Washington, D.C. 20549

Form 10-Q

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

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

Commission File Number 001-16391

TASER INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ       No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o       No o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ

There were 61,970,801 shares of the issuer’s common stock, par value $0.00001 per share, outstanding as of November 3, 2009.

 

 

TASER INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009
TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1. Consolidated financial statements (unaudited)
Consolidated balance sheets as of September 30, 2009 and December 31, 2008			3
Consolidated statement of operations for the three and nine months ended September 30, 2009 and 2008			4
Consolidated statements of cash flows for the nine months ended September 30, 2009 and 2008			5
Notes to consolidated financial statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			31
Item 4. Controls and Procedures			31
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			32
Item 1A. Risk Factors			32
Item 6. Exhibits			32
SIGNATURES			33
INDEX TO EXHIBITS			34
Items 2,3, 4 and 5 are not applicable.
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

TASER INTERNATIONAL, INC.

		September 30, 2009				December 31, 2008
ASSETS
Current Assets:
Cash and cash equivalents		$	45,414,569			$	46,880,435
Short-term investments			—				2,498,998
Accounts receivable, net of allowance of $200,000 at September 30, 2009 and December 31, 2008, respectively			16,318,653				16,793,553
Inventory			13,227,387				13,467,117
Prepaids and other assets			1,771,464				2,528,539
Deferred income tax assets, net			9,430,073				9,430,073
Total current assets			86,162,146				91,598,715
Property and equipment, net			35,631,871				27,128,032
Deferred income tax assets, net			12,584,846				8,826,778
Intangible assets, net			2,624,384				2,447,011
Other long-term assets			116,245				14,970
Total assets		$	137,119,492			$	130,015,506
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	7,704,600			$	3,856,961
Accrued liabilities			3,847,560				4,275,907
Current portion of deferred revenue			6,267,807				2,510,645
Customer deposits			293,510				312,686
Total current liabilities			18,113,477				10,956,199
Deferred revenue, net of current portion			4,821,519				4,840,965
Liability for unrecorded tax benefits			2,135,401				1,692,080
Total liabilities			25,070,397				17,489,244
Commitments and Contingencies
Stockholders’ Equity
Preferred stock, $0.00001 par value per share; 25 million shares authorized; no shares issued and outstanding at September 30, 2009 and December 31, 2008			—				—
Common stock, $0.00001 par value per share; 200 million shares authorized; 61,970,635 and 61,795,712 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively			641				638
Additional paid-in capital			91,553,138				87,663,129
Treasury stock, 2,091,600 shares at September 30, 2009 and December 31, 2008, respectively			(14,708,237	)			(14,708,237	)
Retained earnings			35,203,553				39,570,732
Total stockholders’ equity			112,049,095				112,526,262
Total liabilities and stockholders’ equity		$	137,119,492			$	130,015,506

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

TASER INTERNATIONAL, INC.

		For the Three Months Ended Sept 30,								For the Nine Months Ended Sept 30,
		2009				2008				2009				2008
Net Sales		$	23,310,457			$	22,859,459			$	69,748,635			$	66,447,272
Cost of products sold:
Direct manufacturing expense			7,372,091				6,286,067				20,081,221				19,877,521
Indirect manufacturing expense			2,672,554				2,677,850				8,033,623				6,306,617
Total cost of products sold			10,044,645				8,963,917				28,114,844				26,184,138
Gross margin			13,265,812				13,895,542				41,633,791				40,263,134
Sales, general and administrative expenses			11,419,527				9,055,060				33,689,688				27,925,704
Research and development expenses			6,656,536				3,331,697				15,246,764				8,463,231
Legal judgment expense			—				—				—				5,200,000
Income (loss) from operations			(4,810,251	)			1,508,785				(7,302,661	)			(1,325,801	)
Interest and other income, net			19,994				269,718				162,044				1,492,448
Income (loss) before provision (benefit) for income taxes			(4,790,257	)			1,778,503				(7,140,617	)			166,647
Provision (benefit) for income taxes			(1,614,241	)			1,128,126				(2,773,438	)			315,419
Net income (loss)		$	(3,176,016	)		$	650,377			$	(4,367,179	)		$	(148,772	)
Income (loss) per common and common equivalent shares
Basic		$	(0.05	)		$	0.01			$	(0.07	)		$	(0.00	)
Diluted		$	(0.05	)		$	0.01				(0.07	)			(0.00	)
Weighted average number of common and common equivalent shares outstanding
Basic			61,937,769				61,714,889				61,891,638				62,568,846
Diluted			61,937,769				63,313,702				61,891,638				62,568,846

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

TASER INTERNATIONAL, INC.

		For the Nine Months Ended September 30,
		2009				2008
Cash Flows from Operating Activities:
Net loss		$	(4,367,179	)		$	(148,772	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			2,408,269				1,945,526
Loss on disposal of fixed assets			63,113				78,207
Provision for doubtful accounts			3,000				10,023
Provision for excess and obsolete inventory			290,353				375,363
Provision for warranty			(31,140	)			409,102
Stock-based compensation expense			3,782,181				1,396,113
Deferred insurance settlement proceeds			—				(404,848	)
Deferred income taxes			(3,758,068	)			295,776
Provision for unrecognized tax benefits			443,321				—
Litigation judgment expense			—				5,200,000
Change in assets and liabilities:
Accounts receivable			471,900				81,220
Inventory			(50,623	)			(4,343,901	)
Prepaids and other assets			654,798				2,517,471
Accounts payable and accrued liabilities			1,831,628				(3,730,394	)
Deferred revenue			3,737,716				904,595
Customer deposits			(19,176	)			25,580
Net cash provided by operating activities			5,460,093				4,611,061
Cash Flows from Investing Activities:
Purchases of investments			—				(43,887,640	)
Proceeds from maturity of investments			2,500,000				56,391,253
Purchases of property and equipment			(9,291,237	)			(4,791,190	)
Purchases of intangible assets			(242,553	)			(446,400	)
Net cash provided by (used in) investing activities			(7,033,790	)			7,266,023
Cash Flows from Financing Activities:
Repurchase of common stock			—				(12,499,280	)
Proceeds from options exercised			107,831				320,024
Net cash provided by (used in) financing activities			107,831				(12,179,256	)
Net decrease in cash and cash equivalents			(1,465,866	)			(302,172	)
Cash and cash equivalents, beginning of period			46,880,435				42,801,461
Cash and cash equivalents, end of period		$	45,414,569			$	42,499,289
Supplemental Disclosure:
Cash paid for income taxes — net		$	878,063			$	473,468
Non-Cash Transactions:
Deferred tax asset correction		$	—			$	2,014,955

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

TASER INTERNATIONAL, INC.

1. The Company and Summary of Significant Accounting Policies

TASER International, Inc. (“TASER” or the “Company”) is a developer and manufacturer of advanced electronic control devices (“ECDs”) designed for use in law enforcement, military, corrections, private security and personal defense. In addition, the Company is developing 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 Santa Barbara, California.

The accompanying consolidated financial statements include the accounts of the Company, and its wholly owned subsidiary, TASER International Europe SE (“TASER Europe”). TASER Europe was established in the third quarter of 2009 to facilitate sales and provide customer service to our customers in the European region. All material intercompany accounts, transactions, and profits have been eliminated.

a. Basis of presentation, preparation and use of estimates

The accompanying unaudited consolidated financial statements of TASER include all adjustments (consisting only of normal recurring accruals) which in the opinion of management are necessary for the fair presentation of the Company’s operating results, financial position and cash flows as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008. The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been omitted from these unaudited consolidated financial statements in accordance with applicable rules. The results of operations for the three and nine month periods ended September 30, 2009 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, 2008.

