AXON ENTERPRISE, INC. - Annual Report: 2006 (Form 10-K)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

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

For the fiscal year ended December 31, 2006

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

For the transition period from                      to                     

TASER International, Inc.

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o      Accelerated Filer þ      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of the Common Stock held by non-affiliates of the issuer, based on the last sales price of the issuer’s common stock on June 30, 2006, which is the last business day of the registrant’s most recently completed second fiscal quarter, as reported by NASDAQ, was $449,048,952. The number of shares of the registrants’ common stock outstanding as of March 9, 2007 was 62,054,907.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of registrant’s definitive proxy statement to be prepared and filed with the Securities and Exchange Commission not later than 120 days after December 31, 2006 are incorporated by reference into Part III of this Form 10-K.

 

 

TASER INTERNATIONAL, INC.

ANNUAL REPORT ON FORM 10-K
Year Ended December 31, 2006

TABLE OF CONTENTS

				Page
		PART I
Item 1.		Business			3
Item 1A.		Risk Factors			12
Item 1B.		Unresolved Staff Comments			17
Item 2.		Properties			17
Item 3.		Legal Proceedings			17
Item 4.		Submission of Matters to a Vote of Security Holders			17
		PART II
Item 5.		Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities			18
Item 6.		Selected Financial Data			19
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			29
Item 8.		Financial Statements and Supplementary Data			30
Item 9.		Changes In and Disagreements with Accountants on Accounting and Financial Disclosure			60
Item 9A.		Controls and Procedures			60
Item 9B.		Other Information			61
		PART III
Item 10.		Directors, Executive Officers and Corporate Governance			62
Item 11.		Executive Compensation			62
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			62
Item 13.		Certain Relationships and Related Transactions and Director Independence			63
Item 14.		Principal Accountant Fees and Services			63
		PART IV
Item 15.		Exhibits and Financial Statement Schedules			63
		Signatures			65
EX-10.16
EX-23.1
EX-23.2
EX-31.1
EX-31.2
EX-32

PART I

     The statements contained in this report that are not historical are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, intentions or strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things:

	(1)		expected revenue and earnings growth;
	(2)		estimates regarding the size of our target markets;
	(3)		our ability to successfully penetrate the law enforcement market;
	(4)		growth expectations for existing accounts;
	(5)		our ability to expand product sales to the private security, military, corrections, airline, and private citizen self-defense markets;
	(6)		expansion of product capability;
	(7)		new product introductions;
	(8)		product safety;
	(9)		our target business model;
	(10)		the automation of our production process;
	(11)		our insulation from competition;
	(12)		our focus on future development initiatives;
	(13)		our expectation that research and development costs will continue to increase; and
	(14)		our litigation strategy and the importance of recent favorable verdicts.

     These statements are qualified by important factors that could cause our actual results to differ materially from those reflected by the forward-looking statements. Such factors include but are not limited to: (1) market acceptance of our products; (2) our ability to establish and expand direct and indirect distribution channels; (3) our ability to attract and retain the endorsement of key opinion-leaders in the law enforcement community; (4) the level of product technology and price competition for our products; (5) the degree and rate of growth of the markets in which we compete and the accompanying demand for our products; (6) risks associated with rapid technological change and new product introductions; (7) competition; (8) litigation including lawsuits resulting from alleged product related injuries and death; (9) negative media publicity concerning our products; (10) TASER device tests and reports; (11) product quality; (12) implementation of manufacturing automation; (13) potential fluctuations in our quarterly operating results; (14) financial and budgetary constraints of current and prospective customers; (15) order delays; (16) dependence upon sole and limited source suppliers; (17) negative reports concerning TASER device uses; (18) fluctuations in component pricing; (19) government regulations and inquiries; (20) dependence upon key employees and our ability to retain employees; (21) execution and implementation risks of new technology; (22) aligning manufacturing production with sales demand; (23) medical and safety studies; (24) the timing and outcome of the final court approval of our shareholder litigation settlement; (25) the outcome of any current or future tax audit of us, and (26) other factors detailed in our filings with the Securities and Exchange Commission, including, without limitation, those factors detailed in ITEM 1A. of this annual report entitled “Risk Factors.” The risks included in the foregoing list are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. New risk factors emerge from time to time, and it is not possible for management to predict all such factors, nor can it assess the impact of all such risk factors or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligations to update or revise forward looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to projections over time.

     We own the following trademarks: TASER^® and AIR TASER^tm, TASER-Wave^tm, T-Wave^tm, AUTO TASER^tm, ADVANCED TASER^® , Shaped Pulse Technology^tm, X-Rail^tm, TASER M18^tm, TASER M26^tm, TASER X26^tm, TASER Cam^tm, TASER XREP^tm, TASER C2^tm, TASER X26c^tm and AFID^tm. Each other trademark, trade name or service mark appearing in this report belongs to its respective holder.

Item 1.		Business

Overview

     TASER International, Inc. (the “Company” or “TASER” or “we” or “us”) is a global leader in the development and manufacture of advanced electronic control devices designed for use in law enforcement, corrections, private security and personal defense. Since our founding in 1993, we have remained committed to providing solutions to violent confrontation by developing products that enable people to protect themselves. To that end, we have focused our efforts on the continuous development of our technology for both new and existing products as well as industry leading training services. We have done this while building distribution channels for marketing our products and services to law enforcement agencies, primarily in North America with increasing efforts on expanding these programs in international markets.

Products

Electronic Control Devices

     We make electronic control devices for two main types of target markets; the law enforcement, military, and corrections market, and the consumer market.

     For the law enforcement, military and corrections market we manufacture two product lines. The first is the ADVANCED TASER M26. We launched the ADVANCED TASER M26 in November 1999. The ADVANCED TASER M26 product line consists of the ADVANCED TASER M26, various cartridges (described below), rechargeable batteries, a battery charging system, data download software and equipment, extended warranties, and a number of holstering options and accessories.

     The second product manufactured for the law enforcement, military and corrections market is the TASER X26 with Shaped Pulse Technology. We introduced the TASER X26 in 2003. Shaped Pulse technology is a refined energy pulse that concentrates a small portion of energy to first penetrate any barriers, while the majority of the energy flows into the target freely after the barrier has been penetrated. The TASER X26 product line consists of the TASER X26, various cartridges, TASER Cam, a proprietary battery system, a digital power magazine, download software and equipment, extended warranties, and a number of holstering options and accessories.

     The ADVANCED TASER device was our best selling item in 2003. In 2004, the TASER X26 became our best selling product and remained as such during 2005 and 2006. Our law enforcement distributors sell the ADVANCED TASER M26 to police and corrections agencies for $399. The TASER X26 is sold to police, military, and corrections agencies for $799. Retail cartridge prices range from $16 per unit for law enforcement to $30 per unit for private citizen purchases.

     For the consumer market we manufacture the ADVANCED TASER M18, ADVANCED TASER M18L, and TASER X26^c devices. The AIR TASER was developed in 1994 and did not look like a gun so that we could focus it for the consumer electronics market. In 2003, we discontinued the manufacture of this model after building all available units from raw material inventory. We are holding remaining units to satisfy any warranty claims and are continuing to sell off available accessories into the private citizen market. The ADVANCED TASER M18 and ADVANCED TASER M18L are designed after the law enforcement ADVANCED TASER M26 version; however, the electrical pulse rate is lower. The ADVANCED TASER M18 and ADVANCED TASER M18L are identical except that the ADVANCED TASER M18L has an integrated laser-aiming device. The X26^c was developed in conjunction with the law enforcement TASER X26 version; however, its effect can last longer allowing the owner more time to escape danger. These three product lines consist of the units themselves, air cartridges, batteries and digital power magazines, and a number of holstering options and accessories.

     Our most inexpensive private citizen product is the entry-level ADVANCED TASER M18 product with a retail price of $399.95. Our high-end private citizen model, the TASER X26 ^C retails for $995.95. The kit includes the X26 ^C device, six cartridges, a holster and a coupon which can be redeemed for a one hour one-on-one training session with a certified instructor in the citizen’s home.

Cartridges and Accessories

     All of our TASER devices are capable of firing various cartridges from our cartridge product line. The cartridge is connected to the TASER device before firing. It contains two small probes that are propelled by compressed nitrogen when the trigger of the TASER device is pulled. After a cartridge is fired, the probes discharged from our cartridges remain connected to the device by insulated wires that transmit electrical pulses into the target. These electrical pulses are transmitted through the body’s nerves in a manner similar to the transmission of signals used by the nervous system to communicate within the body. The pulses electrical signals temporarily stimulate the body’s nerve fibers causing muscles to contract and release with each pulse, impairing the subjects’ ability to control their bodies or perform coordinated actions. The TASER device’s electrical output can penetrate up to two inches of clothing. The initial effect lasts 5 seconds for the law enforcement, military and corrections models and up to ten seconds for the consumer market models. This effect can be extended, if necessary, by the operator.

     We manufacture five cartridge types; a 15’ cartridge, a 21’ cartridge, a 25’ XP cartridge, a 35’ cartridge, and a 21’ training cartridge. The 15’ cartridge is capable of firing a distance of 15’ and is sold primarily to the law enforcement market for training and the consumer market for use in the ADVANCED TASER M18, ADVANCED TASER M18L, and TASER X26^c devices. The 21’, 25’ XP, 35’, and 21’ training cartridge are sold only to the law enforcement, military, and corrections market. The 25’ XP cartridge is different from the 21’ cartridge in that it has a longer range and its probes are longer and heavier, which allows it to penetrate a thicker clothing barrier. The training cartridge contains non-conductive wiring, which allows law enforcement, military, and corrections trainers to use the cartridge during training role-playing scenarios.

     All of our cartridges, with the exception of the training cartridge, contain numerous colored, confetti-like tags bearing the cartridge’s serial number. These tags, referred to as Anti-Felon Identification tags, or AFIDs, are scattered when one of our cartridges is fired. We require sellers of our products to participate in the AFID program by registering buyers of our cartridges. In many cases, we can use AFIDs to identify the registered owner of cartridges fired.

     In 2006, we launched an accessory to the X26 called the TASER Cam. The TASER Cam is a video recording device that captures both video and audio of potential and actual TASER use incidents. The device captures video and audio before, during and after a TASER deployment, which provides law enforcement with a greater level of accountability to support their use of TASER devices against a resistant subject. The TASER Cam is capable of recording in zero light conditions through the use of an infrared illuminator. A non audio version of the device is also available for agencies operating in states where legislation prohibits the use of audio recordings.

     In 2004, we introduced an accessory to the X26 that allows the X26 electronic control device to be attached to military and law enforcement rifles via a Picatinny rail giving the user lethal and non-lethal options on the same weapon.

Product Warranties

     We offer a lifetime warranty on the AIR TASER. Under this warranty, we will replace any AIR TASER that fails to operate properly for a $25 fee. The AIR TASER and the X26^c are designed to disable an attacker for up to 30 seconds. We encourage private citizens to leave the units and flee after firing them. As a result, we also provide free replacement units to private citizens who follow this suggested procedure. To qualify for the replacement unit, users must file a police report that describes the incident and confirms the use of the AIR TASER or the X26^c.

     We offer a one year limited warranty on all of the ADVANCED TASER devices and TASER X26 ^c devices. After the warranty expires, if the device fails to operate properly for any reason, we will replace the ADVANCED TASER device for a fee of $75, and the TASER X26 at a discounted price depending on when the product was placed in service. These fees are intended to cover the handling and repair costs and include a profit. This policy is attractive to our law enforcement, military, and corrections agency customers. In particular, it avoids disputes regarding the source or cause of any defect.

Markets

Law Enforcement and Corrections

     Federal, state and local law enforcement agencies in the United States currently represent the primary target market for our ADVANCED TASER device and TASER X26 products. In the law enforcement market, over 9,800 law enforcement agencies have made initial purchases of our TASER brand devices for testing or deployment. In addition, approximately 3,300 police departments have purchased or are in the process of purchasing one TASER device to issue to each of their on duty patrol officers.

     We believe our TASER products could prove equally suitable for use in correctional facilities and we have begun to see TASER devices deployed in correctional facilities such as those operated by the Los Angeles Custody Division; Maricopa County, Arizona Sheriff and the State of Wisconsin.

Military Forces, both United States and Foreign Allies

     During 2006, TASER devices continued to be deployed in support of key strategic operations in locations around the world. In total, we have shipped military users approximately 8,000 TASER devices through the end of 2006. Additionally, in 2006 we began a focus initiative on supporting our military customers. We hired the former head of the Military Joint Non Lethal Weapons Directorate as our Vice President of Government and Military Programs. Additionally, we formed a Senior Executive Advisory Group (SEAG) comprised of a team of professionals with extensive military, homeland defense and law enforcement experience with the purpose of advising on business models in support of military users. With this new focus, a new business group has been formed (Government and Military Programs) with the focus on supporting military use of for our existing hardware as well as developing increased technology development through contracted support.

