Rick Smith – CEO Dan Marc Behrendt – CFO

Steve Dyer – Craig Hallum Greg Mckinley – Dougherty

Welcome to the Q2 2010 TASER International Incorporated Earnings Conference Call. My name is Don and I will be your operator for today's call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. Please note that the conference is being recorded. I will now turn the call over to Rick Smith. Mr. Smith, you may begin.

Thank you. Welcome everyone. Appreciate you joining us this morning. Before we get started I'm going to ask Dan to read the Safe Harbor Statement.

Thanks Rick. Certain statements contained in this presentation may be deemed to be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and 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 law enforcement markets, expansion of product sales through 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 in 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 risk of new technology, new product introduction risks, 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 risks, potential fluctuations in quarterly operating results, competition, negative reports concerning TASER device uses, financial and budgetary constraints in prospects and customers, dependence upon sole and limited source suppliers, fluctuations in component pricing, risks of governmental investigations and regulations, TASER product tests and reports, dependence upon key employees, employee retention risks and other factors detailed in the company’s filings with the Securities and Exchange Commission. With that, I’ll turn it back over to Rick Smith.

Thanks Rick. Certain statements contained in this presentation may be deemed to be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and 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 law enforcement markets, expansion of product sales through 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 in 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 risk of new technology, new product introduction risks, 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 risks, potential fluctuations in quarterly operating results, competition, negative reports concerning TASER device uses, financial and budgetary constraints in prospects and customers, dependence upon sole and limited source suppliers, fluctuations in component pricing, risks of governmental investigations and regulations, TASER product tests and reports, dependence upon key employees, employee retention risks and other factors detailed in the company’s filings with the Securities and Exchange Commission. With that, I’ll turn it back over to Rick Smith.

Thanks Dan. Okay, so I'm sure everybody has seen by now this morning we reported Q2 sales were up $7 million or 33% year-over-year coming into $28.2 million. Perhaps even more importantly, if you look at the cash generation of the business we generated $9.7 million in cash from operations. Of course if you do the math on that we were generating cash at an annualized rate in the second quarter of $0.73 per share. Operating income came in at $6.1 million. To go back and touch on the cash as well, we can point out the obvious, that was inclusive across the entire business, if you look at the core ECD business, which has been funding our investments in the new video business, obviously that number is significantly higher in the core business if look at on a standalone basis. Margins improved year-over-year although they declined slightly sequentially, came in at 58.5% compared to 57.8% last year and course if you look in our ECD business 63.7% gross margin, a number we're very proud of. Again we break this out so that it helps us as a management team to use investors to monitor how well we're managing our core business so (inaudible) by the investments that we're making in the new business. Revenues in the ECD business increased 8% sequentially from $24.8 million to $26.9 million and in the core ECD business operating income was $8.6 million. So we're running at 32% operating income in the core ECD business. Revenues in the video business increased 47% sequentially albeit from a small base of $884,000 in the first quarter to $1.3 million in the second quarter. That growth is really driven primarily by TASER CAM and the new TASER CAM HD as the AXON Flex didn’t ship until late in the quarter. If we look at the SG&A expenses coming down, the result of a continuous focus on efficiency and cost control, research and development also decreased by $800,000 to $2.0 million. I'm sure people are wondering is TASER investing sufficiently in research and development and as I always tell you the decreases are really about this continued streamlining of our research and development efforts. We are more efficient than we have ever been. This is largely attributable to reduction in professional consulting fees, basically some of the bulk resources when you've got to go out and bring an external consultant's when you are finishing up a major project. So I say at this point we are innovating at a much more efficient and better pace and we've also moved to an OEM model looking to insource technology from other providers rather than building it ourselves. For example if you look at the AXON Flex, in our partnership with Looksie [ph] we were able to buy the major components of the AXON Flex and then only focus on engineering that is required to customize for our marketplace is a far more efficient and faster way to get to market than if you look at the previous AXON Pro product we've developed where we develop the computer, the communications hub and the camera all from the ground up in house. That's a longer slower more extensively developed product. So I'm very proud of what we've accomplished in our R&D segment. Again I'd say we're getting better, we're doing more with less and we believe that we are right sized in terms of how we're approaching R&D. So with that I'm going to turn it over to Dan to take us through the financial results in greater detail.