The Company has evaluated subsequent events through the date and time the consolidated financial statements were issued on November 5, 2009.

b. Segment information and major customers

Management has determined that its operations are comprised of one reportable segment. For the three and nine months ended September 30, 2009 and 2008, sales by geographic area were as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
United States			81	%			84	%			75	%			86	%
Other Countries			19	%			16	%			25	%			14	%
Total			100	%			100	%			100	%			100	%

Sales to customers outside of the United States are denominated in U.S. dollars and are attributed to each country based on the billing address of the distributor or customer. For the three months ended September 30, 2009, sales to Australia represented approximately 15% of total net sales. For the three months ended September 30, 2008, no individual country outside of the U.S. represented a material amount of total net sales. For the nine months ended September 30, 2009 and 2008, no individual country outside of the U.S. represented a material amount of total net sales. Substantially all assets of the Company are located in the United States.

In the three months ended September 30, 2009, two distributors represented approximately 25% and 15% of total net sales. In the three months ended September 30, 2008, one distributor represented approximately 13% of total net sales. In the nine months ended September 30, 2009, one distributor represented approximately 12% of total net sales. In the nine months ended September 30, 2008, one distributor represented approximately 12% of total net sales. At September 30, 2009, the Company had receivables from two customers comprising 30% and 13%, respectively, of the aggregate accounts receivable balance. At December 31, 2008, the Company had receivables from two customers comprising 30% and 12%, respectively, of the aggregate accounts receivable balance. These customers are unaffiliated distributors of the Company’s products.

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

c. Income (loss) per common share

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

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2009				2008				2009				2008
Numerator for basic and diluted earnings per share
Net income (loss)		$	(3,176,016	)		$	650,377			$	(4,367,179	)		$	(148,772	)
Denominator for basic earnings per share — weighted average shares outstanding			61,937,769				61,714,889				61,891,638				62,568,846
Dilutive effect of shares issuable under stock options outstanding			—				1,598,813				—				—
Denominator for diluted earnings per share — adjusted weighted average shares outstanding			61,937,769				63,313,702				61,891,638				62,568,846
Net income (loss) per common share
Basic		$	(0.05	)		$	0.01			$	(0.07	)		$	(0.00	)
Diluted		$	(0.05	)		$	0.01			$	(0.07	)		$	(0.00	)

Net income (loss) per share includes the dilutive effect of potential stock option exercises, calculated using the treasury stock method. As a result of the net loss for the three and nine months ended September 30, 2009, we excluded 6,560,918 and 8,171,700 stock options, respectively, from the calculation as their effect would have been to reduce the net loss per share. For the three months ended September 30, 2008, the effects of 3,822,497 stock options were excluded from the calculation of diluted net income per share as their exercise prices were greater than the closing price of our common stock on September 30, 2008. As a result of the net loss for the nine months ended September 30, 2008, we excluded 3,979,808 stock options from the calculation as their effect would have been to reduce the net loss per share.

d. Revenue Recognition

On July 27, 2009, the Company announced a temporary trade-in program to enable agencies who purchase a TASER X26 ECD for deployment in the United States the opportunity to upgrade the product in exchange for a partial credit against the purchase of the newly announced semi-automatic TASER X3 ECD. The Company has accounted for the trade-in right on new sales as a separate element, which has been deferred based on the relative fair value of the credit to the arrangement as a whole. The trade-in offer, which expires on December 31, 2009, resulted in deferred revenue of $3.5 million at September 30, 2009, which is included in current deferred revenue in the accompanying consolidated balance sheet. The Company will recognize the deferred revenue at the earlier of the respective trade-in during the fourth quarter or when the offer expires on December 31, 2009.

e. Warranty costs

The Company warrants its X26, Advanced, TASER Cam, XREP and Shockwave products from manufacturing defects on a limited basis for a period of one year after purchase. The C2 product is warranted for a period of 90 days after purchase. After the one year warranty expires, if the device fails to operate properly for any reason, the Company will replace the X26 for a prorated price depending on when the product was placed into service and replace the ADVANCED TASER device for a fee of $75. These fees are intended to cover the handling and repair costs and provide a profit for the Company. The Company also sells extended warranties, primarily for the X26, for periods of up to four years after the expiration of the limited one year warranty. Management tracks historical data related to returns and warranty costs on a quarterly basis, and estimates future warranty claims based upon historical experience. 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 nine months ended September 30, 2009 and 2008.

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

		2009				2008
Balance at January 1,		$	615,031			$	919,254
Utilization of accrual			(286,138	)			(558,593	)
Warranty true up expense (benefit)			(30,440	)			409,102
Balance at September 30,		$	298,453			$	769,763

f. Capitalized software development costs

For development costs related to EVIDENCE.com, the Company’s Software as a Service (SaaS) product, the Company capitalizes qualifying computer software costs that are incurred during the application development stage. Costs related to preliminary project planning activities and post-implementation activities are expensed as incurred. For the three and nine months ended September 30, 2009, the Company capitalized $852,000 and $1,500,000 of qualifying software development costs. The Company will begin amortizing capitalized software development costs over an estimated useful life of 36 months once all final product testing is substantially complete, which is expected to be during the fourth quarter of 2009.

g. Fair value of financial instruments

The Company accounts for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The Company categorizes each of its fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

	•		Level 1 — Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.
	•		Level 2 — Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.
	•		Level 3 — Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability.

h. Recently adopted accounting guidance

On July 1, 2009, the Company adopted the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) that the Accounting Standard Codification (“ASC”) be recognized as the source of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”). The Codification did not change U.S. GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized single source of authoritative GAAP. Adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

On July 1, 2009, the Company adopted the guidance issued by the FASB on subsequent events which establishes the accounting for and disclosure of events that occur after the balance sheet date but before consolidated financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date (that is, whether that date represents the date the consolidated financial statements were issued or were available to be issued). See “Basis of presentation, preparation and use of estimates” included in “Note 1 — The Company and Summary of Significant Accounting Policies” for the related disclosure. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

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

On January 1, 2009, the Company adopted the authoritative guidance issued by the FASB on business combinations. The guidance expands the definition of a business and a business combination; requires the acquirer to recognize the assets acquired, liabilities assumed and non-controlling interests (including goodwill), measured at fair value at the acquisition date; requires acquisition-related expenses and restructuring costs to be recognized separately from the business combination; requires assets acquired and liabilities assumed to be recognized at their acquisition-date fair values with subsequent changes recognized in earnings; and requires in-process research and development to be capitalized at fair value as an indefinite-lived intangible asset. This guidance will impact acquisitions, if any, closed after January 1, 2009.

On January 1, 2009, the Company adopted the authoritative guidance issued by the FASB that changes the accounting and reporting for non-controlling interests. Non-controlling interests are to be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control are to be accounted for as equity transactions. In addition, net income or loss attributable to a non-controlling interest is to be included in net income and, upon a loss of control, the interest sold, as well as any interest retained, is to be recorded at fair value with any gain or loss recognized in net income. Adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

On January 1, 2009, the Company adopted the authoritative guidance on fair value measurement for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements, as management has not adopted the fair value option for any non-financial assets or liabilities.

On January 1, 2009, the Company adopted the authoritative guidance on the determination of the useful life of intangible assets which amended the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under previously issued goodwill and intangible assets guidance. This change was intended to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under topics related to business combinations and other U.S. GAAP. Adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

Recent accounting guidance not yet adopted

In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective for the Company beginning January 1, 2011, with earlier adoption permitted. 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. Management is evaluating the impact that adoption of this new guidance will have on the Company’s consolidated financial statements.

