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

Executive Overview and Key Strategic Initiatives

Our core mission is to protect life and to protect truth through technologies that make communities safer. We are a market leader in the development and manufacture of advanced conducted electrical weapons ("CEWs") designed for use in law enforcement, federal, military, corrections, private security and personal defense. More recently, to address challenges faced by law enforcement officers subsequent to post-incident, we have developed a fully integrated hardware and software solution to provide our law enforcement customers the capabilities to capture, store, manage, share and analyze video and other digital evidence.

Technological innovation is the foundation for our long-term growth and we intend to maintain our commitment to the research and development of our technology for both new and existing products that further our mission. At the same time we have established industry leading training services to provide our users a comprehensive overview of legal, policy, medical and risk mitigation issues relating to our CEWs and the use of force. We have built a network of distribution channels for selling and marketing our products and services to law enforcement agencies, primarily in North America, with ongoing focus and effort placed on expanding these programs in international, military and other markets. Over 16,000 law enforcement agencies in over 100 countries have made initial purchases of our TASER brand devices for testing or deployment. To date, we do not know of any significant sales of any competing CEW products.

Our key strategies include:

• Increase market penetration in both the United States and international law enforcement markets. In the United States, the focus is a deeper penetration into law enforcement agencies that do not have a CEW on every officer, whereas in the international law enforcement market, there is a very significant portion of the market where officers do not carry CEWs or on-officer video devices. We believe that a large portion of markets that do not currently use our products continue to present an opportunity for future growth, particularly with respect to international law enforcement agencies where there remains a substantial opportunity for more widespread adoption. In recent years, we have seen international markets become increasingly noteworthy and we seek to maintain that trend as we demonstrate the benefits of large-scale adoptions of our CEWs, using countries such as the United Kingdom and Australia as benchmarks of successful programs. We have also decided to make focused investments in France and Brazil as we see considerable opportunity for increased sales in those regions. Given that the sales cycle to sell into a new international market can be as long as 18 to 24 months, it is important that we continue to develop our pipeline in terms of both the number and size of opportunities.

• Focus on the significant opportunity of re-selling into our existing large installed base of law enforcement customers. TASER CEWs are sophisticated electronic devices that are regularly subjected to the harsh environment of law enforcement, security and the military. We design and manufacture our CEWs to be as robust as we can make them. However, these electronic systems are dropped, used in violent confrontations, and exposed to extreme heat, cold, rain and dust, all of which can contribute to general wear and tear. Taking into account all of the above factors and based on our years of field experience, we recommend that the general useful life of a TASER handheld CEW is five years. With many adopters still utilizing CEWs purchased from 2003 to 2008, we believe there exists a significant number of our customers that recognize the need to consider either a model upgrade, or replacement CEWs to refresh the aging profile of the TASER CEWs they have in field use. In addition, the X26P and X2 CEWs have a number of advanced features that we think will be a benefit to our customers.

• Focus on increasing sales of AXON Flex and EVIDENCE.COM. To introduce this new technology to customers, as part of the sales process, we have optional test and evaluation periods of the product on-site with customers. We completed a number of test and evaluation trials of the AXON Flex and EVIDENCE.COM service throughout 2011 and 2012 which began transitioning into sales. We experienced increasing volumes of trial programs in 2012 and believe these trial programs are the best way for our customers to see the powerful capabilities, benefits and compelling value proposition of this technology for themselves and helped to achieve increased revenues from these products in 2012. We anticipate further increases in these trial programs in 2013, ultimately leading to increased sales. In addition, as market acceptance grows, we anticipate fewer and/or shorter trial programs required preceding sales.

• Continued investment in development of innovative new products, which both complement and add to our existing platforms. Our research and development efforts in 2012 were primarily focused on the next generation of CEW hardware, and we continue to devote resources to refine and improve both AXON Flex and EVIDENCE.COM with new and enhanced features. In January 2013 we introduced the next generation of single shot CEW hardware, the TASER X26P CEW.