Thank you Rick. So as Rick says revenues for Q2 was $28.2 million. This is up approximately $7 million or 33% over the prior year. The increase in sales versus prior years is driven by the continuous option extension of the upgraded program for the X2 Electronic Control Device as well as a significant order I guess during the quarter from Brazil. One of the bright spots for the quarter is the North American law enforcement market, continues to be strong, mostly driven by the upgrade cycle to the new X2 device. North American law enforcement sales are actually up 39% year-over-year. This follows a 25% year-over-year improvement in the fourth quarter of last year and the first quarter this year. So we've got three quarters in a row of significant growth, almost completely driven by the adoption cycle of the new X2 device. Gross margin for the quarter was $16.5 million or 58.5% of revenue. That's up 70 basis points from 57.8% of the prior year. This is actually the fifth consecutive quarter of gross margin improvement. We continue to see a benefit from the higher operating leverage in the business as well as a favorable product mix. The SG&A expenses of $8.4 million in the second quarter versus $9.1 million in the prior year, the reduction in SG&A expenses were driven by the continuing cost controls in the business. SG&A as a percentage of sales was actually 29.8% of net sales in Q2 of 2012 that compares to 42.8% in the same quarter of last year. If you sort of look at our history over the last four quarters we've sort of ranged from this sort of low water market of $8.4 million all the way up to $10.3 million over the last four quarters and we are going to be making some strategic investments in France and Brazil along with some new hires. So we do expect that SG&A expenses will tick up a little bit in the second half of 2012 but still within the range of what we've seen over the last four quarters and we are executing this focus on our cost controls. Research and development expenses of $2 million for the second quarter which were favorable by $800,000 comparative to the 2011 second quarter, again due to the continued cost controls as Rick mentioned we see mostly, the biggest drivers there are the reductions of consulting cost as well as some headcount reductions we have taken over last year. Again, similar to SG&A, we do expect R&D expenses to tick up a little bit in the second half as we make some critical hires to drive that business going forward but we're focused on a continued cost control. So we don’t expect as we get significantly up from sort of the range we've been over the last four quarters. Adjusted operating income which excludes the impact of stock based compensation charges, depreciation and amortization and litigation judgment expenses was $8.4 million in the second quarter of 2012. This is actually a $7.2 million increase from the adjusted operating income of $1.2 million in the second quarter of 2011. The GAAP income from operations for the quarter was $6.1 million. This compares to a GAAP loss of $5 million in the second quarter of 2011. Again the second quarter of 2011 was impacted by a number of sort of significant onetime items. We had a sterner judgment to protect our impairment last year and also the impairment of some of our assets for e.com datacenters. So that was a driver for loss last year but again even on an adjusted basis we're up significantly over the prior year. Net income for the second quarter of 2012 is $3.4 million or $0.06 per share on both a basic and diluted basis compared to a loss of $2.3 million or $0.04 loss on a diluted basis in the second quarter of last year. We finished the quarter with $23.2 million worth of cash, cash equivalents and short term investments. It's actually a decrease of $3.3 million from the yearend cash levels, investment levels but the base driver there is the buyback of stock as we announced on April 25th, the Board of Directors authorized the $20 million buyback of stock. We actually purchased $16.1 million worth of stock in the second quarter and that was offset by the operating cash flow. So cash came down slightly but given the significant cash generation in the business is funny, that buyback of stock. Accounts receivable $14.7 million, or up actually $2.9 million from the prior year end, again due to increased sales in the second quarter of 2012 versus the fourth quarter of 2011. Inventory at June 30th is $10.5 million. It's actually down $1 million from the prior year end balance. Decreases attributed to reductions in finished goods due to the strong sales in the second quarter. The total assets for the business at June 30th were $97.8 million. As you move on the liability side of the balance sheet, accounts payable $3.9 million is actually down $0.6 million from the yearend balance due to the timing of some check runs and just purchasing activity versus the fourth quarter. Crew liabilities of $6.6 million are actually down $1.1 million reduced the litigation judgment expense reversal of $2.2 million that we took last quarter relating to the Turner case. The total deferred revenue line on the balance sheet of $9.2 million has actually increased $1.3 million from the 2011 year end levels. This is due to a number of factors. The increased sales of the X2 are driving that because of a number of the extended warranties that are purchased with that X2 trading program as well as we sell more Flex as we do defer roughly between that 50% and 60% of the Flex sales to reflect the fact it does come in the e.com service and will be recognized in that EVIDENCE.com service over the service life which is anywhere from one to three years. So you will see that deferred revenue line tick up as we see further traction in both the X2 trading programs and the increase in our Flex sales over time. The total liabilities are $20.5 million and we finished the quarter with $75.3 million in stockholders’ equity. Again that's down a little bit from the year end, just driven by the stock buyback that we executed on in the second quarter. We continue to have no debt on the balance sheet and have plenty of liquidly to fund those R&D efforts and sales expansion efforts internationally. As we move on to the cash flow information the company had cash provided from operations of $9.7 million during the second quarter of 2012 and for the six months ended June 30th, we've generated $13.4 million of cash from operations. The cash used by investing activities for the six months ended June 30th was $1 million compared to $11.6 million in the same period last year. Again the cash usage this year is really driven mostly by the by the purchasing activities and property and equipment, mostly some computers and also some of the production equipment for some of the new products we've launched this year. Cash used in financing activities was $15.7 million for the six months ended June 30th, 2012, compared to $12.5 million in the same period of 2011. Again the base driver there is the repurchase of $16.1 million worth of the company stock during the quarter. We did purchase approximately 3.1 million shares during the June 30th quarter. We ended the quarter with $18 million in cash and $5.2 million in short term investments for a total of $23.2 million of cash in investments. We still feel very confident in the strong liquidity position and the ability to continue investing in the business and then with that I just want to move on to sort of the sales statistics for people modeling the business here. For the second quarter we actually sold 11,292 of the X26 ECDs. We sold 8,338 of the X2 ECDs. That's up sharply from the first quarter. M26s, we sold 790 units. We sold 25 of the X3 product, 2,708 C2 units and 2,351 TASER CAMs. Again that's up pretty sharply from the first quarter as well and for cartridge sales we had 364,104 cartridges sold in the quarter. Again that's comparable to the first quarter where we're seeing a pretty strong year in cartridge sales so far. And with that I'll turn it back over to Rick Smith, our CEO.