In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities, which is effective for the Company beginning January 1, 2010. The new guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. Management believes adoption of this new guidance will not have a material impact on the Company’s consolidated financial statements.

2. Cash, cash equivalents and investments

Cash and cash equivalents include funds on hand and short-term investments with original maturities of three months or less. Short-term investments include securities generally having maturities of 90 days to one year. Long-term investments include securities having maturities of more than one year. At September 30, 2009, the entire $45.4 million of the Company’s cash and cash equivalents was comprised of cash and money market funds. In February 2009, the Company’s remaining short-term investment in a government sponsored entity was called at par value by the issuing agency.

The Company valued its cash equivalents in money market accounts using observable inputs that reflect quoted prices for securities with identical characteristics, and accordingly, management classified the valuation techniques that use these inputs as Level 1.

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

3. Inventory

Inventory is stated at the lower of cost or market. Cost is determined using the weighted average cost of raw materials, which approximates the first-in, first-out (FIFO) method, and an allocation of manufacturing labor and overhead. Provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value. Inventories as of September 30, 2009 and December 31, 2008 consisted of the following:

		September 30, 2009				December 31, 2008
Raw materials and work-in-process		$	9,456,429			$	7,371,608
Finished goods			4,035,403				6,225,409
Reserve for excess and obsolete inventory			(264,445	)			(129,900	)
		$	13,227,387			$	13,467,117

4. Intangible assets

Intangible assets consisted of the following at September 30, 2009 and December 31, 2008:

				September 30, 2009											December 31, 2008
				Gross								Net				Gross								Net
				Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		Useful Life		Amount				Amortization				Amount				Amount				Amortization				Amount
Amortized intangible assets:
Domain names		5 Years		$	146,753			$	60,000			$	86,753			$	117,756			$	60,000			$	57,756
Issued patents		4 to 15 Years			832,338				194,447				637,891				677,808				156,297				521,511
Issued trademarks		9 to 11 Years			103,179				15,900				87,279				46,283				9,888				36,395
Non compete agreements		5 to 7 Years			150,000				99,643				50,357				150,000				79,286				70,714
					1,232,270				369,990				862,280				991,847				305,471				686,376
Unamortized intangible assets:
TASER Trademark					900,000								900,000				900,000								900,000
Patents and trademarks pending					862,104								862,104				860,635								860,635
					1,762,104								1,762,104				1,760,635								1,760,635
				$	2,994,374			$	369,990			$	2,624,384			$	2,752,482			$	305,471			$	2,447,011

Amortization expense for the three and nine months ended September 30, 2009 was approximately $21,000 and $65,000, respectively. Amortization expense for the three and nine months ended September 30, 2008 was approximately $21,000 and $58,000, respectively. Estimated amortization expense of intangible assets for the remaining three months of 2009, the next five years ended December 31, and thereafter is as follows:

2009 (remainder of year)		$	21,820
2010			85,726
2011			76,102
2012			56,103
2013			57,882
2014			51,441
Thereafter			513,206
		$	862,280

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

5. Accrued liabilities

Accrued liabilities consisted of the following at September 30, 2009 and December 31, 2008:

		September 30, 2009				December 31, 2008
Accrued salaries and benefits		$	1,487,708			$	1,145,634
Accrued expenses			2,061,399				2,249,193
Accrued warranty expense			298,453				615,031
Accrued income tax			—				266,049
		$	3,847,560			$	4,275,907

6. Income taxes

The deferred income tax assets at September 30, 2009 are comprised of 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. The Company’s total current and long term deferred tax assets balance at September 30, 2009 is $22.0 million.

In preparing the Company’s consolidated financial statements, management assesses the likelihood that its deferred tax assets will be realized from future taxable income. In evaluating the Company’s ability to recover its deferred income tax assets, management considers all available positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Management exercises significant judgment in determining its provisions for income taxes, its deferred tax assets and liabilities, and its future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred tax assets. Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgment that could become subject to audit by tax authorities in the ordinary course of business, as well as the generation of sufficient future taxable income. Based on consideration of the above factors, management has determined that it is more likely than not that its net operating loss carryforwards for the state of Arizona, which expire in 2009, will be fully realized as a result of significant permanent tax items generating taxable income. Accordingly, the valuation allowance of $200,000 the Company carried against its deferred tax assets as of December 31, 2008 is expected to be reversed and the benefit recognized during 2009 as a reduction of the effective tax rate. Management believes that, other than as previously described, as of September 30, 2009 based on an evaluation and projections of future sales and profitability for the fourth quarter of 2009, no other valuation allowance is necessary. However, such deferred tax assets could be reduced in the future if projections of future taxable income during the carryforward period are reduced.

The effective income tax rate for the first nine months of 2009 was 38.8% compared to 189.3% for the first nine months of 2008. The effective tax rate for the nine months ended September 30, 2009 decreased compared to the same period in the prior year due to the nature of the effective tax rate calculation. Due to a significant variability in the projected 2009 annual effective tax rate caused by relatively small differences in projected fourth quarter results, we were unable to reliably estimate the 2009 effective annual tax rate as of the end of the third quarter and as such calculated an estimated year-to-date tax provision based on current year-to-date results. There will likely be variability in the fourth quarter effective tax rate depending on fourth quarter results and the likelihood that the impact of non-deductible expenses for items such as incentive stock option (“ISO”) expense, meals and entertainment and lobbying, which reduced the effective tax benefit rate in the third quarter, will result in taxable income significantly higher than book pre-tax income. The effective tax rate for the nine months ended September 30, 2008 significantly exceeds the statutory rate due to the impact of certain non-deductible items such as stock-based compensation expense related to ISOs and lobbying expenses against a lower taxable income base expected for the year ended December 31, 2008. The recording of a $250,000 valuation allowance against expiring state (Arizona) net operating loss deferred tax assets resulted in an increase in the effective tax rate in the third quarter of 2008.

The Company has completed research and development tax credit studies which identified approximately $4.0 million in tax credits for Federal and Arizona income tax purposes related to the 2003 through 2008 tax years, net of the federal benefit on the Arizona 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 recorded a liability for unrecognized tax benefits of $2.1 million as of September 30, 2009. Management has estimated that an additional $425,000 of tax credits are available for the nine months ended September 30, 2009. In addition, management accrued approximately $94,000 for estimated uncertain tax positions related to certain state income tax liabilities. As of September 30, 2009, management does not expect the amount of the unrecognized tax benefit liability to increase or decrease significantly within the next 12 months. Should the unrecognized tax benefit of $2.1 million be recognized, the Company’s effective tax rate would be favorably impacted.

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

The following presents a rollforward of our liability for unrecognized tax benefits as of September 30, 2009:

		Unrecognized Tax
		Benefits
Balance at January 1, 2009		$	1,692,080
Increase in prior year tax positions			—
Increase in current year tax positions			443,321
Decrease related to adjustment of previous estimates of activity			—
Decrease related to settlements with taxing authorities			—
Decrease related to lapse in statute of limitations			—
Balance at September 30, 2009		$	2,135,401

7. Stockholders’ equity

Stock Option Activity

At September 30, 2009, 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. On March 31, 2009, the Company’s Board of Directors approved, subject to stockholder approval, the 2009 Stock Incentive Plan, under which the Company reserved 1,000,000 shares of common stock available for future grants. The 2009 Stock Incentive Plan was approved at the Annual Meeting of Stockholders on May 28, 2009.