     In January 2006, we completed phase four of an Office of Naval Research (ONR) grant to develop the wireless eXtended Range Electromuscular Projectile (XREP). The intention of the grant was to develop the technologies required to demonstrate a 12-guage wireless Human Electro-Muscular Incapacitation (HEMI) projectile at a Technology Readiness Level (TRL) of 6. The grant was concluded with the delivery and subsequent discharge of 25 projectiles. All contracted activities including the final report were completed in the first quarter of 2006. We are currently in discussions with our military customers on the scope of the next contracted activities. Additionally, we believe the maturity of the XREP has reached a level that transition to a product having broad market appeal is close enough to justify continued internal development. For this reason, we are continuing the development of the XREP from the demonstrated TRL 6 level in 2006 by focusing on design for manufacturability. We anticipate that a production projectile will be available for sale in 2007.

     Our work on the firm fixed price contract awarded to us by the U.S. Army ARDEC, as well as the final report, was completed in the first quarter of 2006 for the amount of $65,000. This effort was well received by our Army customer and discussions are in process for the scope and direction of follow-on activities.

     Late in 2006, we announced a new area denial technology based on improved sensing, awareness, and networking capabilities called the TASER Remote Area Denial (T-RAD). A sophisticated networking and user interface capability to integrate and control T-RAD devices was also introduced as the TASERNET. We presented these concepts to military and law enforcement customers for comment and we received positive feedback. For this reason, we plan to continue development of the T-RAD/TASERNET capabilities in 2007.

Private Security Firms and Guard Services

     We are still in the early stage of pursuing additional opportunities for sales of the TASER devices in private security markets, and have made only limited sales to date. However, a report of the Security Industry Association for 1999-2000 estimated that there were over 1.7 million privately employed security guards or personnel in the United States. Private security guards represent a broad range of individuals, including bodyguards, commercial and government building security guards, commercial money carrier employees and many others.

Private Citizen/Personal Protection

     Prior to the introduction of the ADVANCED TASER device in late 1999, the majority of our annual revenue was derived from private citizen sales. However, since the introduction of the ADVANCED TASER device in 2000, our annual revenue from private citizen sales has represented a small percentage of our total business. We introduced a private citizen version of our X26 device (X26^C) in 2004 and agreed to a distribution agreement with one of our distributors to distribute the X26^C to federal firearms licensed dealers (FFL) for public sale in December 2004. We believe private citizen sales could become a more meaningful portion of our revenues going forward depending on the success of our newly developed TASERC2 personal protector product (see Research and Development section below), the X26 ^C product, and legislation relating to the purchase and use of our products by private citizens in each state.

Sales and Marketing

     Law enforcement, military and corrections agencies represent our primary target markets. In each of these markets, the decision to purchase TASER devices is normally made by a group of people, including the agency head, the agency head’s training staff, and weapons experts. Depending on the size and cost of the device deployment and local procurement rules and customs, the decision may involve political decision-makers such as city council members or the federal government. The decision-making process can take as little as a few weeks or as long as several years. Although we have focused on three primary markets, we have been able to expand our customer base to thousands of end users within these markets. We currently sell our products to over 9,800 law enforcement agencies.

Since the introduction of the ADVANCED TASER device in 1999, we have used several types of media to communicate the benefits of acquiring and deploying our products. These campaigns have included the development of personalized CD/DVD packages geared toward law enforcement leaders in the community, advertisements in law enforcement publications, and the use of more than 1,600 training classes conducted around the world. We also target key regional and national law enforcement trade shows where we can demonstrate the TASER devices to leading departments. In 2006, we attended and exhibited at 79 regional and national law enforcement trade shows. In 2006, we held our seventh annual U.S. Tactical Conference for the trained master instructors, and law enforcement training officers. We also conducted our fifth and largest European Tactical Conference to reach customers in more than 20 countries, including the United Kingdom, Germany, France, Spain, Austria, Switzerland, Czech Republic, and Finland, who have either expressed an interest in, or who are already in the process of testing or deploying TASER devices. The focus of these conferences in 2006 was to train the officers in the use of the TASER X26.

     We plan to continue investment in the area of law enforcement trade shows and conferences in 2007, as it provides us the ability to market our products to our target audience. We believe these types of activities accelerate penetration of our TASER product lines in each market, which should lead to increased visibility in both the private security and private citizen markets and reinforce the value of non-lethal devices for self-defense.

United States Distribution

     With the exception of several accounts to which we sell directly, the vast majority of our law enforcement agency sales in the Unites States transact through our network of 28 law enforcement distributors. In addition, we have one military and government contracting distributor. These distributors were selected based upon their reputation within their respective industries, their contacts, and their distribution network. Our regional managers work closely with the distributors in their territory to inform and educate the law enforcement communities. We continue to monitor our law enforcement distributors closely to help ensure that our service standards are achieved. We also reserve the right to take any large agency order directly to secure the agency’s account balance with us.

     Sales in the private citizen market are made through web sales and through 25 commercial distributors. In December 2004, we entered into a distribution agreement with one of our existing law enforcement distributors to distribute the X26^C to federal firearms licensed (FFL) dealers for public sale. As of December 31, 2006, this distributor had signed dealer agreements with 400 FFL dealers who are purchasing and reselling the X26^c to citizens in the United States. In 2005, we tested various citizen advertisements in 20 national monthly magazines targeting citizens from various demographics as well as attending citizen tradeshows. We held four press conferences and media events in targeted large cities to further educate the public of the availability for citizens to purchase X26^c products for private use. We also contracted an outside company call center to assist with a large volume of citizen calls generated from these advertisements, trade shows and press/media conferences. In 2006, we continued to sell through web sales and our established commercial distributors.

     Due to the confidential nature of our relationships established with the major U.S. airlines, we intend to transact directly all future sales of our products to the commercial airline industry. These direct sales will enable us to assist the airlines in the development of training and tactical applications, and to provide on-site equipment maintenance services as they are required.

International Distribution

     We market and distribute our products to foreign markets through a network of distributors. For geographical and cultural reasons, our distributors usually have a territory defined by their country’s borders. These distributors market both our law enforcement, military, and corrections products, and our consumer products where allowed by law.

     Our distributors work with their local police, military, and corrections agencies in the same manner as our domestic market distributors. They perform demonstrations, attend industry tradeshows, maintain country specific web sites, engage in print advertising, and arrange training classes.

     In 2006, we concentrated our international marketing on the countries that were furthest along in the testing and purchasing process. These countries included the United Kingdom, France, Singapore, and South Korea. The United Kingdom completed a three year study of TASER brand conducted energy devices during 2004. Their study ended in September 2004 with the Home Office Secretary, David Blunkett, approving their use by all firearms officers. During 2005, an addendum to the initial study was released, which led to the approval of the TASER X26.

     In 2007, we are planning to continue our focus on territories that are moving in the direction of non-lethal weaponry. We also plan to bolster our international presence by expanding our focus to a larger number of countries.

     We shipped products to approximately 35 countries during fiscal 2006. As a percentage of total sales, sales outside the U.S. increased slightly to approximately 14% in 2006 from 13% in 2005. Sales outside the U.S were 4% of total net sales in 2004. Our international sales in 2006 included the shipment of two large orders to France consisting of approximately 2,000 units. Reference is made to Note 2(o) in the accompanying financial statements in Part II, Item 8 of this Form 10-K for further information concerning our sales and long lived assets by geographic region.

Training Programs

     Most law enforcement, military and corrections agencies will not purchase new weapons until a training program is in place to certify all officers in their proper use. We offer a sixteen-hour class that certifies law enforcement, military, corrections and security agency trainers as instructors in the use of the TASER devices. As of December 31, 2006, approximately 26,000 law enforcement officers around the world have been trained and certified as instructors in the proper use of TASER brand devices. This includes approximately 23,550 officers in the United States and 2,450 in other countries.

     Currently, 650 of our certified instructors have undergone further training and became certified as master instructors. We authorize these individuals to train other law enforcement and corrections agency trainers, not just end-users within their own organization. Military personnel are trained by our Chief Master Instructor. Approximately 150 of our master instructors have agreed to conduct TASER device training classes on a regular basis. We provide logistical support for the training classes. The master instructors are independent professional trainers, serve as local area TASER experts, and assist in conducting TASER demonstrations at other police departments within regions. On January 1, 2001, we implemented a $195 charge for each training attendee, which was raised to $225 effective January 1, 2005. We pay master instructors a per-session training fee for each session they conduct. We conducted over 325 training courses in 2006 and, as of December 31, 2006, we have conducted a cumulative 1,644 training courses during which we have trained more than 26,000 individuals in the use of TASER products. We have also designed a training course for private citizen customers. Customers who purchase an X26^C device receive a certificate good for a one hour, one-on-one training session with an X26^C certified instructor. We have over 400 instructors certified to give the X26^C training.

     During 2002, we created a Training Advisory Board to coordinate the growing demands of our training program. This board annually reviews the qualifications of the master instructors, and provides retraining or certification as required. In addition, the Training Board oversees the trainers and curriculum to ensure new tactics and policies are properly communicated and implemented, and gives input into new product development. We created the new position of Director of Training during 2004, which was upgraded to Vice President of Training in 2006 and this person also serves on our Training Board. In order to gain new perspectives on the training, we added five new members to our training board in late 2004. The new members replaced four training board members who rotated off the training board. In 2004, we also created the position of Senior Master Instructor. Eight experienced Master Instructors were promoted to this position based on their exemplary performance as Master Instructors. Their primary duties are to perform quality control checks on Master Instructors during an instructor course and to help instruct at the Master Instructor School.

Manufacturing

     We conduct manufacturing and final assembly operations at our headquarters in Scottsdale, Arizona and we own substantially all of the equipment required to manufacture and assemble our finished products, as well as all molds, schematics, and prototypes utilized by our vendors in the production of required raw materials and sub-assemblies. With our current work force, working only one shift, we are able to produce approximately 80,000 cartridges per month, and more than 7,500 TASER devices per month. We can expand our production capabilities by adding additional personnel and incorporating additional shifts with negligible new investment in tooling and equipment.

     In 2004, we implemented our first automated production line to increase the throughput of the cartridge assemblies. We augmented this by adding our first semi-robotic line in late 2005 for our X26 High Voltage subassembly process. We intend to continue automating labor intensive functions in our production process as well as look to automation equipment for new product lines being introduced in the future.

     We currently purchase finished circuit boards and injection-molded plastic components from suppliers located in the United States. Although we currently obtain plastic components from a single supplier, we own the injection molded component tooling used in their production. As a result, we believe we could obtain alternative suppliers without incurring significant production delays. We also purchase small, machined parts from a vendor overseas, custom cartridge assemblies from a proprietary vendor in the United States, and electronic components from a variety of foreign and domestic distributors. We believe there are readily available alternative suppliers in most cases who can consistently meet our needs for these components. We acquire most of our components on a purchase order basis and do not have long-term contracts with suppliers. We believe that our relations with our suppliers are good.

Competition

Law Enforcement and Corrections Market

     The primary competitive factors in the law enforcement and corrections market include a weapon’s accuracy, effectiveness, safety, cost and ease of use. During 2004, two new competitors announced that they planned to introduce products that directly compete with the products manufactured and sold by us. The two companies were expected to launch their products during 2005. During 2006, we learned that one of those companies introduced a new two-shot device to compete with the TASER X26. To date, we do not know of any significant sales of any competing products. We believe that our strong relationship with customers, our large installed base of products, and the significant amount of medical and safety testing already performed on our products will provide us with a competitive advantage over these new competitors.

     We also believe the ADVANCED TASER device and TASER X26 device also compete indirectly with a variety of other non-lethal alternatives. These alternatives include, but are not limited to pepper spray and impact weapons sold by companies such as Armor Holdings, Inc., and Pepperball. We believe our TASER brand device’s advanced technology; versatility, effectiveness, and low injury rate enable it to compete effectively against other non-lethal alternatives.

Military Market

     In the military markets, both in the United States and abroad, a wide variety of weapon systems are utilized to accomplish the mission at hand. Conducted energy devices have gained increased acceptance during the last three years as a result of the increased policing roll of military personnel in the conflicts in both Iraq and Afghanistan. There has also been an increased awareness of the use of non-lethal weapons to preserve human intelligence. TASER devices give our armed forces one means to capture or immobilize targets without using lethal force. We are the only supplier providing electronic control devices to these agencies. There is indirect competition from pepper spray and impact weapons sold by companies such as Armor Holdings, Inc., and Pepperball.