Thank you Rick. So as Rick says revenues for Q2 was $28.2 million. This is up approximately $7 million or 33% over the prior year. The increase in sales versus prior years is driven by the continuous option extension of the upgraded program for the X2 Electronic Control Device as well as a significant order I guess during the quarter from Brazil. One of the bright spots for the quarter is the North American law enforcement market, continues to be strong, mostly driven by the upgrade cycle to the new X2 device. North American law enforcement sales are actually up 39% year-over-year. This follows a 25% year-over-year improvement in the fourth quarter of last year and the first quarter this year. So we've got three quarters in a row of significant growth, almost completely driven by the adoption cycle of the new X2 device. Gross margin for the quarter was $16.5 million or 58.5% of revenue. That's up 70 basis points from 57.8% of the prior year. This is actually the fifth consecutive quarter of gross margin improvement. We continue to see a benefit from the higher operating leverage in the business as well as a favorable product mix. The SG&A expenses of $8.4 million in the second quarter versus $9.1 million in the prior year, the reduction in SG&A expenses were driven by the continuing cost controls in the business. SG&A as a percentage of sales was actually 29.8% of net sales in Q2 of 2012 that compares to 42.8% in the same quarter of last year. If you sort of look at our history over the last four quarters we've sort of ranged from this sort of low water market of $8.4 million all the way up to $10.3 million over the last four quarters and we are going to be making some strategic investments in France and Brazil along with some new hires. So we do expect that SG&A expenses will tick up a little bit in the second half of 2012 but still within the range of what we've seen over the last four quarters and we are executing this focus on our cost controls. Research and development expenses of $2 million for the second quarter which were favorable by $800,000 comparative to the 2011 second quarter, again due to the continued cost controls as Rick mentioned we see mostly, the biggest drivers there are the reductions of consulting cost as well as some headcount reductions we have taken over last year. Again, similar to SG&A, we do expect R&D expenses to tick up a little bit in the second half as we make some critical hires to drive that business going forward but we're focused on a continued cost control. So we don’t expect as we get significantly up from sort of the range we've been over the last four quarters. Adjusted operating income which excludes the impact of stock based compensation charges, depreciation and amortization and litigation judgment expenses was $8.4 million in the second quarter of 2012. This is actually a $7.2 million increase from the adjusted operating income of $1.2 million in the second quarter of 2011. The GAAP income from operations for the quarter was $6.1 million. This compares to a GAAP loss of $5 million in the second quarter of 2011. Again the second quarter of 2011 was impacted by a number of sort of significant onetime items. We had a sterner judgment to protect our impairment last year and also the impairment of some of our assets for e.com datacenters. So that was a driver for loss last year but again even on an adjusted basis we're up significantly over the prior year. Net income for the second quarter of 2012 is $3.4 million or $0.06 per share on both a basic and diluted basis compared to a loss of $2.3 million or $0.04 loss on a diluted basis in the second quarter of last year. We finished the quarter with $23.2 million worth of cash, cash equivalents and short term investments. It's actually a decrease of $3.3 million from the yearend cash levels, investment levels but the base driver there is the buyback of stock as we announced on April 25th, the Board of Directors authorized the $20 million buyback of stock. We actually purchased $16.1 million worth of stock in the second quarter and that was offset by the operating cash flow. So cash came down slightly but given the significant cash generation in the business is funny, that buyback of stock. Accounts receivable $14.7 million, or up actually $2.9 million from the prior year end, again due to increased sales in the second quarter of 2012 versus the fourth quarter of 2011. Inventory at June 30th is $10.5 million. It's actually down $1 million from the prior year end balance. Decreases attributed to reductions in finished goods due to the strong sales in the second quarter. The total assets for the business at June 30th were $97.8 million. As you move on the liability side of the balance sheet, accounts payable $3.9 million is actually down $0.6 million from the yearend balance due to the timing of some check runs and just purchasing activity versus the fourth quarter. Crew liabilities of $6.6 million are actually down $1.1 million reduced the litigation judgment expense reversal of $2.2 million that we took last quarter relating to the Turner case. The total deferred revenue line on the balance sheet of $9.2 million has actually increased $1.3 million from the 2011 year end levels. This is due to a number of factors. The increased sales of the X2 are driving that because of a number of the extended warranties that are purchased with that X2 trading program as well as we sell more Flex as we do defer roughly between that 50% and 60% of the Flex sales to reflect the fact it does come in the e.com service and will be recognized in that EVIDENCE.com service over the service life which is anywhere from one to three years. So you will see that deferred revenue line tick up as we see further traction in both the X2 trading programs and the increase in our Flex sales over time. The total liabilities are $20.5 million and we finished the quarter with $75.3 million in stockholders’ equity. Again that's down a little bit from the year end, just driven by the stock buyback that we executed on in the second quarter. We continue to have no debt on the balance sheet and have plenty of liquidly to fund those R&D efforts and sales expansion efforts internationally. As we move on to the cash flow information the company had cash provided from operations of $9.7 million during the second quarter of 2012 and for the six months ended June 30th, we've generated $13.4 million of cash from operations. The cash used by investing activities for the six months ended June 30th was $1 million compared to $11.6 million in the same period last year. Again the cash usage this year is really driven mostly by the by the purchasing activities and property and equipment, mostly some computers and also some of the production equipment for some of the new products we've launched this year. Cash used in financing activities was $15.7 million for the six months ended June 30th, 2012, compared to $12.5 million in the same period of 2011. Again the base driver there is the repurchase of $16.1 million worth of the company stock during the quarter. We did purchase approximately 3.1 million shares during the June 30th quarter. We ended the quarter with $18 million in cash and $5.2 million in short term investments for a total of $23.2 million of cash in investments. We still feel very confident in the strong liquidity position and the ability to continue investing in the business and then with that I just want to move on to sort of the sales statistics for people modeling the business here. For the second quarter we actually sold 11,292 of the X26 ECDs. We sold 8,338 of the X2 ECDs. That's up sharply from the first quarter. M26s, we sold 790 units. We sold 25 of the X3 product, 2,708 C2 units and 2,351 TASER CAMs. Again that's up pretty sharply from the first quarter as well and for cartridge sales we had 364,104 cartridges sold in the quarter. Again that's comparable to the first quarter where we're seeing a pretty strong year in cartridge sales so far. And with that I'll turn it back over to Rick Smith, our CEO.