The following table summarizes the stock options available and outstanding as of September 30, 2009, as well as activity during the nine months then ended:

						Outstanding Options
		Shares Available								Weighted Average
		for Grant				Number of options				Exercise Price
Balance at December 31, 2008			702,680				9,108,930			$	5.87
Granted			(451,270	)			451,270			$	4.50
Exercised			—				(174,923	)		$	0.62
Expired/terminated			421,855				(421,855	)		$	6.28
Additional shares approved			1,000,000				—
Balance at September 30, 2009			1,673,265				8,963,422			$	5.86

The options outstanding as of September 30, 2009 have been segregated into five ranges for additional disclosure as follows:

														Options Exercisable
		Options Outstanding																Weighted
						Weighted				Weighted Average								Average
		Number				Average				Remaining				Number				Exercise
Range of Exercise Price		Outstanding				Exercise Price				Contractual Life				Exercisable				Price
$0.28 – $0.99			821,503			$	0.35				3.4				821,503			$	0.35
$1.03 – $2.41			822,578			$	1.57				3.0				822,578			$	1.57
$3.53 – $9.93			6,424,952			$	6.14				7.8				3,397,555			$	6.98
$10.07 – $19.76			834,089			$	12.20				6.5				710,560			$	12.41
$20.12 – $29.98			60,300			$	24.00				4.5				60,300			$	24.00
			8,963,422			$	5.86				6.8				5,812,496			$	6.11

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

The total fair value of options exercisable at September 30, 2009 and 2008 was $18.5 million and $14.8 million, respectively. The aggregate intrinsic value of options outstanding and options exercisable was $6.7 million and $6.3 million, respectively, at September 30, 2009. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $4.72 per share, and the exercise price multiplied by the number of options outstanding. Total intrinsic value of options exercised for the three and nine month periods ended September 30, 2009 was approximately $193,000 and $721,000, respectively. Total intrinsic value of options exercised for the three and nine month periods ended September 30, 2008 was approximately $93,000 and $2.3 million, respectively.

At September 30, 2009, the Company had 3,150,926 unvested options outstanding with a weighted average exercise price of $5.49 per share, weighted average grant date fair value of $2.82 per share and a weighted average remaining contractual life of 9.3 years. Of these unvested options outstanding, management estimates that approximately 3,017,642 options will ultimately vest based on its historical experience.

As of September 30, 2009, total unrecognized stock-based compensation expense related to unvested stock options was approximately $9.0 million, which is expected to be recognized over a remaining weighted average period of approximately 13 months.

Stock-Based Compensation Expense

The Company calculates the fair value of stock-based awards using the Black-Scholes-Merton option valuation model, which incorporates various assumptions including volatility, expected life, and interest rates. The assumptions used for the periods ended September 30, 2009 and 2008 and the resulting estimates of weighted-average fair value per share of options granted during those periods are as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Expected life of options		4.5 years				4.0 years				4.5 years				4.0 years
Weighted average volatility			64.9	%			67.4	%			73.0	%			68.1	%
Weighted average risk-free interest rate			2.3	%			3.0	%			1.9	%			3.0	%
Dividend rate			0.0	%			0.0	%			0.0	%			0.0	%
Weighted average fair value of options granted		$	2.66			$	2.93			$	2.62			$	3.27

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 exercise patterns. Expected stock price volatility is based on a combination of historical volatility of the Company’s stock and the one-year implied volatility of its traded options for the related vesting periods. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The Company has not paid dividends in the past and does not plan to pay any dividends in the foreseeable future. As stock-based compensation expense is recognized on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures are required to be 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.

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

Reported share-based compensation was classified as follows for the three and nine months ended September 30, 2009 and 2008:

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2009				2008				2009				2008
Cost of Products Sold		$	62,154			$	72,730			$	260,517			$	182,838
Sales, general and administrative expenses			814,159				442,892				2,441,178				932,015
Research and development expenses			146,550				149,997				1,080,486				281,260
		$	1,022,863			$	665,619			$	3,782,181			$	1,396,113

Total share-based compensation expense recognized in the income statement for the three and nine months ended September 30, 2009 includes $480,000 and $2.0 million, respectively, related to Incentive Stock Options (“ISO”s) for which no tax benefit is recognized. Total share-based compensation expense recognized in the income statement for the three and nine months ended September 30, 2008 includes $317,000 and $881,000, respectively, related to Incentive Stock Options (“ISO”s) 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 nine months ended September 30, 2009, was approximately $193,000 and $721,000 respectively. The total unrecognized tax benefit related to the non-qualified disposition of stock options in the three and nine months ended September 30, 2008 was approximately $136,000 and $201,000, respectively.

The Company granted 826,000 performance-based stock options in 2008 and the first half of 2009, 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 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 September 30, 2009, management determined that approximately 100,000 of these options were either forfeited or no longer expected to vest resulting in the reversal of $164,000 of previously recognized compensation expense. The fair value of the performance-based options outstanding and still expected to vest was estimated to be $985,000, and the Company reversed and recognized related compensation expense of $(97,000) and $512,000, respectively, in the three and nine months ended September 30, 2009.

8. Line of credit

The Company has a line of credit agreement with a bank which provides for a total availability of $10.0 million. The line is secured by the Company’s accounts receivable and inventory and bears interest at varying rates of interest, ranging from LIBOR plus 1.5% to prime (3.25% at September 30, 2009). The availability under this line is computed on a monthly borrowing base, which is based on the Company’s eligible accounts receivable and inventory. The line of credit matures on September 30, 2010 and requires monthly payments of interest only. At September 30, 2009, there was no amount outstanding under the line of credit and the available borrowing was $10.0 million. There have been no borrowings under the line of credit to date.

The Company’s agreement with the bank requires the Company to comply with certain financial and other covenants including maintenance of minimum tangible net worth and fixed charge coverage ratios. At September 30, 2009, the Company was in compliance with all such covenants.

9. Commitments and Contingencies

Equipment purchase commitment

On July 2, 2007, the Company entered into a contract with Automation Tooling Systems Inc. for the purchase of equipment at a cost of approximately $8.4 million. The equipment was delivered and installed at the Company’s facility during the third quarter of 2009. Payments have been made in installments, with total installments paid to date of $6.9 million, with the remaining balance of $1.5 million, which was accrued in accounts payable at September 30, 2009, likely to be paid in the fourth quarter upon final acceptance. The installments paid and accrued to date have been recorded in property, plant and equipment in the accompanying balance sheets.

Lease commitment

On June 24, 2009, the Company entered into an operating lease agreement with IBM Credit, LLC for various data center server equipment used to host EVIDENCE.com. Total future minimum lease payments are $882,432 for terms ranging from 36 to 42 months in duration. The equipment was placed in service in the third quarter of 2009.

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

Legal proceedings

Product Liability Litigation

The Company is currently named as a defendant in 43 lawsuits in which the plaintiffs allege either wrongful death or personal injury in situations in which the TASER device was used (or present) by law enforcement officers or during training exercises. Companion cases arising from the same incident have been combined into one for reporting purposes.

In addition, 97 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 both the Mann (GA) litigation, Thompson (MI) litigation, and the Neal-Lomax (NV) litigation where judgment was entered in favor of the Company.

Also not included in the number of pending lawsuits 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 percent responsible for his death. The jury assigned 15 percent 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.

With respect to each of the pending 43 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. In each of the pending lawsuits, the plaintiff is seeking monetary damages from the Company. 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. We are defending each of these lawsuits vigorously and do not expect these to individually and in the aggregate, materially affect our business, results of operations or financial condition.