• Focus on creating incremental sales channels and methods including a municipal leasing program (the TASER Protection Plan), long-term service plans and a dedicated telesales team to drive sales growth.

• Continued focus on operational excellence through leveraging our existing cost structure and human capital to drive increases in profitability.

• Continued application for patents and intellectual property rights, both in the United States and internationally, to protect key technology in our products and further attempt to protect and maintain our competitive position.

• Continued aggressive litigation defense to protect our brand equity. We maintain a team of world class medical experts and internal legal resources to provide an efficient means of defending the Company against product liability claims. We view a continued record of successful litigation defense as a key factor for our long-term growth and success.

Results of Operations

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

                                                                   Year Ended December 31,
                                                 2012                        2011                        2010
Net sales                               $ 114,753        100.0 %    $  90,028        100.0 %     $ 86,930        100.0 %
Cost of products sold and services
delivered                                  47,038         41.0         41,753         46.4         41,563         47.8
Excess inventory charges                      -            -            3,746          4.2            -            -

Gross margin                               67,715         59.0         44,529         49.5         45,367         52.2

Operating expenses:
Sales, general and administrative          39,086         34.1         38,000         42.2         39,022         44.9
Research and development                    8,139          7.1          9,989         11.1         11,412         13.1
Litigation judgment                        (2,200 )       (1.9 )        3,301          3.7            -            -
Loss on impairment                            -            -            1,354          1.5            -            -
Loss on write down / disposal
of property and equipment, net                161          0.1          2,800          3.1             73          0.1

Total operating expenses                   45,186         39.4         55,445         61.6         50,507         58.1

Income (loss) from operations              22,529         19.6        (10,916 )      (12.1 )       (5,140 )       (5.9 )
Interest and other income, net                 83          0.1          1,287          1.4             26          -

Income (loss) before provision for
income taxes                               22,611         19.7         (9,629 )      (10.7 )       (5,114 )       (5.9 )
Provision (benefit) for income taxes        7,874          6.9         (2,589 )       (2.9 )         (729 )       (0.8 )

Net income (loss)                       $  14,738         12.8 %    $  (7,040 )       (7.8 )%    $ (4,384 )       (5.0 )%

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

                                         Year Ended December 31,
                                      2012           2011       2010
                   United States          81 %          80 %       79 %
                   Other Countries        19            20         21

                   Total                 100 %         100 %      100 %

The Company's operations are comprised of two reportable segments: the sale of CEWs, accessories and other products and services (the "CEW segment"); and the Video business, which includes the TASER Cam, AXON Video products and EVIDENCE.COM (the "Video segment"). The Company includes only revenues and costs directly attributable to the Video segment in that segment. Included in Video segment costs are: costs of sales for both products and services, selling expense for the Video segment sales team, Video segment product management expenses, Video segment trade shows and related expenses, and research and development for products included in the Video segment. All other costs are included in the CEW segment.

Net Sales

Net sales by product line were as follows for the years ended December 31, 2012
and 2011 (dollars in thousands):



                                   Year Ended December 31,                   Dollar       Percent
                               2012                       2011               Change        Change
 CEW segment:
 TASER X26             $  35,950        31.3 %    $ 37,278        41.4 %    $ (1,328 )        (3.6 )%
 Single Cartridges        32,811        28.6        25,353        28.2         7,458          29.4
 TASER X2                 25,841        22.5         8,110         9.0        17,731         218.6
 TASER C2                  3,095         2.7         3,253         3.6          (158 )        (4.9 )
 M26                       1,233         1.1         3,104         3.4        (1,871 )       (60.3 )
 Extended Warranties       3,589         3.1         3,237         3.6           352          10.9
 TASER X3                    283          .2           326          .4           (43 )       (13.2 )
 XREP                        301          .3           387          .4           (86 )       (22.2 )
 Other                     5,952         5.2         5,627         6.3           325           5.8

 CEW segment             109,055        95.0        86,675        96.3        22,380          25.8