Okay, thanks Dan. Okay, before we wrap up I want to revisit our three core strategic (inaudible) that we talked about in the last several conference calls and those areas of focus are number one upgrading our installed base of ECDs that was greater than five years old, number two, accelerating the penetration of our video and cloud business and number three expanding international sales. So first let's talk about the X2 and expanding our installed base. I saw a number of significant orders this quarter. One of the more important ones was in Australia 775 X@ ECDs. The international markets tend to take a longer time to improve new products. So we're delighted to see Australia being the first country to move in a significant way to the X2 and also 475 TASER CAM HDs. It is also a strong quarter for state patrols, Oregon State Petrol went full deployment with 454 X2s, North Carolina Highway Petrol with 422 X2s, how state petrol upgraded from M26s to X26's 485 units. We also saw in the municipal area some strong X2 purchases, 250 units going to Manchester, 162 units going to Las Vegas beginning their transition. Obviously that's a very large department I believe, over 3000 officers so this hopefully the start of a larger transition. We also had another large agency purchase 2,500 X2 units. That agency for operational security reasons asked us not to disclose who it was so we're not going to. In terms of the upgrades themselves, obviously some of these were new purchases. We like to keep tabs on how much of the installed base is actually upgrading. At the end of Q1 we had upgraded approximately 3.3% of the installed base of ECDs that are greater than five years old and at the end of Q2 this number has risen from 3.3% to 5%. So we're making some progress there. This was partially due to the reintroduction of an upgrade program this year. We had an upgrade program last year that (inaudible) at the end of the year. We did see a dip in X2 sales in the first quarter. So we revamped a new upgrade that's declined in value each quarter, starting at $250.00 and declining to $160 by year end. We believe that helped to reinvigorate upgrades. Now today we just announced the new program that we believe could also have a significant impact on upgrade. So this is a new initiative we help our customers transition, called the TASER Protection Plan or TPP. The Protection Plan allows our customers, TASER ECDs accessories tunable in five equal payments over a five year time period. This program offers two key advantages. First, it allows our customers to avoid the difficult process of getting large singular capital equipment purchase approvals. Instead we allow them to use roughly one fifth of that amount of money and break it into annual outlays from their operating budget. This creates predictable ongoing budget (inaudible) and it can be used to replace after the fifth year to replace and upgrade the (inaudible). So basically we're able to get an operating line item. Obviously in governments that's a very helpful thing because once you're there, tendency it makes it a lot easier if you're sick to just continue that line item, go ahead and upgrade those units with the new extended payment purchase or lease purchase in your six as opposed to once every five or six or longer number of years, having you come back for abnormal approvals for capital equipment expenditures. So we believe this will allow a more smooth transition to upgrading over time and we expect this budgetary dynamic could allow for a much larger percentage of the market to upgrade their devices in a more timely fashion that we've seen historically. Again over the past year we've seen around 5% of the market upgrade to the newer product, 5% of devices that are over five years old. Obviously we can pick that 5% up to a greater number which can impact on the business. Now we only started test marketing this TCP to a small number of agencies over the last 45 days. We've already received our first order from Colorado Springs for 525 X2s. We do have several other deals in the pipeline now and we're planning a full roll out in the middle of August. So we're preparing distributor training and all the items needed to scale this program from a small test to a full roll out. I should also point out that we are partnering with leasing partners that enable us to accelerate payment, basically so that we would get paid up front with the lease partners exercising their core competencies operating over the term of the lease which obviously means we can outsource the credit risk and the payments over time and we can accomplish this due to the way we're structuring these programs without degrading our operating margins. Let's move to our secondary analysis video in EVIDENCE.com. I'm very proud to report we have had two full deployments within weeks of shipping, BART, the Bay Area Rapid Transit police is up to 220 units. They've started with an initial order of I believe around 160 and then expanded it within a matter of weeks, so a full 220 and Modesto California, $131 AXON Flex cameras. The other thing we're seeing that is quite encouraging is the major cities are moving much faster than we experienced with the ECD launch 10 years ago. Both Mesa and Fort Worth had 50 units in the field. We have several other major cities that are currently testing and many of them who expressed interest. So we had anticipated that we see the smaller agency outpacing the large agencies just due to the dynamics of the purchasing environment but we think we've been pleasantly surprised that large agencies seem to be moving more