Private Citizen Market

     Electronic control devices have gained limited acceptance in the private citizen market for non-lethal weapons. These weapons compete with other non-lethal weapons such as stun guns, batons and clubs, and chemical sprays. The primary competitive factors in the private citizen market include a weapon’s cost, effectiveness, safety and ease of use. The widespread adoption of our TASER devices by prominent law enforcement agencies may help us overcome the historical perception of a lack of private citizen confidence in electronic control devices.

     In the private citizen market, the AIR TASER formerly competed with an electronic control device introduced by Bestex, Inc. in 1996, called the Dual Defense, and indirectly competed with other non-lethal alternatives. In July 2002, we purchased a patent which covers the propulsion system of our air cartridge. Prior to our purchase, the previous owner of the patent had granted licenses to both Bestex and TASER International. However, at the time we purchased the patent, Bestex had not renewed its license, and subsequently lost its right to continue utilizing the patented technology. Therefore, we believe our products will only compete with remaining inventories of the Bestex Dual Defense product produced prior to July 2002. The remaining inventory of Bestex is believed to consist of 11 units.

Regulation

United States Regulation

     The AIR TASER device, ADVANCED TASER device, and TASER X26 device, as well as the cartridges used by these devices, are subject to identical regulations. None of our devices are considered to be a “firearm” by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives. Therefore, no Federal firearms-related regulations apply to the sale and distribution of our devices within the United States. In the 1980’s however, many states introduced regulations restricting the sale and use of stun guns, inexpensive hand-held shock devices. We believe existing stun gun regulations also apply to our devices.

     In 2002 through 2004, we worked with several law enforcement agencies, government agencies and distributors to overturn prior legislation preventing the sale of TASER devices to law enforcement agencies in certain regions of the U.S. These combined efforts were successful in changing the legislation in the states of Hawaii, Massachusetts and Michigan. We consider this to be an important change in regulations. For example, prior to the amendment to the Michigan Penal Code, the possession of a TASER or electronic weapon of any kind in Michigan could result in a felony conviction. Currently, New Jersey is the only remaining state in which TASER technology is prohibited for law enforcement use.

     In many cases, the law enforcement and corrections market is subject to different regulations than the private citizen market. Where different regulations exist, we assume the regulations affecting the private citizen market also apply to the private security markets except as the applicable regulations otherwise specifically provide.

     Based on a review of current regulations, we have determined the following states regulate the sale and use of our device systems:

		Law Enforcement
State		Use		Private citizen Use
Connecticut		Legal		Legal, subject to restrictions
District of Columbia		Legal		Legal, subject to restrictions
Florida		Legal		Legal, subject to restrictions
Hawaii		Legal		Prohibited
Illinois		Legal		Legal, subject to restrictions
Indiana		Legal		Legal, subject to restrictions
Massachusetts		Legal		Prohibited
Michigan		Legal		Prohibited
New Jersey		Prohibited		Prohibited
New York		Legal		Prohibited
North Carolina		Legal		Legal, subject to restrictions
North Dakota		Legal		Legal, subject to restrictions
Rhode Island		Legal		Prohibited
Washington		Legal		Legal, subject to restrictions
Wisconsin		Legal		Prohibited

United States Export Regulation

     Our devices are considered a crime control product by the United States Department of Commerce. Accordingly, the export of our devices is regulated under export administration regulations. As a result, we must obtain export licenses from the Department of Commerce for all shipments to foreign countries other than Canada. Most of our requests for export licenses have been granted, and the need to obtain these licenses has not caused a material delay in our shipments. The need to obtain licenses, however, has limited or impeded our ability to ship to certain foreign markets. Export regulations also prohibit the further shipment of our products from foreign markets in which we hold a valid export license to foreign markets in which we do not hold an export license for the products.

     In addition, in the fall of 2000, the Department of Commerce adopted new regulations restricting the export of technology used in our devices. These regulations apply to both the technology incorporated in our device systems and in the processes used to produce them. The technology export regulations do not apply to production that takes place within the United States, but is applicable to all sub-assemblies and controlled items manufactured outside the United States.

Foreign Regulation

     Foreign regulations, which may affect our devices, are numerous and often unclear. We prefer to work with a distributor who is familiar with the applicable import regulations in each of our foreign markets. Experience with foreign distributors in the past indicates that restrictions may prohibit certain sales of our products in a number of countries. The countries in which we are aware of restrictions for both citizens and law enforcement include: Belgium, Denmark, Hong Kong, Italy, Japan, Malaysia, the Netherlands, Norway, Serbia, and Pakistan.

     Additionally, Australia, Canada, Greece, India, Latvia, Lithuania, South Korea, Sweden, Switzerland and New Zealand permit our products to be sold only to law enforcement and corrections agencies. During 2003, Switzerland completed a review of TASER brand devices, and has approved their use for law enforcement. Although there have been no significant orders from this country, we believe this approval is a milestone in reversing legislation in the international community that previously prohibited the use of TASER brand devices.

     Previously, the United Kingdom was among the countries where TASER technologies were prohibited. However, in January 2003, the British Police announced that the national government would be backing a TASER pilot program for five police forces within the UK. The agencies participating in the trial program of the ADVANCED TASER M26 include: the Northamptonshire Police, Lincolnshire Police, Thames Valley Police, North Wales Police and Metropolitan Police. This decision came after the completion of two years of testing by the Police Scientific Development Branch of the Home Office in England, during which the product was reviewed for operational effectiveness and medical safety. Following a detailed evaluation of a 12-month operational trial of the ADVANCED TASER device, which was carried out by the five police forces, the Home Secretary David Blunkett agreed that firearms officers in forces nationwide can now use the hand-held electrical device as of September 2004. Currently, all 43 police forces in England, Wales and Scotland deploy TASER technology within their firearms teams. To date, there have been several successful outcomes involving the use of TASER devices reported by the police forces deploying them.

TASER device sales to civilians are permitted in Austria, Bahamas, Bulgaria, Costa Rica, Croatia, Czech Republic, Ecuador, France, Germany, Mexico, Poland, Romania, Slovenia, and South Africa.

Intellectual Property

     We protect our intellectual property with U.S. and foreign patents and trademarks. Our patents and pending patent applications relate to technology used by us in connection with our products. We also rely on international treaties and organizations and foreign laws to protect our intellectual property. As of February 28, 2007, we hold 18 United States patents and 7 international patents and also have numerous patents and trademarks pending. Our patents expire at varying dates ranging between 2010 and 2024.Our earliest expiring United States patent generally covers projectile propellant devices having a container of compressed gas in place of gunpowder as a propellant. We use this technology in our cartridges. This patent expires in 2010. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as: the commercial significance of our operations and our competitors’ operations in particular countries and regions; our strategic technology or product directions in different countries; and the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions.

     Confidentiality agreements are used with employees, consultants and key suppliers to help ensure the confidentiality of our trade secrets.

     TASER has the exclusive rights to the internet domain names ‘taser.com’ and “taser.eu.”

Research and Development

     Our research and development initiatives are conducted in two separate categories. The first is internally funded research and development, and the second is research externally funded by customers having requirements for expanded capabilities. Both categories focus on next generation technology, yet are differentiated by the anticipated breadth of market opportunity, the time to project completion and accounting treatment. Internally funded research has been primarily focused on improvements to existing TASER products, or the development of new applications for TASER technology that we believe generally will have broad market appeal. The work completed in 2006 for the Office of Naval Research and the U.S. Army ARDEC has been focused on developing capabilities to support military combat or policing activities. These projects generally represent product development which are long-term in nature and outside resources team member companies or expert consulting.

     Research and Development initiatives include bio-medical research and electrical and mechanical engineering. We expect that future development projects will focus on reducing the size, extending the range, and improving the functionality of our products.

     Our investment in internally funded research totaled approximately $2.7 million, $1.6 million and $824,000 in 2006, 2005 and 2004, respectively. This allowed the R&D department to expand to 27 engineers and technicians at the end of 2006. Our investment in research and development staff and equipment continues to represent a significant increase from previous years and reflects our commitment to maintaining and extending our current technology. The return on that investment is intended to be realized over the long term but new systems and technologies continue to have an impact on our business. In 2006, the TASER Cam product has been launched and has entered production. Additionally, a new commercial product was developed in 2006 and was announced at the beginning of 2007 called the C2 personal protector. This new device is a compact system that provides the same NMI effectiveness as our market leading X26 but in a form factor that will be more attractive to private citizens. Additionally, we believe the maturity of the XREP has reached a level that transition to a product having broad market appeal is close enough to justify continued internal development. For this reason, we are continuing the development of the XREP from the demonstrated TRL 6 level achieved in 2006 by focusing on design for manufacturability. We anticipate that a production projectile will be available for sale in 2007. In addition to the development of new products many product improvement projects were completed, increasing the reliability and quality of our current products.

     As we progress with projects underway, we expect that our research and development expenditures will increase. This is due to the addition of personnel in our research and development department and the costs associated with conducting and preparing biomedical studies.

Employees

     As of December 31, 2006, we had 240 full-time employees and 67 temporary employees of which 59 are employed in direct manufacturing. The breakdown of our full time employees by department is as follows: 110 direct manufacturing employees and 130 administrative and manufacturing support employees. Of the 130 administrative and manufacturing support employees; 39 were involved in sales, marketing, communication and training; 27 were employed in research, development and engineering; 21 were employed in administrative functions inclusive of executive management, legal, finance, accounting and investor relations; 8 were employed in information systems technologies; 12 were employed in quality control and 23 were employed in manufacturing support functions.

     Our employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage. We believe that our relations with our employees are good.

Available Information

     We were incorporated in Arizona in September 1993 as an ICER Corporation. We changed our name to AIR TASER, Inc. in December 1993 and to TASER International, Incorporated in April 1998. In January 2001, we reincorporated in Delaware as TASER International, Inc. Our website is located at www.taser.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on our website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. Other information that is not part of this Annual Report on Form 10-K can be accessed through our website at www.TASER.com.

Item 1A.		Risk Factors

Because of the following factors, as well as other variables affecting our operating results, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

We are materially dependent on acceptance of our products by the law enforcement and corrections market, and if law enforcement and corrections agencies do not purchase our products, our revenues will be adversely affected and we may not be able to expand into other markets.

     A substantial number of law enforcement and corrections agencies may not purchase our conducted energy, non-lethal devices. In addition, if our products are not widely accepted by the law enforcement and corrections market, we may not be able to expand sales of our products into other markets such as the military market. Law enforcement and corrections agencies may be influenced by claims or perceptions that conducted energy weapons are unsafe or may be used in an abusive manner. In addition, earlier generation conducted energy devices may have been perceived as ineffective. Sales of our products to these agencies may also be delayed or limited by these claims or perceptions.

We substantially depend on sales of our TASER X26 products, and if these products are not widely accepted, our growth prospects will be diminished.

     In the years ended December 31, 2006, 2005 and 2004, we derived our revenues predominantly from sales of the TASER X26 brand devices and related cartridges, and expect to depend on sales of these products for the foreseeable future. A decrease in the prices of or demand for these products, or their failure to achieve broad market acceptance, would significantly harm our growth prospects, operating results and financial condition.

If we are unable to manage any growth in our business, our prospects may be limited and our future profitability may be adversely affected.

     We intend to expand our sales and marketing programs and our manufacturing capacity as needed to meet future demand. Any significant expansion may strain our managerial, financial and other resources. If we are unable to manage our growth, our business, operating results and financial condition could be adversely affected. We will need to continually improve our operations, financial and other internal systems to manage our growth effectively, and any failure to do so may lead to inefficiencies and redundancies, and result in reduced growth prospects and profitability.

We may face personal injury, wrongful death and other liability claims that harm our reputation and adversely affect our sales and financial condition.

     Our products are often used in aggressive confrontations that may result in serious, permanent bodily injury or death to those involved. Our products may be associated with these injuries. A person injured in a confrontation or otherwise in connection with the use of our products may bring legal action against us to recover damages on the basis of theories including personal injury, wrongful death, negligent design, defective product or inadequate warning. We are currently subject to a number of such lawsuits. We may also be subject to lawsuits involving allegations of misuse of our products. If successful, personal injury, misuse and other claims could have a material adverse effect on our operating results and financial condition. Although we carry product liability insurance, we do incur large legal expenses within our self insured retention in defending these lawsuits and significant litigation could also result in a diversion of management’s attention and resources, negative publicity and a potential award of monetary damages in excess of our insurance coverage. The outcome of any litigation is inherently uncertain and there can be no assurance that our existing or any future litigation will not have a material adverse effect on our revenues, our financial condition or financial results.

Pending litigation may subject us to significant litigation costs, judgments, fines and penalties in excess of insurance coverage, and divert management attention from our business.