 Video segment:
 TASER Cam                 3,055         2.7         2,222         2.5           833          37.5
 AXON/EVIDENCE.com         2,453         2.1           771         0.9         1,682         218.2
 Other                       190          .2           360          .4          (170 )       (47.2 )

 Video segment             5,698         5.0         3,353         3.7         2,345          69.9

 Total net sales       $ 114,753       100.0 %    $ 90,028       100.0 %    $ 24,725          27.5

Net sales were $114.8 million and $90.0 million for the years ended December 31, 2012 and 2011, respectively, an increase of $24.7 million or 27.5%. Net sales for the CEW segment were $109.1 million and $86.7 million for the years ended December 31, 2012 and 2011, respectively, an increase of $22.4 million or 25.8%. Net sales for the Video segment were $5.7 million and $3.4 million for the years ended December 31, 2012 and 2011, respectively, an increase of $2.3 million or 69.9%.

The increase in net sales for 2012 compared to 2011 in the CEW segment was primarily driven by growing demand as well as the continuing upgrade cycle of agencies to the TASER X2 from legacy versions of our CEWs. In the Video segment, the increase in net sales was driven by the continued adoption of the AXON Flex on-officer recording system and EVIDENCE.COM application in the law enforcement markets. The Company also adopted new selling processes to reach a broader law enforcement agency market than in the past through the introduction of a municipal leasing program, the TASER Protection Plan, as well as a dedicated telesales team. In our first full year sales cycle of the AXON Flex camera system in 2012, we closed the year with approximately $3.8 million in bookings, about 44.1% of which occurred in the fourth quarter of 2012.

Net sales by product line were as follows for the years ended December 31, 2011 and 2010 (dollars in thousands):

                                   Year Ended December 31,                   Dollar       Percent
                                2011                      2010               Change        Change
  CEW segment:
  TASER X26             $ 37,278        41.4 %    $ 41,290        47.5 %    $ (4,012 )        (9.7 )%
  Single Cartridges       25,353        28.2        21,979        25.3         3,374          15.4
  TASER X2                 8,110         9.0           -             *         8,110             *
  TASER C2                 3,253         3.6         3,779         4.3          (526 )       (13.9 )
  M26                      3,104         3.4         2,686         3.1           418          15.6
  Extended Warranties      3,237         3.6         3,167         3.6            70           2.2
  TASER X3                   326          .4         2,305         2.7        (1,979 )       (85.9 )
  XREP                       387          .4         1,306         1.5          (919 )       (70.4 )
  Other                    5,627         6.3         5,878         6.8          (251 )        (4.3 )

  CEW segment             86,675        96.3        82,390        94.8         4,285           5.2

  Video segment:
  TASER Cam                2,222         2.5         4,026         4.6        (1,804 )       (44.8 )
  AXON/EVIDENCE.com          771         0.9           307          .4           464         151.1
  Other                      360          .4           207          .2           153          73.9

  Video segment            3,353         3.7         4,540         5.2        (1,187 )       (26.1 )

  Total net sales       $ 90,028       100.0 %    $ 86,930       100.0 %    $  3,098           3.6

* not meaningful

Net sales were $90.0 million and $86.9 million for the years ended December 31, 2011 and 2010, respectively, an increase of $3.1 million or 3.6%. Net sales for the CEW segment were $86.7 million and $82.4 million for the years ended December 31, 2011 and 2010, respectively, an increase of $4.3 million or 5.2%. Net sales for the Video segment were $3.4 million and $4.5 million for the years ended December 31, 2011 and 2010, respectively, a decrease of $1.2 million or 26.1%.

The primary factors affecting our increased net sales for 2011 compared to 2010 were an increase in sales of single cartridges of $3.4 million, or 15.4%, and the contribution of $8.1 million of TASER X2 sales. Domestically, the launch of the TASER X2 partially replaced demand for other products within our CEW segment. Offsetting these increases were decreased sales of our X26, X3, XREP and C2 CEW products by a combined $7.4 million, or 15.3%. Our Video segment was adversely affected by declining sales of the TASER Cam of $1.8 million, or 44.8%, reflecting a large international order in 2010 that did not occur in 2011.