quickly. Let me share a couple of customer quotes from agencies that have been testing these out in the field over the last several weeks, is these actually just came back in the last week or two. So from a First Officer, I have been a law enforcement officer for nine years. I've tested several body worn cameras for years now. By far the AXON Flex rates the best in every category. I personally wear a camera everyday on duty and believe that officer worn video is the wave of the future and not only protects officers from false claims, which it has done for me several times but it reminds people that their actions are being recorded and can be shown to a judge. Often that is enough for them to act differently towards the officer. I was surprised that I never ran out of battery power with both the cameras recording even on super long days when the camera was on the entire time it never failed me and on traffic stops they would start getting mouthy, then see the camera and stop talking. That's a reaction we have not been able to elicit with this group in the 50 years we've been dealing with them. And finally, just this last weekend on a quick patrol, I had someone tell me I was more intimidating than the 6'5" deputy standing next to me because of the camera. From another officer, I'm very pleased with the performance of the TASER AXON Flex camera system. I use it on every shift since it was assigned to me, uploading tons of videos to EVIDENCE.com website. I found the system as very easy to operate. I found this does not interfere with my performance in any way and I use the camera in rain, in the sun and even the cold. I use it on my motorcycle, in a patrol car, in the day time and at night and I've been nothing short of amazed at the performance of this system, the clarity of the picture, et cetera. In closing I highly recommend the purchase of the TASER AXON Flex body worn camera by our city police. So we're obviously delighted to be getting this sort of user feedback, the project being very well received. Now new bookings this quarter for the AXON Flex were roughly flat at a little over $400,000 which we attribute largely due to the fact that the Flex did not begin shipping until late in the quarter and most agencies were just receiving test units. However the TASER CAM HD, which had started shipping earlier in the year, did accelerate total sales in our video segment up to $1.3 million up from $884,000 in the first quarter. Now let's turn our attention to international sales with very solid results at $4.8 million in international sales. We had already talked about the orders from Australia which were significant. We also had an 800 unit X26 order from Brazil. This was important in that Brazil had historically been primarily buying the M26; we believe will see some transition to the X26 and even the X2 in Brazil. As mentioned, we have a team that's going in the country to set the foundation. They were at the International Association of Chiefs of Police conference in Brazil this week and they will be located full time in Brazil by the end of the year. I should also clarify we did announce in Brazil, we put out a press release in conjunction with a distributor and some government agencies down in Brazil that we do plan to invest approximately $6 million in the country. We have received several questions while we were writing the check today and this is an immediate expense. As you know, this is being funded out of revenues from Brazil over the next several years. Brazil has been around a $3 million a year country for us in revenues. So expect those investments to come from positive net margins in the country, not a large upfront capital investment. We're focused on being efficient and growing our business in Brazil intelligently. We're not building a company owned facility in Brazil. Rather one of our contract manufacturing partners that already manufactures some of the more complicated and complex components for us here in the U.S. they have their own facility in Brazil, which is well established. So we're partnering with that same contract manufacturer in order to do the final assembly of the complete unit in Brazil. So we will be sending a team of several U.S. employees to spend the next year in Brazil and help us build out the local team and grow the country over the long term. But again we expect this to be funded out of operating margin from that country. In Europe we've also expanded our presence. We have two employees who have relocated from the U.S. to help the team of four that we already had in Europe. They are located in France and Germany. Earlier this month you saw we announced several significant orders out of TASER Europe. So we're seeing our investments in greater customer engagement begin to bear fruit. So in completion we've been very pleased with the performance of the company in the first half of 2012. Your employees have been working hard, cutting cost, improving our processes across the board. So all the effort is paying off with the results that we're so proud to report today. We believe such products and programs are in place, such as the new TPP payment plan which will set the foundation for a stronger second half of 2012 however I should remind you that the third quarter has tended to be seasonally weaker than the second quarter and as always it still remains difficult to predict the timing of large orders and the random adoption for our newest products. So thanks for taking time to join us today. We look forward to talking with you all again in October and with that we'll open it up for a few questions.