     We are involved in numerous litigation matters relating to our products or the use of such products, litigation against persons who we believe have defamed our products, litigation against medical examiners who made errors in their autopsy reports, litigation against a competitor, litigation against our former patent attorney as well as shareholder class action and shareholder derivative lawsuits. Such matters have resulted and are expected to continue to result in substantial costs to us and a likely diversion of our management’s attention, which could adversely affect our business, financial condition or operating results. In particular, we recently reached an agreement to settle our shareholder class action lawsuits and derivative lawsuits for approximately $21.75 million, of which approximately $4.1 million is covered by insurance.

Our future success is dependent on our ability to expand sales through distributors and our inability to recruit new distributors would negatively affect our sales.

     Our distribution strategy is to pursue sales through multiple channels with an emphasis on independent distributors. Our inability to recruit and retain police equipment distributors who can successfully sell our products would adversely affect our sales. In addition, our arrangements with our distributors are generally short-term. If we do not competitively price our products, meet the requirements of our distributors or end-users, provide adequate marketing support, or comply with the terms of our distribution arrangements, our distributors may fail to aggressively market our products or may terminate their relationships with us. These developments would likely have a material adverse effect on our sales. Our reliance on the sales of our products by others also makes it more difficult to predict our revenues, cash flow and operating results.

If we are unable to design, introduce and sell new products or new product features successfully, our business and financial results could be adversely affected.

     Our future success will depend on our ability to develop new products or new product features that achieve market acceptance in a timely and cost-effective manner. The development of new products and new product features is complex, and we may experience delays in completing the development and introduction of new products. We cannot provide any assurance that products that we may develop in the future will achieve market acceptance. If we fail to develop new products or new product features on a timely basis that achieve market acceptance, our business, financial results and competitive position could be adversely affected.

We expend significant resources in anticipation of a sale due to our lengthy sales cycle and may receive no revenue in return.

     Generally, law enforcement and corrections agencies consider a wide range of issues before committing to purchase our products, including product benefits, training costs, the cost to use our products in addition to or in place of other non-lethal products, budget constraints and product reliability, safety and efficacy. The length of our sales cycle may range from a few weeks to as long as several years. Adverse publicity surrounding our products or the safety of such products has in the past and could in the future lengthen our sales cycle with customers. In particular, we believe our revenue decrease for the year ended December 31, 2005 compared to the year ended December 31, 2004 was impacted in part by the adverse effect on customers and potential customers of the negative publicity surrounding our products or use of our products. We may incur substantial selling costs and expend significant effort in connection with the evaluation of our products by potential customers before they place an order. If these potential customers do not purchase our products, we will have expended significant resources and received no revenue in return.

Most of our end-users are subject to budgetary and political constraints that may delay or prevent sales.

     Most of our end-user customers are government agencies. These agencies often do not set their own budgets and therefore have little control over the amount of money they can spend. In addition, these agencies experience political pressure that may dictate the manner in which they spend money. As a result, even if an agency wants to acquire our products, it may be unable to purchase them due to budgetary or political constraints. Some government agency orders may also be canceled or substantially delayed due to budgetary, political or other scheduling delays which frequently occur in connection with the acquisition of products by such agencies.

Government regulation of our products may adversely affect sales.

     Federal regulation of sales in the United States: Our devices are not firearms regulated by the Bureau of Alcohol, Tobacco, Firearms and Explosives, but are consumer products regulated by the United States Consumer Product Safety Commission. Although there are currently no federal laws restricting sales of our devices in the United States, future federal regulation could adversely affect sales of our products.

     Federal regulation of international sales: Our devices are controlled as a “crime control” product by the United States Department of Commerce, or DOC, for export directly from the United States. Consequently, we must obtain an export license from the DOC for the export of our devices from the United States other than to Canada. Our inability to obtain DOC export licenses on a timely basis for sales of our devices to our international customers could significantly and adversely affect our international sales.

     State and local regulation: Our devices are controlled, restricted or their use prohibited by a number of state and local governments. Our devices are banned from private citizen sale or use in seven states: New York, New Jersey, Rhode Island, Michigan, Wisconsin, Massachusetts and Hawaii. Law enforcement use of our products is also prohibited in New Jersey. Some municipalities, including Omaha, Nebraska and Washington, D.C., also prohibit private citizen use of our products. Other jurisdictions may ban or restrict the sale of our products and our product sales may be significantly affected by additional state, county and city governmental regulation.

     Foreign regulation: Certain foreign jurisdictions, including Japan, Australia, Italy and Hong Kong, prohibit the sale of conducted energy devices such as our products, limiting our international sales opportunities.

Environmental laws and regulations subject us to a number of risks and could result in significant liabilities and costs.

     We may be subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in electronic products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of those products. Recent environmental legislation within the European Union (EU) may increase our cost of doing business internationally and impact our revenues from EU countries as we comply with and implement these new requirements.

     The EU has published Directives on the restriction of certain hazardous substances in electronic and electrical equipment (the RoHS Directive) which became effective in July 2006, and on electronic and electrical waste management (the WEEE Directive). The RoHS Directive restricts the use of a number of substances, including lead. The Waste Electrical and Electronic Equipment Directive, or WEEE directs members of the European Union to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the market after August 15, 2005 and from products in use prior to that date that are being replaced. In addition, similar environmental legislation has been or may be enacted in other jurisdictions, including the U.S. (under federal and state laws) and other countries, the cumulative impact of which could be significant.

     We continue to evaluate the impact of specific registration and compliance activities required by the RoHS and WEEE Directives. We endeavor to comply with these environmental laws, yet compliance with such laws could increase our operations and product costs; increase the complexities of product design, procurement, and manufacturing; limit our ability to manage excess and obsolete non-compliant inventory; limit our sales activities; and impact our future financial results. Any violation of these laws can subject us to significant liability, including fines, penalties, and prohibiting sales of our products into one or more states or countries, and result in a material adverse effect on our financial condition.

If we are unable to protect our intellectual property, we may lose a competitive advantage or incur substantial litigation costs to protect our rights.

     Our future success depends upon our proprietary technology. Our protective measures, including patents, trademarks and trade secret protection, may prove inadequate to protect our proprietary rights. Our earliest expiring United States patent generally covers projectile propellant devices having a container of compressed gas in place of gunpowder as a propellant. We use this technology in our cartridges. This patent expires in 2010. The scope of any patent to which we have or may obtain rights may not prevent others from developing and selling competing products. The validity and breadth of claims covered in technology patents involve complex legal and factual questions, and the resolution of such claims may be highly uncertain, lengthy and expensive. In addition, our patents may be held invalid upon challenge, or others may claim rights in or ownership of our patents.

     On February 14, 2006, U.S. Patent No. US 6,999,295 entitled “Dual Operating Mode Electronic Disabling Device For Generating A Time-Sequenced, Shaped Voltage Output Waveform” was issued to named inventors Thomas G. Watkins, III and Magne Nerheim. Mr. Nerheim assigned his interest in this patent to us. This patent covers a portion of the technology utilized in the TASER X26 device. This patent was applied for by Mr. Watkins, who was our former patent attorney, without our knowledge or consent. Mr. Watkins originally filed patent applications on our behalf as our patent attorney for the same inventions in February and May 2003 with the U.S. Patent and Trademark Office. In each application he filed a declaration stating that Mr. Nerheim was the sole inventor. These patent applications are now issued as granted patents. In December 2004, he informed us that he now felt that he was the inventor of a portion of this invention. We vigorously dispute his claim and we have filed litigation against Mr. Watkins for declaratory judgment, breach of fiduciary duty, constructive fraud, and breach of contract. We believe that we are the sole owner of this invention. Since we are a joint owner of this patent, this patent will not restrict us from manufacturing and selling the TASER X26 device. We have other patent applications pending that cover inventions contained in this patent. In March 2006, the court issued a temporary restraining order and a preliminary injunction preventing Mr. Watkins from selling, assigning, transferring, or licensing this patent to a third party during the duration of this litigation.

We may be subject to intellectual property infringement claims, which could cause us to incur litigation costs and divert management attention from our business.

     Any intellectual property infringement claims against us, with or without merit, could be costly and time-consuming to defend and divert our management’s attention from our business. If our products were found to infringe a third party’s proprietary rights, we could be required to enter into royalty or licensing agreements in order to be able to sell our products. Royalty and licensing agreements, if required, may not be available on terms acceptable to us or at all.

If we face competition in foreign countries, we can enforce patent rights only in the jurisdictions in which our patent applications have been granted.

     Our US patents only protect us from imported infringing products coming into the US from abroad. Applications for patents in a few foreign countries have been made; however, these may be inadequate to protect markets for our products in other foreign countries. Each foreign patent is examined and granted according to the law of the country where it was filed independent of whether a US patent on similar technology was granted.

Government regulations applied to our products may affect our markets for these products.

     We rely on the opinions of The Bureau of Alcohol Tobacco and Firearms, including that a device that has projectiles propelled by the release of compressed gas, in place of the expanding gases from ignited gunpowder, are not classified as firearms. Changes in statutes, regulations, and interpretation outside of our control may result in our products being classified or reclassified as firearms. Our market to civilians could be substantially reduced if consumers are required to obtain registration to own a firearm prior to purchasing our products.

Competition in the law enforcement and corrections market could reduce our sales and prevent us from achieving profitability.

     The law enforcement and corrections market is highly competitive. We face competition from numerous larger, better capitalized and more widely known companies that make other non-lethal devices and products. Increased competition may result in greater pricing pressure, lower gross margins and reduced sales. In this regard, two different competitors announced plans to introduce new products in 2005. During 2006, one of those companies introduced a new device to compete with the TASER X26. We are unable to predict the impact such products will have on our sales or our sales cycle, but existing or potential customers may choose to evaluate such products which could lengthen our sales cycle and potentially reduce our future sales.

Defects in our products could reduce demand for our products and result in a loss of sales, delay in market acceptance and injury to our reputation.

     Complex components and assemblies used in our products may contain undetected defects that are subsequently discovered at any point in the life of the product. Defects in our products may result in a loss of sales, delay in market acceptance and injury to our reputation and increased warranty costs.

Our dependence on third party suppliers for key components of our devices could delay shipment of our products and reduce our sales.

     We depend on certain domestic and foreign suppliers for the delivery of components used in the assembly of our products. Our reliance on third-party suppliers creates risks related to our potential inability to obtain an adequate supply of components or subassemblies and reduced control over pricing and timing of delivery of components and sub-assemblies. Specifically, we depend on suppliers of sub-assemblies, machined parts, injection molded plastic parts, printed circuit boards, custom wire fabrications and other miscellaneous customer parts for our products. We also do not have long-term agreements with any of our suppliers. We believe that there are readily available alternative suppliers in most cases, however there is no guarantee that supply will not be interrupted. Any interruption of supply for any material components of our products could significantly delay the shipment of our products and have a material adverse effect on our revenues, profitability and financial condition.

Component shortages could result in our inability to produce volume to adequately meet customer demand. This could result in a loss of sales, delay in deliveries and injury to our reputation.

     Single source components used in the manufacture of our products may become unavailable or discontinued. Delays caused by industry allocations, or obsolescence may take weeks or months to resolve. In some cases, part obsolescence may require a product re-design to ensure quality replacement circuits. These delays could cause significant delays in manufacturing and loss of sales, leading to adverse effects significantly impacting our financial condition or results of operations.

Our dependence on foreign suppliers for key components of our products could delay shipment of our finished products and reduce our sales.

     We depend on foreign suppliers for the delivery of certain components used in the assembly of our products. Due to changes imposed for imports of foreign products into the United States, as well as potential port closures and delays created by terrorist threats, public health issues or national disasters, we are exposed to risk of delays caused by freight carriers or customs clearance issues for our imported parts. Delays caused by our inability to obtain components for assembly could have a material adverse effect on our revenues, profitability and financial condition.

We may experience a decline in gross margins due to rising raw material and transportation costs associated with an increase in petroleum prices.

     A significant number of our raw materials are comprised of petroleum based products, or incur some form of landed cost associated with transporting the raw materials or components to our facility. Any significant rise in oil prices such as that which occurred in 2006 could adversely impact our ability to sustain current gross margins, by reducing our ability to control component pricing.

Our revenues and operating results may fluctuate unexpectedly from quarter to quarter, which may cause our stock price to decline.

     Our revenues and operating results have varied significantly in the past and may vary significantly in the future due to various factors, including, but not limited to: market acceptance of our products and services, the outcome of any existing or future litigation, adverse publicity surrounding our products, the safety of our products, or the use of our products, increased raw material expenses, changes in our operating expenses, regulatory changes that may affect the marketability of our products, budgetary cycles of municipal, state and federal law enforcement and corrections agencies and the outcome of any current or future tax audits. As a result of these and other factors, we believe that period- to-period comparisons of our operating results may not be meaningful in the short term, and our performance in a particular period may not be indicative of our performance in any future period.

