Good day, ladies and gentlemen. And welcome to the Second Quarter 2011 TASER International Earnings Conference Call. My name is [Natasha], and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) I’d now like to turn the call over to Mr. Rick Smith, CEO. Please proceed.

Thank you. Okay. Welcome everybody. Before we get started, I’m going to pass to our CFO, Dan Behrendt for the Safe Harbor statement.

Yeah. Good morning. Safe Harbor statement, certain statements contained in this presentation maybe deemed to be forward-looking statements as it defined by the Private Securities Litigation Reform Act of 1995. TASER International intends that such forward-looking statements be subject to the Safe Harbor created thereby. Such forward-looking statements relate to, expected revenue and earnings growth, estimations regarding the size of our target markets, successful penetration of the law enforcement market, expansion of product sales to the private security, military and consumer self-defense markets, growth expectations for new and existing accounts, expansion of production capability, new product introductions, product safety and our business model. We caution 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 accompanying demand for our products, potential delays in international and domestic orders, implementation risk of manufacturing automation, risks associated with rapid technological change, execution and implementation risks of new technology, new product introduction risk, ramping manufacturing production to meet demand, litigation resulting from alleged product related injuries and deaths, media publicity concerning product uses and allegations of injury and death and the negative impact this could have on sales, product quality risk, potential fluctuations in the quarterly operating results, competition, negative reports concerning TASER device uses, financial and budgetary constraints of prospects and customers, dependence upon sole and limited source suppliers, fluctuations in component pricing, risks of governmental investigations and regulations, TASER product test and reports, dependence upon key employees, employee retention risks and other factors detailed in the company’s filings with the Securities and Exchange Commission. And, with that, I’ll turn it back over to Rick Smith, our CEO.

Thanks Dan. Okay. I think the interesting story this quarter particularly is about cash. We generated almost $5 million in cash and we’ve announced in addition to the $12.5 -- $12.5 million stock buy-back we just completed that we’re beginning another, up to $20 million cash buy-back. Revenues for the quarter were $21.2 million, up 11% over last year and we saw our TASER X2 that we announced this quarter and we just began shipping in the last two weeks generated $1.4 million of sales in the quarter. Gross margins improved to 57.7%, but the real impressive figure here in my line and a lot of credit goes to Doug Klint and his team that run our Hardware Operation. The margins in our core electronic control business were 63.8%, before you take on the data center operations and software maintenance. Operational costs to breakdown to 57.7%. So a lot of the operational focus on tuning our business unit-by-unit, I think is paying off as we seize operational efficiencies. SG&A down about 10% over last year, again a lot of focus on the cost controls. R&D down 8.6% over the same period last year and anytime, I talk about R&D, I also like to point out, we are getting more out of R&D now than we ever have even though our spend level is down. The TASER new development process has really been refined over the past 12 months. The X2 was developed, frankly, for a fraction of the cost that it took us to develop the X3 a few years ago and the variable cost of goods of our product is dramatically lower than the X3. The quality is -- and reliability is higher than anything we have ever built. The process changes we’ve made, I cannot overstate how important…

Yeah. Thanks, Rick. I’m going to go through the results for the second quarter maybe just a little bit more detail. As Rick indicated, revenues for Q2 were $21.2 million. These were up approximately $2.1 million or 10.9% from the prior year. The increase was driven mostly by the introduction of the X2, which generated about $1.4 million of sales during the second quarter. And as a result, North American sales for the second quarter are up approximately 8% over the prior year results. International sales were also up sharply over the prior year due to sizable follow-on orders that we announced during the quarter. The gross margins of $12.2 million or 57.7% of revenues were up 7.3% as a percent of sales over the 50.4% for the prior year and again following the complete loss of commercial loss of Evidence.com during the second quarter of 2010 we are recognizing the cost of service up in gross margins. The impact of that was $1.3 million this quarter or 6% of sales. So excluding those costs for the cost of service delivered, the actually hardware part of the business had gross margins of 63.8% and they are very strong for the quarter. They were actually favorably impacted by the product mix including the introduction X2, which actually enjoyed a very strong gross margin as well with some of the other ECD products. We also had better absorption or a fixed overhead and lower scrapped and obsolete inventory expenses. The SG&A expenses for the quarter of $9.1 million are down somewhat $10 million in the prior year. SG&A as a percent of sales were 42.8%, compared to 52.2% for the same quarter last year. The SG&A is down due to reductions in salaries and benefits, stock compensation and professional services offset by…