Cost of Products Sold and Services Delivered



                                               Year Ended December 31,                                Year Ended December 31,
                                                              Dollar       Percent                                   Dollar       Percent
                                    2012          2011        Change        Change         2011          2010        Change        Change
CEW segment:
Cost of products sold             $ 39,350      $ 34,213      $ 5,137          15.0 %    $ 34,213      $ 35,019      $  (806 )        (2.3 )%

Cost as % of sales                    36.1 %        39.5 %                                   39.5 %        42.5 %
Video segment:
Cost of products sold                3,773         2,693        1,080          40.1         2,693         3,396         (703 )       (20.7 )
Cost of services delivered           3,915         4,847         (932 )       (19.2 )       4,847         3,148        1,699          54.0

Total cost of products sold and
services delivered                   7,688         7,540          148           2.0         7,540         6,544          996          15.2

Cost as % of sales                   134.9 %       224.9 %                                  224.9 %       144.1 %
Total cost of products sold and
services delivered                $ 47,038      $ 41,753      $ 5,285          12.7      $ 41,753      $ 41,563      $   190           0.5

Cost as % of sales                    41.0 %        46.4 %                                   46.4 %        47.8 %

Cost of products sold and services delivered, before excess inventory charges in 2011, was $47.0 million and $41.8 million for the years ended December 31, 2012 and 2011, respectively, an increase of $5.3 million or 12.7%. As a percentage of net sales, cost of products sold and services delivered decreased to 41.0% in 2012 from 46.4% in 2011.

Within the CEW segment, cost of products sold increased $5.1 million in 2012 from 2011, but decreased as a percent of sales to 36.1% from 39.5%, respectively. The net decrease in cost of products sold and services delivered as a percent of sales is driven by several factors including: (i) a more favorable product sales mix with a further increased contribution by the X2 CEW, replacing lower contribution margin CEWs such as the X26, Advanced and XREP.;
(ii) improved leverage on fixed manufacturing costs resulting from a 25.8% overall increase in sales in the CEW segment; and (iii) increased average selling price, without a corresponding increase in cost of products sold, in those states where the Company began selling direct. These efficiencies were partially offset by the continuation of the upgrade program for the TASER X2 CEW. Also, 2011 had a $3.7 million charge for excess inventory which did not reoccur in 2012. This provided customers purchasing the TASER X2 with a $160 to $300 trade-in credit, depending on the quarter purchased, to replace any existing CEW. This offer generated $3.5 million of trade-in credits during the year ended December 31, 2012, compared to $2.1 million of trade-in credits in the second, third and fourth quarters of 2011.

In the Video segment, cost of products sold and delivered increased $0.2 million from $7.5 million to $7.7 million and as a percent of sales decreased to 134.9% for the year ended December 31, 2012, as compared to 224.9% in the prior year. Within this segment, the cost of products sold decreased as a percentage of sales due to the increased leverage on fixed manufacturing costs resulting from the 69.9% overall increase in sales as noted above. In 2012, the cost of services delivered was $3.9 million compared to $4.8 million in 2011, a reduction of $0.9 million or 19.2%. This decrease is due to the Company's decision to discontinue operations of its data center in favor of moving the data storage piece of the video business to a third party provider. This change reduced total operating and software maintenance costs included in cost of services delivered.