While we believe that we currently have adequate internal control over financial reporting, we are exposed to risks from legislation requiring companies to evaluate those internal controls.

     Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control structure and procedures for financial reporting. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. However, this legislation is relatively new and subject to changing interpretations, and companies and accounting firms have limited experience in complying with its requirements. As a result, we have incurred, and expect to continue to incur increased expense and to devote additional management resources to Section 404 compliance. In the event that our chief executive officer, chief financial officer or our independent registered public accounting firm determine that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions of us may be adversely affected and could cause a decline in the market price of our stock.

We may experience difficulties in the future in complying with Sarbanes-Oxley Section 404.

     We are required to evaluate our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002. Beginning with our annual report on Form 10-K for the fiscal year ending December 31, 2005, we have been required to furnish a report by our management on our internal control over financial reporting. Such report contains among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. Such report also contains a statement that our independent registered public accounting firm has issued an attestation report on management’s assessment of such internal controls. In our Form 10-K for our 2005 fiscal year, because the previously reported material weaknesses related to not having controls in place to record appropriate accruals related to professional fees in the appropriate accounting period and inadequate resources related to accounting and financial statement preparation particularly with respect to financial statement footnote preparation were not fully remediated and tested at December 31, 2005, our management assessment and the report of our Independent Registered Public Accounting Firm concluded that our internal controls were not effective at December 31, 2005.

     Because of these material weaknesses, there is heightened risk that a material misstatement of our annual or quarterly financial statements will not be prevented or detected. While we have completed our remediation efforts to address these material weaknesses and while we did not identify any materials weaknesses at December 31, 2006, we cannot assure you that material weaknesses will not occur in future periods. If we fail to maintain proper and effective internal controls in future periods, it could adversely affect our operating results, financial condition and our ability to run our business effectively and could cause investors to lose confidence in our financial reporting.

Foreign currency fluctuations may affect our competitiveness and sales in foreign markets.

     The relative change in currency values creates fluctuations in product pricing for potential international customers. These changes in foreign end-user costs may result in lost orders and reduce the competitiveness of our products in certain foreign markets. These changes may also negatively affect the financial condition of some existing or potential foreign customers and reduce or eliminate their future orders of our products.

Use of estimates may cause our financial results to differ from expectations.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

We face risks associated with rapid technological change and new competing products.

     The technology associated with non-lethal devices is receiving significant attention and is rapidly evolving. While we have patent protection in key areas of electro-muscular disruption technology, it is possible that new non-lethal technology may result in competing products that operate outside our patents and could present significant competition for our products.

To the extent demand for our products increases, our future success will be dependent upon our ability to ramp manufacturing production capacity which will be accomplished by the implementation of customized manufacturing automation equipment.

     Although our revenue decreased in 2005 compared to 2004, we experienced significant revenue growth in 2006 compared to 2005 and in 2004 and 2003. To the extent demand for our products increases significantly in future periods, one of our key challenges will be to ramp our production capacity to meet sales demand, while maintaining product quality. Our primary strategies to accomplish this include increasing the physical size of our assembly facilities, the hiring of additional production staff, and the implementation of customized automation equipment. We have limited previous experience in implementing automation equipment, and the investments made on this equipment may not yield the anticipated labor and material efficiencies. Our inability to meet any future increase in sales demand or effectively manage our expansion could have a material adverse affect on our revenues, financial results and financial condition.

We depend on our ability to attract and retain our key management and technical personnel.

     Our success depends upon the continued service of our key management personnel. Our success also depends on our ability to continue to attract, retain and motivate qualified technical personnel. Although we have employment agreements with certain of our officers, the employment of such persons is “at-will” and either we or the employee can terminate the employment relationship at any time, subject to the applicable terms of the employment agreements. The competition for our key employees is intense. The loss of the service of one or more of our key personnel could harm our business.

Item 1B.		Unresolved Staff Comments

None

Item 2.		Properties

Principal Location, Corporate Headquarters and Manufacturing Facilities

Our corporate headquarters and manufacturing facilities are based in a 100,000 square foot facility in Scottsdale, Arizona which we own.

Item 3.		Legal Proceedings

See discussion of Legal Proceedings in Note 8c to the financial statements included in Part II, Item 8 of this annual report.

Item 4.		Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of 2006.

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

     Our common stock is quoted under the symbol “TASR” on The NASDAQ Global Select Market. The closing price of our common stock on March 9, 2007 was $7.78.

     The following table sets forth the high and low closing sales prices per share for our common stock as reported by NASDAQ for each quarter of the last two fiscal years.

Common Stock “TASR”

Fiscal Quarters		High				Low
March 31, 2005		$	29.98			$	11.99
June 30, 2005		$	11.68			$	7.64
September 30, 2005		$	10.24			$	5.88
December 31, 2005		$	7.98			$	5.42
March 31, 2006		$	10.91			$	7.06
June 30, 2006		$	11.04			$	7.47
September 30, 2006		$	8.57			$	6.89
December 31, 2006		$	9.69			$	7.43

Holders

     As of March 9, 2007, there were approximately 342 holders of record of our Common Stock.

Dividends

     To date, we have not declared or paid cash dividends on our common stock. We do not intend to pay cash dividends in the foreseeable future. Our revolving line of credit with our principal bank prohibits the payment of cash dividends.

Issuer Purchases of Equity Securities

     We did not repurchase any shares of our common stock in the fourth quarter of 2006.

Recent Sales of Unregistered Securities

     No unregistered securities were sold by us in 2006.

Stock Performance Graph

     The following stock performance graph compares the performance of our common stock to the NASDAQ Stock Market (U.S.) and the Russell 3000 Index. The Graph covers the period from December 31, 2001 to December 31, 2006. The graph assumes that the value of the investment in our stock and in each index was $100 at December 31, 2001 and that all dividends were reinvested. We do not pay dividends on our common stock.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among TASER International, Inc., The NASDAQ Composite Index
And The Russell 3000 Index

		12/01		12/02		12/03		12/04		12/05		12/06
TASER International, Inc.		100.00		29.38		599.05		2762.18		607.43		664.15
NASDAQ Composite		100.00		69.66		99.71		113.79		114.47		124.20
Russell 3000		100.00		78.46		102.83		115.11		122.16		141.35

Item 6.		Selected Financial Data

The following selected financial data should be read in conjunction with our financial statements and the notes thereto, and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The statement of operations data for the years ended December 31, 2006, 2005 and 2004 and the balance sheet data as of December 31, 2006 and 2005 have been derived from and should be read in conjunction with our audited financial statements and the notes thereto included herein. The statement of operations data for the years ended December 31, 2003 and 2002 is derived from audited financial statements and the notes thereto which are not included in this Annual Report on Form 10-K. The balance sheet data as of December 31, 2004, 2003 and 2002 is derived from audited financial statements and the notes thereto which are not included in this annual report on Form 10-K.

		For the Years Ended December 31,
		2006				2005				2004				2003				2002
						(As restated)(b)
Statement of Operations Data
Net sales		$	67,717,851			$	47,694,181			$	67,639,879			$	24,455,506			$	9,842,777
Gross margin			43,179,061				29,597,895				45,184,383				15,052,890				5,536,226
Sales, general and administrative expenses			29,680,764				26,483,485				13,880,322				6,973,721				5,038,712
Research and development expenses			2,704,521				1,574,048				823,593				498,470				136,503
Shareholder litigation settlement expense (a)			17,650,000				—				—				—				—
Income (loss) from operations			(6,856,224	)			1,540,362				30,480,468				7,580,699				361,591
Net income (loss)			(4,087,679	)			1,056,516				18,881,742				4,453,690				208,903
Income (loss) per common and common equivalent shares
Basic (1)		$	(0.07	)		$	0.02			$	0.33			$	0.12			$	0.01
Diluted (1)		$	(0.07	)		$	0.02			$	0.30			$	0.10			$	0.01
Weighted average number of common and common equivalent shares outstanding
Basic (1)			61,984,240				61,303,939				57,232,329				37,889,640				33,561,204
Diluted (1)			61,984,240				63,556,246				62,319,590				46,598,312				34,915,404

		As of December 31,
		2006				2005				2004				2003				2002
						(As restated)(b)
Balance Sheet Data
Working capital		$	37,813,576			$	34,663,101			$	51,100,989			$	22,479,594			$	5,336,963
Total assets			119,837,689				112,241,247				109,452,578				31,444,690				7,904,213
Total current liabilities			18,302,688				7,586,701				8,933,939				3,895,371				1,804,305
Total long term obligations			30,974				76,188				—				3,655				15,486
Total stockholders equity		$	99,328,539			$	103,738,375			$	99,910,783			$	27,427,450			$	6,014,601

Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our 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 is presented in nine sections:

•		Executive Overview
•		Key Strategic Initiatives
•		2006 Overview
•		2007 Outlook
•		Results of Operations
•		Liquidity and Capital Resources
•		Off-Balance-Sheet Arrangements
•		Contractual Obligations
•		Critical Accounting Estimates

     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 following information has been adjusted to reflect the restatement of the Company’s 2005 financial results, which is more fully described in Note 14 to the financial statements. The net of tax impact of the adjustments on our 2005 results of operation was $(6,341). The impact of these adjustments was not significant to our operating results, trends, or liquidity in 2005.

Executive Overview

     We are a global leader in the development and manufacture of advanced electronic control devices designed for use in law enforcement, corrections, private security and personal defense. We have focused our efforts on the continuous development of our technology for both new and existing products as well as industry leading training services while building distribution channels for marketing our products and services to law enforcement agencies, primarily in North America with increasing efforts on expanding these programs with a view toward international markets.

     Law enforcement, military and corrections agencies represent our primary target markets. In each of these markets, the decision to purchase TASER Electronic Control Devices (ECDs) is normally made by a group of people including the agency head, the agency head’s training staff, and weapons experts. Depending on the size and cost of the device deployment, the decision may involve political decision-makers such as city council members and the federal government. The decision making process can take as little as a few weeks or as long as several years.

     Our devices are not considered to be a “firearm” by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives. Therefore, no firearms-related regulations apply to the sale and distribution of our devices within the United States. However, many states have regulations restricting the sale and use of stun guns, which we believe apply to our devices as well. Our products are often used in aggressive confrontations that may result in serious, permanent bodily injury or death to those involved. Our products may be associated with these injuries. A person injured in a confrontation or otherwise in connection with the use of our products may bring legal action against us to recover damages on the basis of theories including personal injury, wrongful death, negligent design, defective product or inadequate warning. We are currently subject to a number of such lawsuits. We may also be subject to lawsuits involving allegations of misuse of our products. If successful, personal injury, misuse and other claims could have a material adverse effect on our operating results and financial condition. Although we carry product liability insurance, significant litigation could also result in a diversion of management’s attention and resources, negative publicity and an award of monetary damages in excess of our insurance coverage. The outcome of any litigation is inherently uncertain and there can be no assurance that our existing or any future litigation will not have a material adverse effect on our revenues, our financial condition or financial results.

Key Strategic Initiatives

Our key strategies include:

	•		Increase market penetration in both the United States and international law enforcement and corrections markets. We currently have a penetration rate of approximately 22% of the United States police and corrections market and about 1% of the worldwide police and corrections market. We believe that the large portion of these markets that do not currently use our products presents an opportunity for our future growth, particularly with respect to international law enforcement agencies.
	•		Grow our presence in the private citizen market. Having consistently demonstrated the effectiveness of our technology in the professional law enforcement community we aim to leverage this experience to increase our presence in the private citizen market. At the forefront of this initiative will be the introduction of the TASER C2 personal protector, a newly developed product which successfully debuted at the Consumer Electronics Show in January 2007. This new device is a compact system that provides the same proven Neuro-Muscular Incapacitation (NMI) effectiveness as our market leading X26 but in a form factor and at a price point that will be more attractive to private citizens. The TASER C2 also promotes responsible ownership and aims to prevent misuse with the introduction of a background check system whereby the device remains inactive until the owner has successfully completed a background check either online or via a toll-free telephone number. In addition the TASER C2 cartridges each have a unique serial number and are equipped with Anti-Felon Identification tags, which are dispersed upon deployment and which would allow the police to track a potential misuse. We expect to begin shipments of the TASER C2 in the second quarter of 2007.
	•		Further develop our presence in government and military markets. In 2006, we introduced a focus initiative to support our military customers. We hired the former head of the Military Joint Non Lethal Weapons Directorate as our Vice President of Government and Military Programs and we formed a Senior Executive Advisory Group (SEAG) comprised of a team of professionals with extensive military, homeland defense and law enforcement experience with the purpose of advising on business actions in support of military users. With this new focus, a new business group has been formed by us (Government and Military Programs) with the sole emphasis on supporting military use of for our existing hardware as well as increasing technology development through contracted support.