Great. A couple other items I’m going to want to touch on qualitatively here. The first is, of course, the X2, very excited about that product, but more importantly our customers are quite excited about that product. At our master instructor school where we train roughly 300 officers who are the elite of training across this country who then go forth and train the instructors around the world in TASER use. After showing them and giving them a chance to use the X2, we surveyed them as to which product they would prefer to carry, the X2 or our flagship X26. And 96% of respondents said they would prefer to carry the X2, which tells us our design efforts really hit the mark this time. Quantitatively we saw affirmation of that as well in that we saw two state patrols go full deployment on the X2 right out of the gate within the first two weeks of its shipping, as well as the Newport News Sheriff’s Office in Virginia, not just ordering 77 X2 but also the new 77 TASER Cam HD, which is our color high definition version of the TASER Cam, which is only available on the X2 and that will be out in the second half of this year. That’s still in late stage development. As I mentioned the TASER new product development process is really humming. The quality levels on the X2 are extraordinary in terms of the tests that that went through before release and the reliability that we’ve seen in both field trials and rigorous use in training environments. We believe that will have significant impact on our operating margins over the long-term by significantly reducing our returns for broken units in need of repair. This quarter also the NIJ, National Institute of Justice,…

(Operator Instructions) Your first question comes from the line of Eric Wold with Merriman Capital. Please proceed. Eric Wold – Merriman Capital: Thank you and good morning, guys.

Good morning. Eric. Eric Wold – Merriman Capital: A couple of questions. One just first off Dan, housekeeping, I’m not sure if I missed it in the opening comments, if I did I apologize. What was the $1.3 million of other income?

That’s partially the result of the settlement against the prime banks. Eric Wold – Merriman Capital: Okay.

Litigation settlement that we received. Eric Wold – Merriman Capital: Okay. Perfect. And then moving on, huge gross margins in the quarter, it looks like the best gross margins you have had in about three years on the core products. Assuming we start getting a ramp back up over the coming quarters in terms of spending by law enforcement and your capacity utilization moves up, I mean, where could that core product margin go?

I mean, certainly, we’ve always targeted sort of a 60% margin that’s kind of the historic levels. I think it will be certainly we had great results this quarter. Partially it was a little bit of absorption this quarter which helped things but we would certainly like to see that stay north of 60%. As the units transition from the X26 to the X2, the absorption of the X2 is better due to the higher price points. So, we do expect that that will improve margins but certainly we’d like to stay north of 60% for sure. Eric Wold – Merriman Capital: And on the X2, given the demand or kind of a response to that and demand so far, is it likely that -- is the X3 going to be phased out or is that something that can still be kept in the catalog and is pretty easy to put together if there is demand for it?

No. The X3 will remain part of our product catalog. It’s -- we are tailoring the X3 more towards SWOT applications and guys that don’t mind carrying a slightly larger unit to get more capability. So it will remain in our catalog. It’s not a huge volume mover but frankly from just a marketing perspective, having a three product offering with the X26, the X2 and the X3. We believe that the X3 is a referential price point. It helps to, in the positioning of the X2 for mass adoption. Eric Wold – Merriman Capital: Okay. And then last question, any way you can kind of look at all of the departments that are trialing the AXON, Evidence.com and give a sense that if all of those departments went to full deployment kind of what is the current potential users of AXON would it be on trial?

I don’t have that immediately available.

Yeah. We’re trialing in a lot of places and the focus has been to go deep with these agencies that we are trialing with to make sure that we actually have the benefits and the product offerings dialed in, the pricing right as we try to scale up that part of the business. So, at this point, we are trialing with agencies of different sizes, some significant major agencies along with smaller agencies because obviously we sell into the whole breadth of the market.