(Operator Instructions). Our first question comes from Steve Dyer from Craig Hallum. Please go ahead. Steve Dyer – Craig Hallum: Congratulations on the good results. A question just generally on the phase out of the X26. I shouldn’t say phase out but it's my understanding that departments have been made aware that essentially five years is the useful life for an X26. I'm just wondering in general anecdotal reaction to that. Do you see that driving upgrade cycles, other people just sort of deciding they are going to roll the dice, what's the general reaction to that?

We are seeing that it is helping our customer to sort of get focused on upgrade technology. The X26 is a 10 year old platform. Now in the current budgetary environment we have seen many agencies have been putting out their capital equipment purchases, vehicles that they normally replace every three or four years, they are getting several X2 out of them. So we're certainly not seeing across the board that people are immediately moving to upgrade a repressed unit that are getting past their useful life but it's starting to make a different. We believe the most important and compelling aspect are the improved safety features of the newer product which helps giving them a more compelling reason to upgrade and we're certainly hoping that this new TASER Payment Plan helps them to do that off operating budgets and accelerate the upgrade. So it is making a difference if not 100% across the board, certainly that the people are immediately to upgrade units outside their useful life. Steve Dyer – Craig Hallum: Have you noticed any difference and maybe this is too early to say but in cartridge usage with the X2 versus the 26?

Yes, this is Dan. Nothing significant so far. Because you've got ability to display the wearing art we are hearing from the CO that they are getting compliance from people, just displaying that Warning Arc which they're more likely to do with the X2 because with the X26 you have to basically unload the weapon to display the Warning Arc, where the X2, one of the key features and the key benefits is the fact you can do that while it's loaded so you don’t create an officer safety issue. So and certainly we are hearing that they're getting a lot of compliance from that. We haven’t really seen that translate into a difference in the cartridge usage so far.

Yes, this is Dan. Nothing significant so far. Because you've got ability to display the wearing art we are hearing from the CO that they are getting compliance from people, just displaying that Warning Arc which they're more likely to do with the X2 because with the X26 you have to basically unload the weapon to display the Warning Arc, where the X2, one of the key features and the key benefits is the fact you can do that while it's loaded so you don’t create an officer safety issue. So and certainly we are hearing that they're getting a lot of compliance from that. We haven’t really seen that translate into a difference in the cartridge usage so far.