	•		Continual development of new innovative products, which both complement and add to our existing products. These development efforts include the TASER C2 personal protector mentioned above and the wireless eXtended Range Electromuscular Projectile (XREP), which, following a successful test of the device for the ONR in January 2006 was further developed throughout 2006 with focus on design for manufacturability. A production projectile is expected to be available for sale in 2007. Additionally, late in 2006 we announced a new area denial technology based on improved sensing, awareness, and networking capabilities called the TASER Remote Area Denial (T-RAD). A sophisticated networking and user interface capability to integrate and control T-RAD devices was also introduced as the TASERNET. These concepts have been presented to military and law enforcement customers for comment with positive feedback. For this reason, we plan to continue development of the T-RAD/TASERNET capabilities in 2007.
	•		Continued application for patents and intellectual property rights to protect key technology in our products and further protect our competitive position.
	•		Continued aggressive litigation defense to protect our brand equity. We have an assembled team of world class medical experts at our disposal and hired additional internal legal resources during 2005 to provide an efficient means of defending us against numerous product liability claims. Through March 9, 2007, we have had a total of 37 cases dismissed or defense judgments in our favor. We view a continued record of successful litigation defense as a key factor for our long term growth.

2006 Overview

     Management believes that its ability to achieve a balance between growing our core business and building the foundations for future growth is the key to increasing long-term shareholder value. Our 2006 performance and the initiatives we have put in place reflect our continuing commitment to achieving this balance.

     Some 2006 highlights include:

	•		During 2006, our focus on rebuilding our momentum in the law enforcement community delivered a return to the level of sales achieved in 2004. This manifested in a 42% sales increase in 2006, growing to a record $67.7 million compared to $47.7 million in 2005 and surpassing the $67.6 million we achieved in 2004. This growth in 2006 was achieved with the introduction of new TASER device deployments in approximately 1,800 law enforcement agencies, the expansion to full deployment of our devices by approximately 1,300 agencies and the repeat business that this generates. The supplemental orders we fulfilled during 2006 demonstrates the continuing trend of law enforcement agencies expanding the use of TASER ECDs to their first responders. We believe that the ongoing proven effectiveness of our products and their continued acceptance provides a platform from which to generate further growth.
	•		In 2006, we advanced our international presence with the shipment of TASERX26s, TASER Cam systems, cartridges and accessories to France, following a lengthy trial and evaluation process. This represents the first shipments under a tender award to the Company’s distributor which was authorized by the French government to purchase up to 5,000 TASER systems.
	•		We began shipping our first TASER Cam units, enhancing our market position as the leader in accountability for non-lethal technology.
	•		Our strategy of vigorously defending against product liability lawsuits continues to be successful. The dismissals during 2006 included the Alvarado litigation, which was the first in-custody death trial for TASER International and was an important win with a central Los Angeles jury for both TASER International as well as the City of Los Angeles Police Department. Statistics from our customers show that TASER ECDs significantly reduce use of force claims and litigation. As such, we believe the jury verdict in this case is an important indication that juries are seeing the life-saving benefits of law enforcement using TASER technology in the dangerous situations they face every day.

2007 Outlook

     In 2007, we aim to build on the momentum generated in 2006 with a continued commitment to quality and our unrelenting focus on innovation. We intend to pursue profitable increased market penetration in our primary target markets with continued focus on increasing our international presence. Many of our prospective customers from our core business markets are continuing to move forward with evaluation and implementation of TASER programs. We believe that this, when combined with the planned new product introductions and other key initiatives identified above, should result in positive new business growth in 2007.

Results of Operations

The following table presents 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,
		2006								2005								2004
										(As restated)
Net sales		$	67,718				100	%		$	47,694				100	%		$	67,640				100	%
Cost of products sold			24,539				36	%			18,096				38	%			22,455				33	%
Gross margin			43,179				64	%			29,598				62	%			45,185				67	%
Sales, general and administrative expenses			29,681				44	%			26,483				56	%			13,880				21	%
Research and development expenses			2,705				4	%			1,574				3	%			824				1	%
Shareholder litigation settlement expense			17,650				26	%			—					#			—					#
Income (loss) from operations			(6,857	)			-10	%			1,541				3	%			30,481				45	%
Interest income			1,880				3	%			1,229				3	%			439				1	%
Interest expense			(7	)				#			(4	)				#			(1	)				#
Other income and expense			—					#			(60	)				#			2					#
Income (loss) before income taxes			(4,984	)			-7	%			2,706				6	%			30,921				46	%
Provision (benefit) for income taxes			(896	)			-1	%			1,649				3	%			12,039				18	%
Net income (loss)		$	(4,088	)			-6	%		$	1,057				2	%		$	18,882				28	%

# — Less than 1%

Net Sales

For the years ended December 31, 2006, 2005 and 2004, sales by product line and by geography were as follows (dollars in thousands):

		2006								2005								2004
Sales by Product Line
TASER X26		$	45,241				67	%		$	31,313				66	%		$	46,083				68	%
TASER Cam			2,289				3	%			—					#			—					#
ADVANCED TASER			2,578				4	%			2,635				6	%			3,929				6	%
AIR TASER			116					#			78					#			107					#
Single Cartridges			15,269				23	%			12,468				26	%			14,655				22	%
Other			2,225				3	%			1,200				3	%			2,866				4	%
Total		$	67,718				100	%		$	47,694				100	%		$	67,640				100	%

# — Less than 1%

Sales by Geographic Area		2006								2005								2004
United States			86	%							87	%							96	%
Other Countries			14	%							13	%							4	%
Total			100	%							100	%							100	%

     Net sales for the year ended December 31, 2006 were $67.7 million, an increase of $20.0 million, or 42%, compared to $47.7 million in 2005. We believe the principal reasons for the increase in net sales are related to us overcoming the various types of negative publicity we experienced during the course of 2005. Specifically, as a result of a formal investigation by the Securities Exchange Commission (SEC), ongoing negative press coverage and increased amounts of litigation concerning our products and their use, many prospective customers, particularly law enforcement agencies, frequently postponed implementation decisions. With the resolution of key portions of the SEC investigation in December 2005, we noted that many of the agencies that were postponing decisions began moving forward with their evaluation and implementation programs and decisions to purchase our products, which had a positive impact on our sales during 2006. Specifically, sales of our predominant TASER X26 product line and the related increase in single cartridge sales demonstrate the increased market penetration and continued use of TASER devices by law enforcement.

     TASER X26 product line sales increased $13.9 million, or 44%, to $45.2 million for 2006 compared to $31.3 million for 2005 and represented 67% and 66% of our total net sales in 2006 and 2005, respectively. Single cartridge sales increased $2.8 million, or 22%, to $15.3 million in 2006 compared to $12.5 million in 2005. In addition, the introduction of the TASER Cam device in 2006 contributed $2.3 million to 2006 net sales. Other sales include warranty, research funding, training and shipping revenues net of cash and distributor discounts. International sales in 2006 represented approximately 14% or $9.5 million of total net sales compared to approximately 13% or $6.2 million in 2005 reflecting our continued commitment to marketing efforts in countries outside the United States.

     Net sales for the year ended December 31, 2005 were $47.7 million, a decrease of $19.9 million, or 29%, compared to $67.6 million in 2004. As noted above, we believe the principal cause of the decline in 2005 was attributable to the SEC investigation, ongoing negative press coverage and increased litigation concerning our products and their use. In particular, these events resulted in longer sales cycles and order delays from prospective customers. The TASER X26 product line continued to be our leading product in 2005 representing 66% of our total net sales compared to 68% in 2004. Sales to countries outside of the U.S increased to 13% in 2005 from 4% in 2004.

Cost of Products Sold

     For the year ended December 31, 2006, cost of products sold were $24.5 million, an increase of $6.4 million, or 36%, over the same period in 2005. However, as a percentage of net sales, cost of products sold decreased to 36% for 2006 compared to 38% for the same period in the prior year. The decrease in cost of products sold as a percentage of sales for 2006 is primarily attributable to the increased volume of device and ancillary product sales in 2006 providing a larger number of units over which to apply relatively fixed indirect manufacturing expenses, resulting in lower per unit costs. In addition, improved production throughput and lower scrap expense were partially offset by increases in the cost of petroleum-based raw materials. Indirect expenses primarily include indirect salaries for manufacturing support personnel including manufacturing engineering, quality and materials management, scrapped materials, freight, supplies and depreciation.

     Cost of products sold decreased $4.4 million, or 19%, to $18.1 million for 2005 compared to $22.5 million for 2004. As a percentage of net sales, cost of products sold increased to 38% of net sales in 2005 compared to 33% of net sales in 2004. The increase in cost of products sold as a percentage of net sales is mainly attributable to lower sales levels and increased one time and recurring costs associated with the relocation to our new headquarters and manufacturing facility.

Gross Margin

     Gross margin increased $13.6 million, or 46%, to $43.2 million for the year ended December 31, 2006 compared to $29.6 million for the year ended December 31, 2005. As a percentage of net sales, gross margin increased to 64% for the year ended December 31, 2006 compared to 62% for the year ended December 31, 2005. The increase in gross margin was due to the lower cost of sales per unit from the improved leverage of indirect manufacturing expenses and improved production yields as discussed above.

     Gross margins for the year ended December 31, 2005 decreased $15.6 million, or 34%, compared to 2004. As a percentage of net sales, gross margin declined to 62% in 2005 from 67% in 2004. The decline in margin percentage is attributable to some production yield and labor utilization issues in the first half of 2005 and reduced sales levels allowing for less leverage of fixed manufacturing expenses.

Sales, General and Administrative Expenses

     For the years ended December 31, 2006, 2005 and 2004, sales, general and administrative expenses were comprised as follows (dollars in thousands):

		Year Ended December 31,																Year Ended December 31,
										$				%												$				%
		2006				2005				Change				Change				2005				2004				Change				Change
						(As restated)												(As restated)
Salaries and benefits		$	5,791			$	4,771			$	1,020				21.4	%		$	4,771			$	3,929			$	842				21.4	%
Legal expenses			4,282				4,004				278				6.9	%			4,004				361				3,643				1009.1	%
Professional, consulting and lobbying fees			5,020				4,936				84				1.7	%			4,936				1,522				3,414				224.3	%
Travel and meals			3,293				2,960				333				11.3	%			2,960				1,916				1,044				54.5	%
D&O and liability insurance			2,121				1,827				294				16.1	%			1,827				1,111				716				64.4	%
Depreciation and amortization			1,563				1,297				266				20.5	%			1,297				320				977				305.3	%
Stock-based compensation			808				—				808				100.0	%			—				—				—				—
Other			6,803				6,688				115				1.7	%			6,688				4,721				1,967				41.7	%
Total		$	29,681			$	26,483			$	3,198				12.1	%		$	26,483			$	13,880			$	12,603				90.8	%
Sales, general and administrative expenses as a percentage of net sales			44	%			56	%											56	%			21	%

     Sales, general and administrative expenses were $29.7 million and $26.5 million for the years ended December 31, 2006 and 2005, respectively, representing an increase of $3.2 million, or 12% in 2006 compared to 2005. As a percentage of total net sales, sales, general and administrative expenses decreased to 44% for the year ended December 31, 2006 compared to 56% for same period in 2005, representing the improved leverage of the relatively fixed costs to the increase in net sales. The dollar increase for the year ended December 31, 2006 compared to the year ended December 31, 2005 is primarily due to a $1.0 million, or 21%, increase in salaries and benefits related to an increased headcount and employee bonuses and a $362,000 increase in legal, professional, consulting and lobbying fees associated with the continuing costs of defending against numerous litigation matters and our ongoing public relations and lobbying efforts to educate the public in regard to the safety and benefits of our products. In addition, we incurred $808,000 of stock-based compensation costs associated with our adoption of SFAS No. 123(R), effective January 1, 2006, D&O and liability insurance costs increased by $294,000 as a result of higher premiums due to increased coverage and depreciation and amortization expense increased $266,000 relating to our new facility and related equipment which were not placed into service until April 2005.

     Sales, general and administrative expenses increased $12.6 million, or 91%, to $26.5 million for the year ended December 31, 2005 compared to $13.9 million in the prior year. As a percentage of net sales, sales, general and administrative expenses increased to 56% for 2005 from 21% for 2004. The increases in 2005 are substantially attributable to the incremental costs incurred by us in order to defend against numerous litigation matters. Specifically, legal fees increased by $3.6 million, professional, consulting and lobbying costs increased by $3.4 million and related travel costs went up by $1.0 million. Approximately $870,000 of the increase in professional fees was due to costs incurred related to the implementation and testing of Section 404 Sarbanes-Oxley compliance. In addition to these incremental costs, depreciation and amortization went up by $977,000 associated with our new facility and related equipment and salaries and related benefits increased by $842,000 due to increased headcount. The remainder of the total increase in sales, general and administrative expenses in 2005 compared to 2004 was due to growth in various other expense items such as higher insurance premiums and increased charitable contributions, primarily to the TASER Foundation.