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

		Month
Plaintiff		Served		Jurisdiction		Claim Type		Status
Glowczenski		Oct-04		US District Court, ED NY		Wrongful Death		Trial Schedued Feb-2010
Washington		May-05		US District Court, ED CA		Wrongful Death		Discovery Phase
Sanders		May-05		US District Court ED CA		Wrongful Death		Discovery Phase, trial scheduled Sept-2010
Graff		Sep-05		Maricopa Superior Court, AZ		Wrongful Death		Discovery Phase
Heston		Nov-05		US District Court, ND CA		Wrongful Death		Plaintiff Jury Verdict, punitive damages thrown out, judgment entered against TASER for $153,150 compensatory damages, $1,423,127 attorney fees and $182,000 costs, appeal filed
Rosa		Nov-05		US District Court, ND CA		Wrongful Death		Trial Scheduled Dec — 09
Yeagley		Nov-05		Hillsborough County Circuit County, FL		Wrongful Death		Discovery Phase
Neal-Lomax		Dec-05		US District Court, NV		Wrongful Death		Dismissed, Appeal Pending
Mann		Dec-05		US District Court, ND GA, Rome Div		Wrongful Death		Dismissed, Appeal Pending
Zaragoza		Feb-06		CA Superior Court, Sacramento County		Wrongful Death		Dismissed
Bagnell		Jul-06		Supreme Court for British Columbia, Canada		Wrongful Death		Discovery Phase
Hollman		Aug-06		US District Court, ED NY		Wrongful Death		Discovery Phase
Oliver		Sep-06		US District Court, MD FL, Orlando Division		Wrongful Death		Trial Stayed
Teran/LiSaola		Oct-06		US District Court, ND CA		Wrongful Death		Taken off Trial Calendar
Augustine		Jan-07		11th Judicial Circuit Court, Miami-Dade, FL		Wrongful Death		Discovery Phase
Bolander		Aug-07		17th Circuit Court Broward County, FL		Wrongful Death		Dismissed
Wendy Wilson, Estate of Ryan Wilson		Aug-07		District Court Boulder County, CO		Wrongful Death		Discovery Phase
Crawford, Estate of Russell Walker		Oct-07		District Court Clark County, NV		Wrongful Death		Dismissed, Summary Judgment Granted
Walker, Estate of Russell Walker (Companion to Crawford)		Oct-07		US District Court District of NV		Wrongful Death		Dismissed, Summary Judgment Granted
Jack Wilson, Estate of Ryan Wilson (Companion to Wendy Wilson)		Nov-07		District Court Boulder County, CO		Wrongful Death		Discovery Phase
Marquez		Jun-08		US District Court, Arizona		Wrongful Death		Discovery Phase
Preyer		Jul-08		US District Court, Middle District, FL		Wrongful Death		Dismissed
Salinas		Aug-08		US District Court, Northern District CA		Wrongful Death		Trial Scheduled April-2010
Thomas (Pike)		Oct-08		US District Court, WD Louisiana, Alexandria		Wrongful Death		Discovery Phase
Haake		Nov-08		US District Court, Kansas		Wrongful Death		Dismissed
Dwyer		Nov-08		US District Court, ED TX, Marshall Division		Wrongful Death		Discovery Phase
Nykiel		Dec-08		Common Pleas Court, Allegheny County, PA		Wrongful Death		Discovery Phase
Carroll		Mar-09		US District Court, Southern District TX		Wrongful Death		Discovery Phase
Shrum		May-09		Allen County District Court, Iola, Kansas		Wrongful Death		Discovery Phase
Athetis		May-09		Maricopa Superior Court, AZ		Wrongful Death		Discovery Phase
Hagans		May-09		Common Pleas Court, Franklin County, OH		Wrongful Death		Discovery Phase-trial scheduled May — 2010
Martinez		May-09		US District Court, SD CA		Wrongful Death		Discovery Phase
Bartley		Jun-09		US District Court, ED LA		Wrongful Death		Discovery Phase
Sapinoso		Jul-09		CA Superior Court, Los Angeles, S Central Dist.		Wrongful Death		Discovery Phase-trial scheduled Oct — 2010
Abrahams		Jul-09		CA Superior Court, Yolo County		Wrongful Death		Discovery Phase-trial scheduled Oct — 2010
Humphreys		Oct-09		CA Superior Court, San Joaquin County		Wrongful Death		Complaint Served
Stewart		Oct-05		Circuit Court for Broward County, FL		Training Injury		Discovery Phase
Lewandowski		Jan-06		US District Court, NV		Training Injury		Summary judgment motion pending
Peterson		Jan-06		US District Court, NV		Training Injury		Trial scheduled Jan — 2010
Husband		Mar-06		British Columbia Supreme Court, Canada		Training Injury		Discovery Phase
Perry		Jul-08		US District Court CO		Training Injury		Dismissed
Grable		Aug-08		FL 6th Judicial Circuit Court, Pinellas County		Training Injury		Discovery Phase
Koon		Dec-08		17th Judicial Circuit Court, Broward County, FL		Training Injury		Discovery Phase
Bickle		Mar-09		18th Judicial District Court, Gallatin County, MT		Training Injury		Discovery Phase
Foley		Mar-09		US District Court, MA		Training Injury		Discovery Phase
Peppler		Apr-09		Circuit Court 5th Judicial Dist., Sumter City, FL		Training Injury		Discovery Phase
Kandt		Jun-09		US District Court, ND NY		Training Injury		Complaint Served
Wieffenbach		Jun-06		Circuit Court of 12th Judicial District, Will County, Il		Injury During Arrest		Discovery Phase
Payne		Oct-06		Circuit Court of Cook County, Illinois		Injury During Arrest		Discovery Phase
Butler		Sep-08		CA Superior Court, Santa Cruz County		Injury During Arrest		Discovery Phase, trial scheduled Mar — 2010
Reston		Apr-09		Circuit Court 4th Judicial Dist., Duval Cty, FL		Injury During Arrest		Discovery Phase
Lucas		Jun-09		US District Court, ED CA		Injury During Arrest		Discovery Phase
Spence		Jul-09		CA Superior Court, Marin County		Injury During Arrest		Discovery Phase
Wheat		Jul-09		CA Superior Court, Los Angeles County		Injury During Arrest		Discovery Phase, trial scheduled Aug — 2010

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

Other Litigation

In November 2006, we filed a lawsuit against the Chief Medical Examiner of Summit County, OH, in the Court of Common Pleas of Summit County Ohio, to seek the correction of erroneous cause of death determinations relating to autopsy reports prepared by medical examiner, Dr. Lisa Kohler, which determined that the TASER device was a contributing factor in the deaths of Richard Holcomb, Dennis Hyde and Mark McCullaugh. We asked the Court to order a hearing on the appropriate causes of death of Messrs. Hyde, Holcomb and McCullaugh, and to order changes in the medical examiner’s cause of death determinations for Messrs. Hyde, Holcomb and McCullaugh removing all references to any TASER device causing or contributing to the causes of death for Messrs. Hyde, Holcomb and McCullaugh. Defendant filed a motion to dismiss for lack of standing and that motion was denied by the Court in January 2007. The City of Akron joined this lawsuit as a co-plaintiff. This case went to trial in April 2008 and on May 2, 2008, the Court entered an order ruling in favor of TASER and the City of Akron and ordered the medical examiner to remove any reference to the TASER device as a cause of death and to change the manner of death for Holcomb and Hyde to accidental and for McCullaugh to undetermined. Defendant filed an appeal and on March 30, 2009, the Ohio’s 9th Judicial District Court of Appeals entered an order affirming the trial court’s order. On May 15, 2009, Defendant filed an appeal to the Ohio Supreme Court, and the Company and the City of Akron have filed responsive briefs.