We do believe that our strategy will be primarily based on agencies under 200 officers over the next couple of years is where we’re going to see most of the growth in adoption. Because those smaller agencies tend to be faster at decision making and they have less political complexities around having a large IT department. And we find that the larger agencies, just the level of the sales process is more complex, it’s going to take longer and we believe we can build network effects and market adoption by getting perhaps a few thousand smaller agencies over the next couple of years and that that will make it more enticing to the larger agencies. So we are in a couple of the big agencies. But I think them going to full deployment is going to be a longer road to hoe than getting more of the Aberdeen’s and Burnsville’s and the smaller agencies that see the benefit and the chief is more actively engaged and again they have a fairly small IT infrastructure in house and are more adaptive. Eric Wold – Merriman Capital: Perfect. Thank you, guys.

Thank you.

Your next question comes from the line of Paul Coster with JPMorgan. Please proceed. Paul Coster – JPMorgan: Yeah. Thank you. Dan, I’m not sure what the most efficient way of doing this is. But can you give us the products and revenue in unit breakdown or point us to the right resource for that?

Yeah. I can run through the units. The unit sales for the quarter, X26 we sold 12,501, we did sell 1,512 of the X2 that we get here and actually finished with a backlog there just due to the launch timing. M26 we sold 628 units, X3 we sold 63 units, we sold 2,007 of the TASER, 1,461 of the TASER Cams and we sold 281,310 cartridges. Paul Coster – JPMorgan: Okay. And then the revenue breakdown, have you already provided that or is it?

It will be in the Q. Paul Coster – JPMorgan: Okay. Got it. And then Rick you talked a little bit about more predictability in the business. What is the source of the visibility and can you give us your best guess on how this muni budget sort of issues is going to play out and when we should start to see reaccelerating growth?

Well, I’d say the level of predictability is more in our internal operations in terms of need for capital spending, et cetera. The last couple of years we have made some significant investments in AXON and Evidence.com and some of these new business units and I think that is where I was primarily focused. We don’t have any major new initiatives that we believe would need a lot of cash potentially and we’ve got a pretty good line on what it is going to take to execute on AXON and Evidence.com. The revenue side of things, I wouldn’t say, it’s any more predictable than it has been but I think we have been operating in a very tough budget environment and we’ve still been turning in results where we are generating ballpark $1 million a month in cash. So unless there was some dramatic downturn in the economy, with the X2 coming online and many agencies having units over five years, we believe that the baseline business we’ve been operating to feels sustainable at a minimum and that gave us comfort in terms of our cash generation and/or cash need. In terms of the municipal environment, the main positive impact I would say is that many law enforcement agencies have made the cuts that last year they were still looking at -- when agencies are looking at cutting officers they become very focused on avoiding all expenses. They don’t want to be out buying equipment when they are cutting the jobs of their comrades. A lot of the restructuring in law enforcement has happened now which just means it has changed our mindset to where when we are in an agency 18 months ago. We had situations where the union guys were pinning up our quotes on the quote board…

Yeah. Paul, this is Dan. Yeah, we’re definitely seeing that the message that agencies need to look to proactively replace the units, they’re certainly listening to that. They’re looking for the budget to help with that. I think it certainly has been very helpful to have a product like the X2 that we have launched that agencies really like and that helps them to prioritize perhaps that upgrade cycle higher on their capital spend list than they might have previously. So we feel very good about that. Yeah, we did see last year we had about $8 million worth of upgrades from M26 to X26 last year. So, I think, yeah, we have seen some of that upgrades at selective agencies that remain optimistic that as we move forward that aging install base will give us an opportunity to resell into our install base of customers.

Dan, how big is the install base currently of units that are over five years old?

It’s over 175,000 units and that will grow by about 80,000 units a year. So it’s going to be -- we’ll have well over 400,000 units over the next four years reach that over five-year mark. Paul Coster – JPMorgan: Great. Thanks very much.

Thank you.

Your next question comes from the line of Steve Dyer with Craig Hallum. Please proceed. Steve Dyer – Craig Hallum: Thank you. Good morning, guys.

Good morning.

Good morning. Steve Dyer – Craig Hallum: So the gross margin just to kind of revisit that quickly, very good level. Was there anything sort of one-time, I mean, I know you want to kind of get to 60% here over time but is that a good level to sort of model going forward or would you expect it to take a step back in Q3?