Research and Development Expenses

     Research and development expenses increased $1.1million, or 72%, to $2.7 million, for the year ended December 31, 2006 compared to $1.6 million for the year ended December 31, 2005. The increase is predominantly related to growth in salary, supplies and consulting costs to support our continuing efforts to develop new products such as the TASER C2 personal protector, the TASER Cam and the XREP (Extended Range Electro-Muscular Projectile). Additionally, we recorded $199,000 in research and development expenses related to stock-based compensation costs associated with our adoption of SFAS No. 123(R) in 2006.

     Research and development expenses for the year ended December 31, 2005 were $1.6 million, an increase of $750,000, or 91% compared to the prior year. The increase is predominantly related to salary related costs and production materials in the development of new products such as the TASERCAM and the TASER XREP.

Litigation Settlement Expenses.

     Litigation settlement expenses for the year ended December 31, 2006 represent $17.65 million recorded in the second quarter of 2006 as a result of an agreement in principle for the proposed settlement of our shareholder class action litigation and derivative lawsuits.

Interest Income

     Interest income increased $651,000, or 53%, to $1.9 million for the year ended December 31, 2006 compared to $1.2 million for the same period in 2005. The year over year increase is a function of the growth in our cash and investment balances and higher average yields on our investments. Our cash and investment accounts earned interest at an approximate average rate of 3.94% during the year ended December 31, 2006 compared to 2.71% during the year ended December 31, 2005, reflecting a more favorable interest rate environment. Our average outstanding cash, cash equivalent and investment balance was approximately $47.3 million in 2006 compared to $45.5 million in 2005.

     Interest income for the year ended December 31, 2005 was $1.2 million, an increase of $790,000, or 180%, compared to 2004. The increase is the result of maintaining higher investment balances for the entire year compared to only part of the year in 2004, combined with a slight increase in interest rates. Our average outstanding cash, cash equivalent and investment balance was $45.5 million in 2005 compared to $33.4 million in 2004.

Other Income and Expense

     We had no other income or expense items in the year ended December 31, 2006.

     For the year ended December 31, 2005, we had other expense of $60,000 compared to other income of $2,000 in the prior year. The increased expense in 2005 primarily relates to a loss on disposition of property and equipment from our previous leased facility following the move into our new corporate headquarters and manufacturing facility in April 2005.

Income Taxes

     The provision for income taxes decreased by $2.5 million from a $1.6 million expense for year ended December 31, 2005 to a benefit of $0.9 million for the year ended December 31, 2006. This change can be attributed to the loss before provision for income taxes of $5.0 million for the year ended December 31, 2006, which was generated by the shareholder litigation expense of $17.65 million recorded in the second quarter of 2006, compared to a pre tax income of $2.7 million in 2005. Our effective income tax rate for the year ended December 31, 2006 was (18.0)% compared to 60.9% for the year ended December 31, 2005. The change in the effective tax rate is because, as a result of the net loss before income taxes in 2006, we receive an income tax benefit compared to the provision for income taxes in 2005. Additionally, the non tax deductible items such as lobbying expenses reduced our effective tax benefit rate by 13.9% in 2006 whereas in 2005 they had the inverse effect, increasing our effective tax rate by 19.5%.

     The provision for income taxes for the year ended December 31, 2005 was $1.7 million, a decrease of $10.3 million compared to $12.0 million in the prior year. While the reduction in provision is the result of lower income before taxes, the effective tax rate increased to 60.9% for 2005 compared to 38.9% for 2004. The increase in the effective tax rate is primarily due to an increase in non tax deductible expenses such as lobbying costs which results in having a higher pretax income for tax purposes than book, driving up the provision for income taxes.

     During 2006, we did not tax effect the stock based compensation expense for tax purposes related to the exercise of stock options as a result of the adoption of SFAS No. 123(R). The benefit will be recorded when we are in a position to realize it with an offset to our taxes payable in future periods. The total unrecognized tax benefit related to the non-qualified disposition of stock options in 2006 was approximately $617,000. We received tax benefits of $2.1 million and $37.3 million from the exercise of stock options and subsequent sale of the underlying stock in 2005 and 2004, respectively. The net deferred tax asset as of December 31, 2006 was $28.2 million compared to $26.9 million at December 31, 2005.

Net Income (Loss)

     For the year ended December 31, 2006 we reported a net loss of $4.1 million compared to net income of $1.1 million for the year ended December 31, 2005, a negative change of $5.2 million. The decrease is a function of the increased gross margins derived from the growth in sales in 2006 offset by $17.65 million of shareholder litigation settlement expenses and the increases in sales, general and administrative and research and development expenses previously discussed. As a result, income per basic and diluted share decreased from $0.02 for the year ended December 31, 2005 to a loss of $0.07 for the year ended December 31, 2006.

     Net income for the year ended December 31, 2005 was $1.1 million, a decrease of $17.8 million or 94% compared to 2004. The decrease is primarily attributable to reduced sales levels and increased legal and professional fees as previously discussed. Income per basic share decreased $0.31 to $0.02 per share in 2005 compared to $0.33 per share in 2004. Income per diluted share also decreased $0.28 to $0.02 per share in 2005 compared to $0.30 per share in 2004.

Liquidity and Capital Resources

The following table presents selected financial information for each of the last three fiscal years (dollars in thousands):

		2006				2005				2004
						(As restated)
Cash, cash equivalents and short term investments		$	22,331			$	16,352			$	31,959
Accounts receivable, net			10,068				5,422				8,460
Inventory			9,258				10,105				6,840
Working capital			37,814				34,663				51,101
Net cash provided by operating activities			7,482				1,068				30,304
Net cash used in investing activities			(3,556	)			(191	)			(46,791	)
Net cash provided by (used in) financing activities		$	(1,504	)		$	718			$	15,366

Liquidity

     As of December 31, 2006, we had $22.3 million in cash, cash equivalents and short term investments, an increase of $6.0 million from the end of fiscal 2005. As of December 31, 2005, we had $16.4 million in cash, cash equivalents and short term investments, a decrease of $15.6 million from the end of fiscal 2004.

     As discussed in note 8 to the financial statements, in 2006 we reached an agreement to settle our shareholder class action and derivative lawsuits. The terms of the agreement call for us to pay approximately $12 million of cash, $4.1 million of which will be provided by insurance. In addition, we will make a final payment of $8 million of stock or cash at our discretion for the shareholder lawsuit and a payment of $1.75 million in stock for the derivative lawsuits. We made the initial payment of $12 million using existing cash balances of $7.9 million and insurance proceeds received of $4.1 million in December 2006 and expect to make the final payment during the first quarter of 2007 using existing cash balances and/or cash generated from operations. In addition, our Board has approved, in connection with the settlement, a stock repurchase of up to $10 million subject to stock market conditions and corporate considerations. During 2006, we repurchased 300,000 shares of our common stock for $2.2 million.

     Operating activities generated net cash of $7.5 million, $1.1 million and $30.3 million during 2006, 2005 and 2004, respectively.

     Net cash provided by operating activities in 2006 of $7.5 million was mainly attributable to our net loss of $4.1 million adjusted for the add back of certain non cash expense items including $9.75 million for the remaining unpaid net shareholder litigation settlement (total net settlement expenses of $17.65 million less the $7.9 million of our cash we paid for the first installment of the settlement in December 2006), depreciation and amortization expense of $2.1 million and stock based compensation expense of $1.1 million. Additionally, our deferred revenue balance increased by $1.6 million created by growth in sales of extended warranties, our inventory decreased by $0.8 million attributable to increased sales of finished goods and our ongoing efforts to reduce our investment in inventory on hand and our insurance proceeds receivable decreased by $0.6 million related to the receipt of insurance proceeds from early settlement with our insurance provider related to the Powers litigation. These increases to our net cash provided by operating activities were partially offset by an increase in accounts receivable of $4.6 million attributable to the increased sales levels in the fourth quarter of 2006 compared to 2005 and a net increase in deferred income taxes of $1.2 million substantially due to the additional net operating loss carryforwards generated in 2006.

     The decrease in cash flow from operating activities in 2005 when compared to 2004 was primarily related to the $17.8 million decrease in net income, a $9.2 million decrease in the cash benefit attributable to stock option exercises and changes in other operating assets and liabilities. Net cash provided by operating activities in 2005 of $1.1 million was mainly comprised of net income of $1.1 million, a reduction in accounts receivable of $3.0 million due to lower sales levels in the fourth quarter of 2005 compared to 2004, depreciation and amortization expense of $1.7 million and stock option tax benefits of $2.1 million. These were partially offset by an increased investment in inventory of $3.3 million created by reduced sales levels in 2005 and vendor buyouts of TASER-specific parts, a reduction in accounts payable and accrued liabilities of $2.1 million primarily due to differences in the timing of payments and increased prepaid and other assets of $1.2 million mainly created by higher prepaid insurance premiums.

     We used $3.6 million of cash in investing activities during the year ended December 31, 2006, compared to $0.2 million and $46.8 million for the same periods in 2005 and 2004, respectively. Net cash used in investing activities for the year ended December 31, 2006 was comprised of net increases in our investments of $1.5 million combined with $1.8 million in acquisitions of property and equipment, which mainly related to building improvements and production and office equipment. Net cash used by investing activities during 2005 was mainly the result of $7.8 million invested in property and equipment substantially all of which was attributable to the final stages of constructing our 100,000 square foot manufacturing and administrative facility in Scottsdale, Arizona and on the related production and computer equipment and furniture and fixtures for the new building. This was offset by net proceeds received of $7.7 million from the purchase and maturity of short and long term investments. Of the funds invested in 2004, $8.7 million was used for the construction of the aforementioned new facility and $1.7 million was used to purchase and install new computer equipment and software including a new ERP system. We also invested $35.3 million in short and long term investments during 2004.

     During the year ended December 31, 2006, we used $1.5 million of cash in financing activities, compared to $0.7 million and $15.4 million provided by financing activities for the same periods in 2005 and 2004, respectively. The $1.5 million of cash used by financing activities in 2006 was mainly comprised of the repurchase of 300,000 shares of or common stock for $2.2 million partially offset by proceeds from stock options exercised of $0.7 million. During 2005, $0.7 million was generated from the exercise of stock options. Of the $15.4 million generated from financing activities in 2004, $13.1 million resulted from the exercise of stock options and $2.5 million resulted from the exercise of warrants.

Capital Resources

     On December 31, 2006, we had total cash, cash equivalents and short term investments of $22.3 million and $0.1million of capital lease obligations outstanding.

     We negotiated a revolving line of credit on July 13, 2004, through a domestic bank. The total availability on the line is $10 million. The line is secured by substantially all of our assets, other than intellectual property, and bears interest at varying rates, ranging from LIBOR plus 1.5% to prime. The line of credit matures on June 30, 2008 and requires monthly payments of interest only. At December 31, 2006, there was a calculated availability of $7.6 million based on the defined borrowing base, which is based on our eligible accounts receivable and inventory. However, there was no outstanding balance under the line of credit at December 31, 2006, and no borrowings under the line as of the date of this filing.

     We believe that our balance of total cash and short term investments of $22.3 million as of December 31, 2006, together with cash expected to be generated from operations, will be adequate to fund our operations for at least the next 12 months including the final payment related to the shareholder litigation settlement. We expect our investment in accounts receivable, inventory and accounts payable to increase in 2007 in line with the anticipated growth in sales levels arising from both organic growth as well as the introduction of new products. Additionally, we expect to invest approximately $1.0 million in manufacturing equipment in 2007 related to the production of the TASER C2. As such, we may require additional resources to expedite manufacturing of new and existing technologies in order to meet possible demand for our products. Although we believe financing will be available at terms favorable to us, both through our existing credit lines and possible additional equity financing, there is no assurance that such funding will be available, or on terms acceptable to us.

Contractual Obligations

The following table outlines our future contractual financial obligations, in thousands, as of December 31, 2006:

						Less than												After
		Total				1 year				1—3 years				4—5 years				5 years
Capital Leases		$	87			$	50			$	36			$	—			$	—
Shareholder litigation settlement			8,000				8,000				—				—				—
Total contractual cash obligations		$	8,087			$	8,050			$	36			$	—			$	—

     As discussed in Note 8 to our financial statements, in 2006 we reached an agreement to settle our shareholder class action and derivative lawsuits. The terms of the agreement called for us to make an initial payment of approximately $12 million of cash and a final payment of $8 million of stock or cash at our discretion. We made the initial payment of $12 million using $7.9 million of existing cash balances and $4.1 million of insurance proceeds in December 2006 and expect to make the final payment of $8 million in the first quarter of 2007 using existing cash balances and/or cash generated from operations.