Yes, I think the dynamics that we would look at in general, if we had to estimate it between 10% and 20% of our cartridges that are sold or actually used in the field, 80% to 90% are used in training. So because of the multi shot capability of the X2 we actually see greater number of the cartridges being fired in training but we may see less cartridges being fired in the field due to the surrenders but the net effect, it is too early to say, which direction it went [ph] down. Steve Dyer – Craig Hallum: And then Dan, how will the revenue be recognized under the new TPP program? Is that going to be a deferred revenue scenario or is that all upfront and just the cash flows are deferred.

Yes. So it's going to depend on whether we actually sell the paper. This first deal with Colorado Springs are actually partner with a leasing company. So we will get paid up front. So we'll recognize the revenue upfront. If we hold the paper we will likely end up recognizing over time that for the most part our goal here will be depending on the deal structure, mostly the deals we expected, we want to hold the papers. So we recognize the sales upfront.

Yes. So it's going to depend on whether we actually sell the paper. This first deal with Colorado Springs are actually partner with a leasing company. So we will get paid up front. So we'll recognize the revenue upfront. If we hold the paper we will likely end up recognizing over time that for the most part our goal here will be depending on the deal structure, mostly the deals we expected, we want to hold the papers. So we recognize the sales upfront. Steve Dyer – Craig Hallum: And is that the full normal ASP or does the leasing company shave anything off for themselves?

Yes, there is a little bit of a discount. As Rick said we think we can do that and still maintain our normal operating profit because just the fact that this driving higher sales than just some of the other considerations as part of the sale. So even though there is a little bit of a haircut we'd say the overall profitability of the deal still be strong.

Yes, there is a little bit of a discount. As Rick said we think we can do that and still maintain our normal operating profit because just the fact that this driving higher sales than just some of the other considerations as part of the sale. So even though there is a little bit of a haircut we'd say the overall profitability of the deal still be strong. Steve Dyer – Craig Hallum: Okay, and then my last question and I'll jump back in the queue. Gross margins have been really very good the last couple of quarters and I'm trying to figure out kind of going forward if that's a sustainable level, how much of that is just attributable to the higher revenue run rate versus do we have with the X2 and the AXON maybe a kind of a permanent shift in mix that's going to take those up some.

Yes, that's a good question. I think that overall certainly the higher operating leverage we have is helping. There is a lot of indirect manufacturing cost that are relatively fixed. So having higher sales levels certainly help in that regard. I think the X2 has certainly helped in that regard because of the higher ASP versus the X26. As we see more adoption of Flex I think that will be in the near term will be a little bit of a drag just because of the deferred revenue. We're not recognizing, we're only recognizing half of that sale upfront and then the other half overtime. It will become normalized over time but in the beginning because of the deferred revenue component of the Flex sales as the AXON Flex takes off and because that they are part of the business; those margins won't be quite as strong as the ECD margins.

Yes, that's a good question. I think that overall certainly the higher operating leverage we have is helping. There is a lot of indirect manufacturing cost that are relatively fixed. So having higher sales levels certainly help in that regard. I think the X2 has certainly helped in that regard because of the higher ASP versus the X26. As we see more adoption of Flex I think that will be in the near term will be a little bit of a drag just because of the deferred revenue. We're not recognizing, we're only recognizing half of that sale upfront and then the other half overtime. It will become normalized over time but in the beginning because of the deferred revenue component of the Flex sales as the AXON Flex takes off and because that they are part of the business; those margins won't be quite as strong as the ECD margins.

Thank you. Your last question comes from Greg Mckinley from Dougherty. Please go ahead. Greg Mckinley – Dougherty: First of all Dan, I missed the number you gave on cartridge units. Could you repeat that please?

Yes, sure thing. So we sold $364,104 cartridges in the quarter.

Yes, sure thing. So we sold $364,104 cartridges in the quarter. Greg Mckinley – Dougherty: And then can you remind me of the X2 rebate rate currently in effect, what reductions if any have occurred and then how you expect that rebate to sort of bleed out later this year?

Yes so it was, for the second quarter it was $250 a unit. In the third quarter it will come down to $210 a unit. So basically we want to, a sort of difference from where we were at year end, we kind of announced the rebates throughout the year. So we want to encourage customers to move as quickly as they can and their budgets allow because the rebate is coming down over the year. So it’s $250 in Q2, come down to $210 in Q3 and certainly it dipped but it helped us a little bit in Q2. Its great emphasis for certain customers that want to move a little quicker to make sure they take advantage of a higher trade in value.

Yes so it was, for the second quarter it was $250 a unit. In the third quarter it will come down to $210 a unit. So basically we want to, a sort of difference from where we were at year end, we kind of announced the rebates throughout the year. So we want to encourage customers to move as quickly as they can and their budgets allow because the rebate is coming down over the year. So it’s $250 in Q2, come down to $210 in Q3 and certainly it dipped but it helped us a little bit in Q2. Its great emphasis for certain customers that want to move a little quicker to make sure they take advantage of a higher trade in value. Greg Mckinley – Dougherty: Great. It was also $250 in Q1? Is that correct?