Cost of products sold and services delivered, before excess inventory charges in 2011, were $41.8 million and $41.6 million for the years ended December 31, 2011 and 2010, respectively, an increase of $0.2 million or 0.5%. As a percentage of net sales, cost of products sold and services delivered decreased to 46.4% in 2011 compared to 47.8% in 2010. The net decrease in costs as a percent of sales is driven by a combination of offsetting factors including: (i) manufacturing costs as a percentage of sales decreased 340 basis points, attributable to a more favorable market segment mix with higher margin international sales; (ii) a more favorable product sales mix with a larger contribution to net sales from higher margin products, including the newly launched TASER X2, replacing products such as the TASER X3 and XREP, which had lower margins and initial production yields; (iii) improved production efficiency resulting from reductions in temporary labor and overtime, as well as a reduction in rework effort; (iv) improved leverage on indirect manufacturing costs following the 3.6% increase in consolidated sales; and (v) scrap charges were reduced, as were warranty provision charges resulting from increased focus on quality initiatives, which reduced product returns. Offsetting the reduction in manufacturing costs as a percentage of net sales were $4.8 million of EVIDENCE.COM data center operating and software maintenance costs, which relate to the Video segment and were included in cost of products sold in 2011, compared to $3.1 million in the prior year following the commercial availability of the service, representing a 170 basis point increase in costs as a percentage of sales. A significant portion of these costs were included as part of research and development in 2010. In addition, the Company offered an upgrade program, which provides customers purchasing a new TASER X2 kit with a $300 trade-in credit to replace any existing CEW. This offer generated $2.1 million of trade-in credits during the second, third and fourth quarters of 2011, which reduced the average selling price on TASER X2 sales and consequently reducing gross margin.

Excess Inventory Charges

Excess inventory charges specific to two of our product lines were $3.7 million for 2011. The success of the new TASER X2 in 2011 led the Company to conclude that it would not sell through its then current level of TASER X3 inventory, even though the Company would continue to sell and support the TASER X3 product line as part of its CEW Segment. These factors resulted in an excess inventory charge of $1.7 million. Similarly, with the launch of the Company's new AXON Flex system for our Video segment in 2011, the Company concluded it would not sell through existing first generation AXON inventory. These factors resulted in an excess inventory charge of $2.0 million. There were no unusual excess inventory charges in 2012 or 2010.

Gross Margin



                                                Year Ended December 31,                                 Year Ended December 31,
                                                                Dollar       Percent                                    Dollar       Percent
                                     2012          2011         Change       Change          2011          2010         Change        Change
CEW segment                        $ 69,705      $ 50,713      $ 18,992          37.4 %    $ 50,713      $ 47,372      $  3,341           7.1 %
Video segment                        (1,990 )      (6,184 )       4,194          67.8        (6,184 )      (2,005 )      (4,179 )      (208.4 )

Total Company                      $ 67,715      $ 44,529      $ 23,186          52.1      $ 44,529      $ 45,367      $   (838 )        (1.8 )

Gross margin as % of sales             59.0 %        49.5 %                                    49.5 %        52.2 %

Gross margin increased $23.2 million to $67.7 million for 2012 compared to $44.5 million for 2011. The 2011 gross margin includes the excess inventory charge of $3.7 million specific to two of our product lines. Excluding the $3.7 million excess inventory charges, gross margin increased $19.4 million, or 40.3% in 2012 as compared to 2011. As a percentage of net sales, gross margin increased to 59.0% for 2012 compared to 49.5% for 2011. Excluding the excess inventory charges, gross margin as a percentage of sales for 2011 was 53.6%. The increase in gross margin as a percentage of net sales for 2012 is primarily attributable to the excess inventory charge in 2011 as well as the move of the EVIDENCE.COM data center to a third party provider, increased sales of higher margin products and the operational efficiencies as discussed above.

Gross margin decreased $0.8 million to $44.5 million for 2011 compared to $45.4 million for 2010. The 2011 gross margin includes the excess inventory charge specific to our two product lines, which when excluded, would increase gross margin by $3.7 million to $48.3 million compared to 2010. As a percentage of net sales, gross margin decreased to 49.5% for 2011 compared to 52.2% for 2010. The decline in gross margin as a percentage of net sales for 2011 is primarily attributable to the excess inventory charges discussed above. After considering these excess inventory charges, gross margin improved slightly for 2011 compared to 2010, which reflects improved leverage on higher sales levels as well as the factors noted above under the discussion of cost of products sold.

Sales, General and Administrative Expenses

Sales, general and administrative expenses were comprised as follows for 2012
and 2011 (dollars in thousands):


. . .