In January 2007, we filed a lawsuit in the U.S. District Court for Arizona against Stinger Systems, Inc. alleging patent infringement, patent false marking, and false advertising. Defendant filed an answer and counterclaim for false advertising and punitive damages. Discovery has begun and no trial date has been set. On February 2, 2009, the court issued an order based on a Markman hearing (patent claims construction hearing) held on May 7, 2008 in which the Court adopted TASER’s claim construction on the disputed patent claim term in TASER’s U.S. patent number 7,102,870 and all of TASER’s claim construction on all of the disputed patent claim terms in TASER’s U.S. patent number 7,234,262. In addition, the Court adopted TASER’s claim construction on one of the disputed patent claim terms in TASER’s U.S. patent number 6,999,295 and rejected both parties’ claim construction in the other disputed claim term in this patent. Discovery is ongoing and no trial date has been sent. Both parties have filed motions for summary judgment.

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 electronic control device 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. Discovery has begun and no trial date has been set. 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 to the Arizona State Court of Appeals.

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.

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

In July 2008, we were served with a summons and complaint in the lawsuit entitled Proformance Vend USA vs. TASER International, Inc. which was filed in Arizona Superior Court for Maricopa County alleging breach of contract of a vending machine contract and seeking money damages, including tort damages, attorney’s fees and costs. We have filed an answer to this complaint. Discovery has begun and no trial date has been set.

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. Motions to dismiss are pending.

General

From time to time, the Company is notified that it may be a party to a lawsuit or that a claim is being made against it. It is the Company’s policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on the Company. After carefully assessing the claim, and assuming we determine that we are not at fault, we vigorously defend and pursue any lawsuit filed against or by the Company. Although we do not expect the outcome in any pending individual case to be material, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts provided by insurance coverage and will not have a material adverse effect on our business, operating results or financial condition. In addition, the Company has seven lawsuits where the costs of legal defense incurred are in excess of its liability insurance deductibles. As of September 30, 2009, 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. One of the training injury lawsuits brought by a law enforcement officer was settled in June 2007 for an amount in excess of nuisance value by our insurance company. Our insurance coverage at that time did not cover our costs of defense if we won at trial. However, our insurance coverage at that time provided for a pro-rata reimbursement of our costs of defense if the lawsuit was settled. Upon final settlement of this case, the Company was paid $241,000 by our insurance company as reimbursement of the Company’s costs of defense. Due to the confidentiality of our litigation strategy and the confidentiality agreements that are executed in the event of a settlement, the Company does not identify or comment on which specific lawsuits have been settled or the amount of any settlement.

10. Related Party Transactions

Aircraft charter

The Company reimburses Thomas P. Smith, Chairman of the Company’s Board of Directors, and Patrick W. Smith, the Company’s Chief Executive Officer, for business use of their personal aircraft. For the three and nine months ended September 30, 2009, the Company incurred expenses of approximately $88,000 and $238,000, respectively, to Thomas P. Smith. For the three and nine months ended September 30, 2008, the Company incurred expenses of approximately $18,000 and $161,000, respectively, to Thomas P. Smith. For the nine months ended September 30, 2009, the Company incurred expenses of approximately $10,000 to Patrick W. Smith. No expense was incurred for the three months ended September 30, 2009. For the three and nine months ended September 30, 2008, the Company incurred expenses of approximately $5,000 and $107,000 to Patrick W. Smith. At September 30, 2009 and December 31, 2008, the Company had outstanding payables of approximately $38,000 and $0, respectively, due to Thomas P. Smith. At September 30, 2009 and December 31, 2008, the Company had no outstanding payables due to Patrick W. Smith. Management and the Audit Committee believes that the rates charged by Thomas P. Smith and Patrick W. Smith are equal to or below commercial rates the Company would pay to charter similar aircraft from independent charter companies.

In the first quarter of 2007, the Company also entered into a charter agreement for future use of an aircraft for business travel from Thundervolt, LLC, a company owned by Patrick W. Smith. For the three and nine months ended September 30, 2009 and 2008, the Company did not incur any direct charter expenses pursuant to its relationship with Thundervolt, LLC. Management and the Audit Committee believes that the rates charged by Thundervolt, LLC are equal to or below commercial rates the Company would pay to charter similar aircraft from independent charter companies.

The Company performed a review of the above relationship with Thundervolt, LLC, and determined that the relationship did not meet the definition of a variable interest entity (VIE) as Thundervolt, LLC is adequately capitalized, its owners possess all of the essential characteristics of a controlling financial interest, and the Company does not have any voting rights in the entity. Therefore, the entity is not required to be consolidated into the Company’s results.

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

TASER Foundation

In November 2004, the Company established the TASER Foundation. The TASER Foundation is a 501(c)(3) non-profit corporation and has been granted tax exempt status by the IRS. The TASER Foundation’s mission is to honor the service and sacrifice of local and federal law enforcement officers in the United States and Canada lost in the line of duty by providing financial support to their families. 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 nine months ended September 30, 2009, the Company incurred approximately $66,000 and $184,000, respectively, in such administrative costs. For the three and nine months ended September 30, 2008 the Company incurred approximately $30,000 and $137,000, 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 nine months ended September 30, 2009 and 2008, the Company did not make a discretionary contribution to the TASER Foundation.

Consulting services

Beginning in August 2005, the Company agreed to pay Mark Kroll, a member of the Board of Directors of the Company (“Board”), for consultancy services. Consulting expenses to Mr. Kroll for the three and nine months ended September 30, 2009 were approximately $57,000 and $202,000, respectively. Consulting expenses to Mr. Kroll for the three and nine months ended September 30, 2008 were approximately $42,000 and $225,000, respectively. At September 30, 2009 and December 31, 2008, the Company had approximately $19,000 and $23,000, respectively, recorded as a payable for these services.

Settlement agreement

On May 15, 2009, Bruce and Donna Culver, husband and wife (the “Culvers”), and the Company, entered into a settlement and release agreement (the “Agreement”), the background and material terms of which are described below. Mr. Culver has served as a director of the Company since January 1994. In addition, he currently chairs the Nominating Committee of the Board and is a member of the Audit Committee of the Board.

In July 2000, the Culvers provided a loan to the Company in exchange for a promissory note and warrants to purchase 136,364 shares of the Company’s common stock for $0.55 per share. In October 2004, the Culvers exercised the warrants, and the Company issued them a Form 1099, which included the in-the-money value of the warrants as stock compensation based upon the advice of the Company’s then-current outside tax advisors. In 2007, the Culvers informed the Company that their personal tax advisors had determined that the 2004 Form 1099 was not the proper tax treatment for the transaction, and that the value of the warrants should not have been included as compensation because the warrants were issued in connection with the loan rather than services. The Company responded by issuing an amended Form 1099 excluding the value of the warrants, and the Culvers filed an amended 2004 federal tax return seeking a refund. The Culvers are also seeking a refund with respect to their 2004 California tax return.

The parties entered into the Agreement to settle any disputes that the Culvers might have with the Company in connection with the original Form 1099 that was issued in October 2004 and the Culvers’ resulting tax liability. Pursuant to the Agreement, the Company agreed to pay the Culvers $350,000 upon execution in exchange for a full release. The Agreement also contains a claw-back provision, pursuant to which the Culvers agreed to pay to the Company the amount of any refund they receive from the federal government and/or the State of California, up to the $350,000 amount of the settlement payment. The Culvers will be entitled to keep 100% of any refund(s) they receive in excess of $350,000. As of September 30, 2009 the Culvers had not received any tax refunds.