That’s correct.

That’s correct. Greg Mckinley – Dougherty: Yes, okay. Just getting back to the TASER Protection Plan for a moment, so you would envision if most transactions occur, such as the one that you are doing with Colorado Springs in my sense is that is how you expect most of these to be handled. On the P&L, where it's just going to see revenue and cost of sales, and then the leasing company in essence is your direct customer and maybe just a slightly lower gross margin rate but you will make up for operating margin just with operating expense leverage on higher volume. Is that how you're thinking about it?

Yes, that's exactly right. Greg Mckinley – Dougherty: Okay. And then you wouldn’t anticipate holding like long term deferred receivables, that you think most of the receivable will be with the leasing company rather than yourself?

Yes. That's the current intent. Obviously we'll have to sort of see how this plays out over time. We've got a strong cash generation in the business but for right now we think we'll let the leasing company do what they're good at and we'll do what we are good at, as long as the economics work. Obviously if that discount the leasing company wants to take becomes (inaudible) if the economics work, we certainly reserve rights to take that paper sell but for right now what we're seeing is that we can do this and have them be responsible, both take a credit risk and also do the sort of recurring billings, everything like that and I think that's the model intend on going forward and I think it should work. We're talking to a number of different leasing companies and that should help us keep it competitive so the rates we sell the paper at remains attractive for us. Greg Mckinley – Dougherty: Any ballpark guidance on what kind of discount you are going to be seeing on those sales?

Not that I can really say. It's going to depend on each deal. A part of it will depend through the inferred interest rate that's based into the lease. Obviously the lower the rate the bigger the discount that well face. So nothing I can really talk to. I think overall like I said, I won't change our operating margins for the business but we still feel that even if we do more of these deals over time we don’t think it will be net accretive to earnings. Greg Mckinley – Dougherty: Okay, thank you. And then on the video business, I wonder if you could just talk a little bit about how you guys are assessing the performance of the business from a higher level perspective in terms of what do we to see out of it in order to continue justifying heavy investment back into it, maybe also give us a framework for what type of annual revenue run rate might be need to be achieved before it's no longer dilutive to operating income. So what kind of milestones do you need to be seeing in the next six to nine months where you say yes, this is something we want to continue to pursue?

Those are great questions. I think one thing we they are going to look at is really just the traction. I think for us if you look at the first quarter results we actually had a net investment in the video business of about $3 million. That's been reduced down to about $2.5 million. Obviously we want to continue to see that work into a short break even and start contributing. So I think that we're going to monitor closely both for the net investment but we are encouraged by the traction we are seeing, we are encouraged by the feedback we're getting from some of the early customers and we still remain convinced that this can be a very interesting and material part of our business. So I think as long as we continue to feel that way we think the investment is warranted. But I think, same as you guys will be doing from an investors perspective, we are going to monitor the performance of that and really want to see this continue to gain traction in both the sales and profitability of that business. Greg Mckinley – Dougherty: Any feel on required revenues in the video segment to sort of have that segment be a breakeven proposition?

It's tough to answer that because it will sort of depend on how quickly we get there. The good thing about the video business, because we're deferring some of the Flex sales, that will actually help in the future because the cost of running sort of the infrastructure, they are sort of a variable part of that. So as those deferred revenues start being recognized that will actually help the profitability. So it's a tough thing to model but certainly I think that sort of the best way to look at it will be to sort of see the trend and be able to sort of predict kind of when we kind of cross that breakeven threshold.

It's tough to answer that because it will sort of depend on how quickly we get there. The good thing about the video business, because we're deferring some of the Flex sales, that will actually help in the future because the cost of running sort of the infrastructure, they are sort of a variable part of that. So as those deferred revenues start being recognized that will actually help the profitability. So it's a tough thing to model but certainly I think that sort of the best way to look at it will be to sort of see the trend and be able to sort of predict kind of when we kind of cross that breakeven threshold.

At this time we have no further questions. Do you have any concluding remarks?

Well just again, thanks everybody. Obviously we really enjoy days like today. You know it's been a long, long road the last several years to get here. I think we've really tuned up the organization. Any shareholders that would like to come take a visit to your company please feel free to contact our IR department by e-mail at ir@taser.com. I would be happy to show you around your company and we look forward to hopefully continued strong performance in the back half of the year and as we move into 2013 and look forward to joining you all again in late October for our next conference call. So thanks and have a great day.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.