Yeah. I think product mix is a big determine. The product mix is really favorable this quarter. We had more sales to sort of the higher margin ECD products, lower sales of some of the things that are maybe a little bit lower margin. So certainly the mix helped us as well and that’s something that is not always super predictable. But as far as a one-time, we did see some extra absorption this quarter with the components of inventory. Our actual finished goods inventory went up a little bit, reduction in raw materials. That caused a little bit more of the overhead to get capitalized on the balance sheet. But that’s kind of the normal ebb and flow. But we certainly feel from modeling purposes that 60% is still a good target for the ECD part of the business. Steve Dyer – Craig Hallum: Okay. And then I noticed this quarter kind of the number of cartridges is a ratio versus handles in the field is the lowest that I have ever seen it. Is there anything to read into that, are people training less or was it just kind of the way things ebbed and flowed in the quarter?

I think it’s mostly ebb and flow, I mean, cartridges tend to do that a little bit. I think normally what we didn’t see as much this quarter is sort of that budget flush which a lot of times is sort of cartridge centric. That may be a little bit due to the introduction of the X2 where the X2 uses a different cartridge than the X26 and if agencies are looking at an upgrade they’re going to want to keep their inventory of the X26 cartridges lower and not bulk up on those so that maybe part of that trend you’re seeing.

I want to add in as well. This is Rick. We probably, we believe we saw some X26 orders push out this quarter delayed once we announced the X2 and some anecdotal information we have about that. For example, we saw the returns rate for X26 is being returned for repair drop about in half the months that we announced the X2. And because we have a trade in offer that runs through the end of the year whether the units are functional or broken, they can be traded in for a $300 trade in credit towards a package that includes the X3, warranty, cartridges, holster, et cetera, I’m sorry, the X2. Once we made that announcement it looks like people really cut back on sending in X26 units for repair or replacement and then anecdotally as well there were some orders we thought -- we expected to see a little stronger push on X26 at the end of the quarter that didn’t develop and we believe that part of that was people are looking at the X2. And again, a couple of them got off the time pretty quick like Newport News and (inaudible) but we know other folks are going through a little more of a rigorous field trial of it before they make a decision. Steve Dyer – Craig Hallum: Okay. And then I know you don’t guide and there’s not always a ton of visibility but how should we think about sort of revenue in the back half of the year versus the first half?

Yeah. We continue to see a good pipeline of interest in the product, so we remain, we feel good about the business longer term. It’s a tough business to forecast as you know but we continue to see good quoting activity and certainly the introduction of the X2 will certainly help as we start unlocking that upgrade cycle.

Yeah. There are also some very significant and large international orders that we continue to work and I know people get a little fatigued as do we, talking about the big orders we were talking about last year are still in the pipeline, they have not closed. So there could be some significant upside surprises in the second half of the year. But from a modeling perspective and expectation perspective we wouldn’t get ahead of ourselves and encourage you to model that in but we also thought we should let you know there are some significant opportunities internationally and those just tend to be super lumpy and big because decisions are made at the senior level of national governments. But we’re hopeful that we’ll start to see some of those break free for us here. Steve Dyer – Craig Hallum: Okay. And then last question, just operating expenses, is this a good level to think about going forward, I mean, obviously X all of the one-time stuff this quarter?

Yeah. I mean, we’re continuing to really drive the OpEx down as much as possible. I think certainly if you sort of look at the average of Q1 and Q2, it’s still pretty good proxy for what we need to run the business, there is always going to be a little bit of ebb and flow with the quarters based on the sort of product introductions, just some things around the business. But we continue to look to drive as much efficiency as we can and really work on controlling the things we can as far as on the operating side of the business to be as efficient as possible and really get that breakeven point of the business as low as practical. Steve Dyer – Craig Hallum: All right. Thanks guys.

Thank you.

I have no further questions in the queue.

Good. All right. Well, thanks everyone for tuning in this morning. As I mentioned stay tuned. Some interesting things happening in the back half of the year with TASER Cam HD and some other things we’re working on and thanks for your continued support. So we will be back to you all in October. Have a great balance of your summer and have a great day. Thanks.

Thank you.

Thank you for your participation in today’s conference. This concludes the presentation and you may all now disconnect. Good day.