11. Employee Benefit Plan

The Company has a defined contribution profit sharing 401(k) plan (the “Plan”) for eligible employees, which is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Employees are entitled to make tax-deferred contributions of up to the maximum allowed by law of their eligible compensation, but not exceeding $16,500. The Company currently matches 100% of the first 3% of eligible compensation contributed to the Plan by each participant and 50% of the next 2% of eligible compensation contributed to the plan by each participant. Beginning January 1, 2008, the Company’s matching contributions are immediately vested. The Company’s matching contributions to the Plan for the three and nine months ended September 30, 2009 were $119,000 and $348,000, respectively. The Company’s matching contributions to the Plan for the three and nine months ended September 30, 2008 were $104,000 and $300,000, respectively. Future matching or profit sharing contributions to the Plan are at the Company’s sole discretion.

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

The following is a discussion of the Company’s financial condition as of September 30, 2009, and results of operations for the three and nine months ended September 30, 2009 and 2008. The following discussion may be understood more fully by reference to the consolidated financial statements, notes to the consolidated financial statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations section contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Certain statements contained in this report may be deemed to be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, and the Company intends that such forward-looking statements be subject to the safe-harbor created thereby. Such forward-looking statements may relate to, among other things: estimates regarding the size of our target markets; successful penetration of the law enforcement market; expansion of product sales to the private security, military and consumer self-defense markets; expansion of production capability; new product introductions; the timing of the implementation of new equipment and payments relating thereto; our anticipated research and development spending in the fourth quarter of 2009; our cash flow activity in accounts receivable, inventory and accounts payable in the fourth quarter of 2009; projections about our fourth quarter effective tax rate; estimates regarding the commencement and amortization period of software development costs relating to our EVIDENCE.com product; the impact of recently adopted accounting guidance; our dividend policy; our anticipated capital expenditures in the fourth quarter of 2009; our expectations that we will hold certain investments until maturity; our expectations about unrecognized tax benefits, deferred income taxes and the reversal of our valuation allowance; assumptions about the future vesting of outstanding stock options and the amortization of costs relating thereto; our litigation strategy; the outcome of pending litigation including that judgments against us may be reversed or reduced; trends about our working capital and the sufficiency of our capital resources and the availability of financing to the Company. We caution that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward-looking statements herein. Such factors include, but are not limited to: market acceptance of our products; establishment and expansion of our direct and indirect distribution channels; attracting and retaining the endorsement of key opinion-leaders in the law enforcement community; the level of product technology and price competition for our products; the degree and rate of growth of the markets in which we compete and the accompanying demand for our products; potential delays in international and domestic orders; implementation risks of manufacturing automation; risks associated with rapid technological change; execution and implementation risks of new technology; new product introduction risks; ramping manufacturing production to meet demand; litigation resulting from alleged product-related injuries; risks related to government inquiries; media publicity concerning allegations of deaths occurring after use of the TASER device and the negative impact this publicity could have on sales; product quality risks; potential fluctuations in quarterly operating results; competition; financial and budgetary constraints of prospects and customers; dependence upon sole and limited source suppliers; fluctuations in component pricing; risks of governmental regulations; dependence on a single product; dependence upon key employees; employee retention risks; and other factors detailed in the Company’s filings with the Securities and Exchange Commission. We assume no obligation to update, and do not intend to update, our forward-looking statements.

Overview

Our mission is to protect life by providing safer, more effective use of force options and technologies. We are a market leader in the development and manufacture of advanced electronic control devices (ECDs) designed for use in law enforcement, military, corrections, private security and personal defense. In addition, we are developing full technology solutions for the capture, storage and management of video/audio evidence as well as other tactical capabilities for use in law enforcement. We have focused our efforts on the continuous development of our technology for both new and existing products as well as industry leading training services while building distribution channels for marketing our products and services to law enforcement agencies, primarily in North America with increasing efforts on expanding these programs in international markets. To date, over 14,000 law enforcement agencies in over 45 countries have made initial purchases of our TASER brand devices for testing or deployment. To date, we do not know of any significant sales of any competing ECD products.

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

Results of Operations

Three Months Ended September 30, 2009 Compared to the Three Months Ended September 30, 2008

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

		Three Months Ended September 30,																Increase / (Decrease)
		2009								2008								$				%
Net sales		$	23,310				100.0	%		$	22,859				100.0	%		$	451				2.0	%
Cost of products sold			10,044				43.1	%			8,964				39.2	%			1,080				12.0	%
Gross margin			13,266				56.9	%			13,895				60.8	%			(629	)			-4.5	%
Sales, general and administrative expenses			11,420				49.0	%			9,055				39.6	%			2,364				26.1	%
Research and development expenses			6,656				28.6	%			3,332				14.6	%			3,324				99.8	%
Income (loss) from operations			(4,810	)			-20.6	%			1,508				6.6	%			(6,317	)			-419.0	%
Interest and other income, net			20				0.1	%			270				1.2	%			(250	)			-92.6	%
Income (loss) before provision (benefit) for income taxes			(4,790	)			-20.5	%			1,778				7.8	%			(6,567	)			-369.4	%
Provision (benefit) for income taxes			(1,614	)			-6.9	%			1,128				4.9	%			(2,742	)			-243.1	%
Net income (loss)		$	(3,176	)			-13.6	%		$	650				2.8	%		$	(3,826	)			-588.3	%

Net Sales

For the three months ended September 30, 2009 and 2008, sales by product line and by geography were as follows (dollars in thousands)

		Three Months Ended September 30,
		2009								2008
Sales by Product Line
TASER X26		$	14,870				63.8	%		$	13,169				57.6	%
TASER C2			1,103				4.7	%			1,008				4.4	%
TASER Cam			749				3.2	%			964				4.2	%
ADVANCED TASER			281				1.2	%			377				1.6	%
Single Cartridges			6,932				29.7	%			5,066				22.2	%
XREP			364				1.6	%			—				—
Shockwave			41				0.2	%			—				—
X3			8				—				—				—
Other			2,428				10.4	%			2,275				10.0	%
Trade-In Deferral			(3,466	)			-14.9	%			—				—
Total		$	23,310				100.0	%		$	22,859				100.0	%

		Three Months Ended September 30,
		2009				2008
United States			81	%			84	%
Other Countries			19	%			16	%
Total			100	%			100	%

Net sales increased $0.5 million, or 2.0%, to $23.3 million for the third quarter of 2009 compared to $22.9 million for the third quarter of 2008. The increase in sales versus the prior year quarter was primarily driven by growth in our Federal business including an order from the U.S. Customs and Border Patrol as well as solid international sales during the quarter including follow-on orders to customers in Australia. The growth in international business offset a decline in domestic sales, which we believe reflects lower municipal spending in the U.S., as agencies have reassigned or reduced budget dollars due to ongoing economic constraints. During the third quarter of 2009, $3.5 million of revenue was deferred related to our temporary trade-in program which enables agencies who purchase a X26 ECD for deployment in the United States the opportunity to upgrade the product in exchange for a partial trade-in credit against the purchase of the newly announced X3 ECD. Sales of our X26 ECDs, before excluding the $3.5 million impact of the trade-in deferral, increased $1.7 million, or 12.9%, while sales of single cartridges increased $1.9 million, or 36.8%, compared to the prior year. Sales of the TASER C2 consumer product increased by $95,000, or 9.4%. Other sales include extended warranty revenue, out of warranty repairs, government grants, training and shipping revenues.

International sales for the third quarter of 2009 and 2008 represented approximately $4.5 million, or 19%, and $3.7 million, or 16%, of total net sales, respectively.

