 2011, the Company has been fully reimbursed by its insurance company for these legal
costs. The Company may settle a lawsuit in situations where a settlement can be obtained for
nuisance value and for an amount that is expected to be less than the cost of defending a lawsuit.
The number of product liability lawsuits dismissed includes a small number of police officer
training injury lawsuits that were settled by the Company and dismissed in cases where the
settlement economics to the Company were significantly less than the cost of litigation. In
addition, it is the Company’s policy to not settle suspect injury or death cases, although the
Company’s insurance company may settle such lawsuits over the Company’s objection where the case is
over the Company’s liability insurance deductibles. Due to the confidentiality of our litigation
strategy and the confidentiality agreements that are executed in the event of a settlement, the
Company does not identify or comment on which specific lawsuits have been settled or the amount of
any settlement.
</div>
</div>
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<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>10. Related Party Transactions</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b><i>Aircraft charter</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The Company reimburses Thomas P. Smith, Chairman of the Company’s Board of Directors for
business use of his personal aircraft. For the three and six months ended June 30, 2011, the
Company incurred expenses of approximately $24,000 and $78,000, respectively, to Thomas P. Smith.
For the three and six months ended June 30, 2010, the Company incurred expenses of approximately
$67,000 and $146,000, respectively, to Thomas P. Smith. At June 30, 2011, there was approximately
$18,000 of outstanding payables due to Thomas P. Smith. At December 31, 2010, the Company had no
outstanding payables due to Thomas P. Smith. Management believes that the rates charged by Thomas
P. Smith are equal to or below commercial rates the Company would pay to charter similar aircraft
from independent charter companies.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>TASER Foundation</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In November 2004, the Company established the TASER Foundation. The TASER Foundation is a
501(c)(3) non-profit corporation and has been granted tax exempt status by the Internal Revenue
Service. The TASER Foundation’s mission is to honor the service and sacrifice of local and federal
law enforcement officers in the United States and Canada lost in the line of duty by providing
financial support to their families. Over half of the initial $1 million endowment was contributed
directly by TASER International, Inc. employees. The Company bears all administrative costs of the
TASER Foundation in order to ensure 100% of all donations are distributed to the families of fallen
officers. For the three and six months ended June 30, 2011, the Company incurred approximately
$2,300 and $3,900, respectively, in such administrative costs. For the three and six months ended
June 30, 2010, the Company incurred approximately $30,000 and $76,000, respectively, in such
administrative costs. The Company is authorized by its Board of Directors to make a discretionary
contribution up to a maximum of $200,000 per quarter. For the three and six months ended June 30,
2011 and 2010, the Company did not make a discretionary contribution to the TASER Foundation.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Consulting services</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The Company engages Mark Kroll, a member of the Board of Directors, to provide consulting
services. The expenses relating to these services for the three and six months ended June 30, 2011,
were approximately $63,000 and $116,000, respectively. The expenses relating to these services for
the three and six months ended June 30, 2010, were approximately $26,000 and $56,000, respectively.
At June 30, 2011 and December 31, 2010, the Company had accrued liabilities of approximately $9,000
and $20,000, respectively, for these services.
</div>
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<b>
</b>
</div>
</div>
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<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>11. Employee Benefit Plan</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The Company has a defined contribution profit sharing 401(k) plan (the “Plan”) for eligible
employees, which is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of
1986, as amended. Employees are entitled to make tax-deferred contributions of up to the maximum
allowed by law of their eligible compensation, but not exceeding $16,500. The Company currently
matches 100% of the first 3% of eligible compensation contributed to the Plan by each participant
and 50% of the next 2% of eligible compensation contributed to the plan by each participant.
Beginning January 1, 2008, the Company’s matching contributions are immediately vested. The
Company’s matching contributions to the Plan for the three and six months ended June 30, 2011, were
approximately $130,000 and $255,000, respectively. The Company’s matching contributions to the Plan
for the three and six months ended June 30, 2010, were approximately $129,000 and $266,000,
respectively. Future matching or profit sharing contributions to the Plan are at the Company’s
sole discretion.
</div>
</div>