Cost of Products Sold

Cost of products sold increased by $1.1 million, or 12.1%, to $10 million for the third quarter of 2009 compared to $9.0 million for the third quarter of 2008. As a percentage of net sales, cost of products sold increased to 43.1% in the third quarter of 2009 compared to 39.2% in the third quarter of 2008. The trade-in deferral which resulted in a $3.5 million reduction in net sales reduced gross margin by 560 basis points in the third quarter of 2009, which was partially offset by improved leverage on indirect manufacturing expenses as a relatively fixed pool of indirect manufacturing costs remained flat while sales increased.

Gross Margin

Gross margin decreased $630,000, or 4.5%, to $13.3 million for the third quarter of 2009 compared to $13.9 million for the third quarter of 2008. As a percentage of net sales, gross margin decreased to 56.9% for the third quarter of 2009 compared to 60.8% for the third quarter of 2008. The 390 basis point decline in gross margin as a percentage of net sales for the third quarter of 2009 reflects the impact of the trade in deferral, offset by decreased indirect manufacturing costs.

Sales, General and Administrative Expenses

For the three months ended September 30, 2009 and 2008, sales, general and administrative expenses were comprised of the following (dollars in thousands):

		Three Months Ended September 30,
										$				%
		2009				2008				Change				Change
Salaries, benefits and bonus		$	3,192			$	2,489			$	703				28.2	%
Legal, professional and accounting fees			1,112				1,406				(294	)			-20.9	%
Sales and Marketing			1,659				1,110				549				49.5	%
Consulting and lobbying services			911				690				221				32.0	%
Stock-based compensation			814				443				371				83.7	%
Travel and meals			968				709				259				36.5	%
D&O and liability insurance			449				536				(87	)			-16.2	%
Depreciation and amortization			510				386				124				32.1	%
Other			1,805				1,286				519				40.4	%
Total		$	11,420			$	9,055			$	2,365				26.1	%
Sales, general and administrative as % of net sales			49.0	%			39.6	%

Sales, general and administrative expenses were $11.4 million and $9.1 million in the third quarter of 2009 and 2008, respectively, an increase of $2.4 million, or 26.1%. As a percentage of total net sales, sales, general and administrative expenses increased to 49.0% for the third quarter of 2009 compared to 39.6% for the third quarter of 2008, partially due to a reduction of leverage resulting from the $3.5 million trade-in deferral which had a 6.3% impact. The dollar increase for the third quarter of 2009 over the same period in 2008 is attributable to a $703,000 growth in salaries, benefits and bonuses primarily related to an increase in personnel to support the expansion of our business infrastructure as we introduce new products and enter new markets. Stock based-compensation expense increased $371,000 which is attributed to the increased employee headcount in the fourth quarter of 2008 and the first half of 2009. Sales and marketing increased $549,000 and travel and meals increased $259,000 in the third quarter of 2009, due to increased efforts to support new product launches as well as the annual TASER Conference, which was held in the third quarter of 2009 (compared to being held in the second quarter of 2008). These increases were partially offset by a $294,000 decrease in legal, professional and accounting fees.

Research and Development Expenses

Research and development expenses were $6.7 million for the third quarter, which is an increase of $3.3 million over the prior year mostly driven by a $1.8 million increase in indirect supplies, component costs and expediting fees associated with the development of the TASER X3 and AXON (Autonomous eXtended on-Officer Network) units shown at our TASER Conference and the IACP trade shows. Tooling and scrap costs increased by $443,000, also related to the development of the TASER X3 and AXON. Salaries, benefits, and stock options expenses increased by $1.1 million to support both hardware development and our new software development team headquartered in California. These increases were partially offset by $852,000 of capitalized internal salary and external consulting costs specifically related to the development of EVIDENCE.com in the third quarter of 2009. We expect this level of research and development spending will decrease during the fourth quarter of 2009 as TASER X3 and AXON are launched into the market.

Interest and Other Income, Net

Interest and other income decreased by $250,000, or 92.6%, to $20,000 for the third quarter of 2009 compared to $270,000 for the third quarter of 2008. The decrease is attributable to a significantly lower average yield on our cash and investments.

Provision (Benefit) for Income Taxes

The provision for income taxes decreased by $2.7 million to a benefit of $1.6 million for the third quarter of 2009 compared to a provision of $1.1 million for the third quarter of 2008. The effective income tax rate for the third quarter of 2009 was 33.7% compared to 63.4% for the third quarter of 2008. The effective tax rate for the three months ended September 30, 2009 decreased compared to the same period in the prior year due to the nature of the effective tax rate calculation. The quarterly tax provision is computed from the year-to-date provision less the cumulative tax provision recognized through the previous quarter end. Due to a significant variability in the projected 2009 annual effective tax rate caused by relatively small differences in projected fourth quarter results, we were unable to reliably estimate the 2009 effective annual tax rate as of the end of the third quarter and as such calculated an estimated year-to-date tax provision based on current year to date results. There will likely be some variability in the fourth quarter effective tax rate depending on fourth quarter results and the likelihood that the impact of non-deductible expenses for items such as ISO stock option expense, meals and entertainment and lobbying will make the income for tax purposes significantly higher than book pre-tax income. The high effective income tax rate in the third quarter of 2008 was attributable to a the higher impact of non-deductible items expenses against a low taxable income base expected for the year ended December 31, 2008

Net Income (Loss)

Our net income declined by $3.8 million to a net loss of $3.2 million for the third quarter of 2009 compared to net income of $650,000 for the third quarter of 2008. Net loss per basic and diluted share was $0.05 for the third quarter of 2009 compared to net income per basic and diluted share of $0.01 for the third quarter of 2008.

Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008

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

		Nine Months Ended September 30,																Increase / (Decrease)
		2009								2008								$				%
Net sales		$	69,749				100.0	%		$	66,447				100.0	%		$	3,302				5.0	%
Cost of products sold			28,115				40.3	%			26,184				39.4	%			1,931				7.4	%
Gross margin			41,634				59.7	%			40,263				60.6	%			1,371				3.4	%
Sales, general and administrative expenses			33,690				48.3	%			27,926				42.0	%			5,764				20.6	%
Research and development expenses			15,246				21.9	%			8,463				12.7	%			6,783				80.1	%
Legal judgment expense			—				0.0	%			5,200				7.8	%			(5,200	)			-100.0	%
Loss from operations			(7,302	)			-10.5	%			(1,326	)			-2.0	%			(5,976	)			450.7	%
Interest and other income, net			162				0.2	%			1,492				2.2	%			(1,330	)			-89.1	%
Income (loss) before provision (benefit) for income taxes			(7,140	)			-10.2	%			166				0.2	%			(7,306	)			4401.2	%
Provision (benefit) for income taxes			(2,773	)			-4.0	%			315				0.5	%			(3,088	)			980.3	%
Net loss		$	(4,367	)			-6.3	%		$	(149	)			-0.2	%		$	(4,218	)			2830.9	%

Net Sales

For the nine months ended September 30, 2009 and 2008, sales by product line and by geography were as follows (dollars in thousands):

		Nine Months Ended September 30,
		2009								2008
Sales by Product Line
TASER X26		$	37,976				54.4	%		$	35,807				53.9	%
TASER C2			3,732				5.4	%			4,268				6.4	%
TASER Cam			2,179				3.1	%			2,748				4.1	%
ADVANCED TASER			2,245				3.2	%			2,432				3.7	%
Single Cartridges			20,151				28.9	%			15,290				23.0	%
XREP			389				0.6	%			—				—
Shockwave			45				0.1	%			—				—
X3			8				—				—				—
Other			6,490				9.3	%			5,902				8.9	%
Trade-In Deferral			(3,466	)			-5.0	%			—				—
Total		$	69,749				100.0	%		$	66,447				100.0	%