Off Balance Sheet Arrangements

     We had no off balance sheet arrangements as of December 31, 2006.

Critical Accounting Estimates

     We have identified the following accounting estimates as critical to our business operations and the understanding of our results of operations. The preparation of this annual report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. The effect of these policies on our business operations is discussed below.

Standard Warranty Costs

     We warrant our products from manufacturing defects on a limited basis for a period of one year after purchase, and thereafter will replace any defective TASER unit for a fee. We track historical data related to returns and related warranty costs on a quarterly basis, and estimate future warranty claims by applying our four quarter average return rate to our product sales for the period. We have also historically increased our reserve amount if we become aware of a component failure that could result in larger than anticipated returns from our customers. As of December 31, 2006, our reserve for warranty returns was $713,000 compared to an $852,000 reserve at December 31, 2005. Our reserve for warranty returns has decreased despite the growth in 2006 sales mainly as the result of continued improvements in our product manufacturing processes which, in turn, have decreased our product return rate. In the event that product returns under warranty differ from our estimates, changes to warranty reserves might become necessary.

Inventory

     Inventories are stated at the lower of cost or market, with cost determined using the weighted average cost, which approximates the first-in, first-out (FIFO) method. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories to their net realizable value. These provisions are based on our best estimates after considering historical demand, projected future demand, inventory purchase commitments, industry and market trends and conditions and other factors. Our reserve for excess and obsolete inventory was $223,000 at December 31, 2006 compared to $261,000 at December 31, 2005. The decrease in 2006 was primarily due to the write off of previously reserved inventories. In the event that actual excess, obsolete or slow-moving inventories differ from these estimates, changes to inventory reserves might become necessary.

Accounts Receivable

     Sales are typically made on credit and we generally do not require collateral. We perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for estimated potential losses. Uncollectible accounts are written off when deemed uncollectible, and accounts receivable are presented net of an allowance for doubtful accounts. These allowances represent our best estimates and are based on our judgment after considering a number of factors including third-party credit reports, actual payment history, customer-specific financial information and broader market and economic trends and conditions. In the event that actual uncollectible amounts differ from these estimates, changes in allowances for doubtful accounts might become necessary.

Valuation of Long-lived Assets

     We review long-lived assets, such as property and equipment and intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We utilize a two-step approach to testing long-lived assets for impairment. The first step tests for possible impairment indicators. If an impairment indicator is present, the second step measures whether the asset is recoverable based on a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Our review requires the use of judgment and estimates. Management believes that no such impairments have occurred to date. However, future events or circumstances may result in a charge to earnings if we determine that the carrying value of a long-lived asset is not recoverable.

Income Taxes

     Statement of Financial Accounting Standards No. 109, or SFAS No. 109, Accounting for Income Taxes, establishes financial accounting and reporting standards for the effect of income taxes. In accordance with SFAS No. 109, we recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carryforwards. We are currently under audit by the United States Internal Revenue Service for our 2004 fiscal year. The audit process has only recently begun and we are unable to determine the outcome of the process at this time. There can be no assurance that the final outcome of this audit will not have an adverse effect on our future operating results.

Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting or tax laws in the United States, or changes in other facts or circumstances. In addition, we recognize liabilities for potential United States tax contingencies based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financial statements.

In preparing our financial statements, we assess the likelihood that our deferred tax assets will be realized from future taxable income. In evaluating our ability to recover our deferred income tax assets we consider all available positive and negative evidence, including our operating results, ongoing tax planning and forecasts of future taxable income. We establish a valuation allowance if we determine that it is more likely than not that some portion or all of the net deferred tax assets will not be realized. We exercise significant judgment in determining our provisions for income taxes, our deferred tax assets and liabilities and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred tax assets. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As a result of the shareholder litigation settlement expense recorded in the second quarter of 2006, we have recorded a valuation allowance of $250,000 against our deferred tax assets for Arizona NOL’s as of December 31, 2006. We believe that, other than as previously described, as of December 31, 2006, based on our evaluation, no additional valuation allowance was deemed necessary as it is more likely than not that our net deferred tax assets will be realized. However, the deferred tax asset could be reduced in the near term if estimates of taxable income during the carryforward period are reduced.

Stock Based Compensation

     We account for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123R. We use the Black-Scholes-Merton option pricing model which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their stock options before exercising them (“expected term”), the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). We contracted with a third-party consultant who utilized our historical data to validate our assumptions for the 2006 option grants. Changes in the subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized on our statements of operations. Refer to Note 2p to our financial statements for further discussion of how we determined our valuation assumptions.

Contingencies

     We are subject to the possibility of various loss contingencies including product related litigation, arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

     We invest in a limited number of financial instruments, consisting principally of investments in high credit quality debt securities, denominated in United States dollars.

     We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” (SFAS No. 115). All of the cash equivalents and marketable securities are treated as “held-to-maturity” under SFAS No. 115. Investments in fixed rate interest earning instruments carry a degree of interest rate risk as their market value may be adversely impacted due to a rise in interest rates. As a result we may suffer losses in principal if forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our debt securities as “held-to-maturity,” no gains or losses are recognized due to changes in interest rates. These securities are reported at amortized cost, which approximates fair value. As of December 31, 2006, we performed a sensitivity analysis on our fixed rate financial investments. According to our analysis, an increase in interest rates of 50 basis points would result in a decrease in the fair market values for these investments of approximately $35,000 and a decrease in interest rates of 50 basis points would result in an approximately $42,000 increase in fair market value.

     Additionally, we have access to a line of credit borrowing facility which bears interest at varying rates, ranging from LIBOR plus 1.5% to prime. At December 31, 2006 the available borrowing under the line of credit was $7.6 million, and there was no amount outstanding under the line of credit. We have not borrowed any funds under the line of credit since its inception, however, should we need to do so in the future, such borrowings would be subject to adverse or favorable changes in the underlying interest rate.

Exchange Rate Risk

     We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, sales to customers provide for pricing and payment in United States dollars, and therefore are not subject to exchange rate fluctuations. To date, we have not engaged in any currency hedging activities, although we may do so in the future. Fluctuations in currency exchange rates could harm our business in the future.

Item 8. Financial Statements and Supplementary Data

TASER INTERNATIONAL, INC.

BALANCE SHEETS

		December 31,
		2006				2005
						(As restated)
Assets
Current assets:
Cash and cash equivalents		$	18,773,685			$	16,351,909
Short-term investments			3,557,289				—
Accounts receivable, net of allowance of $110,000 and $111,000 in 2006 and 2005, respectively			10,068,049				5,422,027
Inventory			9,257,746				10,105,336
Prepaids and other assets			2,164,002				2,840,030
Insurance settlement proceeds receivable			—				575,000
Deferred income tax asset			12,295,493				6,955,500
Total current assets			56,116,264				42,249,802
Long-term investments			25,477,574				27,548,120
Property and equipment, net			20,842,632				21,061,754
Deferred income tax asset			15,868,719				20,040,788
Intangible assets			1,532,500				1,340,783
Total assets		$	119,837,689			$	112,241,247
Liabilities and stockholders’ equity
Current liabilities
Current portion of capital lease obligations		$	45,214			$	43,111
Accounts payable and accrued liabilities			6,789,474				6,315,654
Current portion of deferred revenue			1,037,441				561,165
Deferred insurance settlement proceeds			509,067				476,515
Litigation Settlement Liabilities			9,750,000				—
Customer deposits			171,492				190,256
Total current liabilities			18,302,688				7,586,701
Capital lease obligations, net of current portion			30,974				76,188
Deferred revenue, net of current portion			1,975,489				839,983
Other liabilities			199,999				—
Total liabilities			20,509,150				8,502,872
Commitments and contingencies
Stockholders’ equity
Preferred stock, $0.00001 par value per share; 25 million shares authorized; 0 shares issued and outstanding at December 31, 2006 and 2005			—				—
Common stock, $0.00001 par value per share; 200 million shares authorized; 61,939,974 and 61,938,654 shares issued and outstanding at December 31, 2006 and 2005, respectively			622				619
Additional paid-in capital			80,629,659				78,742,862
Treasury stock, 300,000 shares at December 31, 2006			(2,208,957	)			—
Retained earnings			20,907,215				24,994,894
Total stockholders’ equity			99,328,539				103,738,375
Total liabilities and stockholders’ equity		$	119,837,689			$	112,241,247

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

TASER INTERNATIONAL, INC.

STATEMENTS OF OPERATIONS

		For the Years Ended December 31,
		2006				2005				2004
		(As restated)
Net sales		$	67,717,851			$	47,694,181			$	67,639,879
Cost of products sold:
Direct manufacturing expense			18,296,039				12,843,816				16,898,559
Indirect manufacturing expense (1)			6,242,751				5,252,470				5,556,937
Total cost of products sold			24,538,790				18,096,286				22,455,496
Gross margin			43,179,061				29,597,895				45,184,383
Sales, general and administrative expenses (1)			29,680,764				26,483,485				13,880,322
Research and development expenses (1)			2,704,521				1,574,048				823,593
Shareholder litigation settlement expense			17,650,000				—				—
Income (loss) from operations			(6,856,224	)			1,540,362				30,480,468
Interest income			1,880,407				1,229,044				439,450
Interest expense			(7,281	)			(4,208	)			(1,485	)
Other income (expense), net			(481	)			(59,772	)			2,309
Income (loss) before provision for income taxes			(4,983,579	)			2,705,426				30,920,742
Provision (benefit) for income taxes			(895,900	)			1,648,910				12,039,000
Net income (loss)		$	(4,087,679	)		$	1,056,516			$	18,881,742
Income (loss) per common and common equivalent shares
Basic		$	(0.07	)		$	0.02			$	0.33
Diluted		$	(0.07	)		$	0.02			$	0.30
Weighted average number of common and common equivalent shares outstanding
Basic			61,984,240				61,303,939				57,232,329
Diluted			61,984,240				63,556,246				62,319,590

Indirect manufacturing expense		$	131,086			$	—			$	—
Sales, general and administrative			808,341				—				—
Research and development expenses			199,418				—				—
		$	1,138,845			$	—			$	—

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

TASER INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2006, 2005 and 2004

										Additional																Total
		Common Stock								Paid-in				Treasury Stock								Retained				Stockholders’
		Shares				Amount				Capital				Shares				Amount				Earnings				Equity
Balance, December 31, 2003			50,698,824			$	507			$	22,249,321				—			$	—			$	5,177,622			$	27,427,450
Exercise of stock options			6,912,892				68				13,084,744				—				—				—				13,084,812
Exercise of private warrants			270,208				3				74,997				—				—				—				75,000
Exercise of public warrants			3,110,232				31				2,470,034				—				—				—				2,470,065
Stock options granted for payment of consulting fees			—				—				625,714				—				—				—				625,714
Income tax effect of stock options exercised			—				—				37,346,000				—				—				—				37,346,000
Net income			—				—																18,881,742				18,881,742
Balance, December 31, 2004			60,992,156				609				75,850,810				—				—				24,059,364				99,910,783
Opening adjustment to retained earnings (a)			—				—				—				—				—				(120,986	)			(120,986	)
Balance, December 31, 2004, as adjusted			60,992,156				609				75,850,810				—				—				23,938,378				99,789,797
Exercise of stock options			946,498				10				749,493				—				—				—				749,503
Income tax effect of stock options exercised			—				—				2,142,559				—				—				—				2,142,559
Net income			—				—				—				—				—				1,056,516				1,056,516
Balance, December 31, 2005 (As restated)			61,938,654				619				78,742,862				—				—				24,994,894				103,738,375
Exercise of stock options			301,320				3				747,952				—				—				—				747,955
Stock-based compensation expense			—				—				1,138,845				—				—				—				1,138,845
Purchase of treasury stock			(300,000	)			—				—				300,000				(2,208,957	)			—				(2,208,957	)
Net loss			—				—				—				—				—				(4,087,679	)			(4,087,679	)
Balance, December 31, 2006			61,939,974			$	622			$	80,629,659				300,000			$	(2,208,957	)		$	20,907,215			$	99,328,539

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

TASER INTERNATIONAL, INC.

STATEMENTS OF CASH FLOWS

		For the Year Ended December 31,
		2006				2005				2004
		(As restated)
Cash Flows from Operating Activities:
Net income (loss)		$	(4,087,679	)		$	1,056,516			$	18,881,742
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on disposal of assets			—				56,872				—
Depreciation and amortization			2,096,595				1,712,738				551,793
Provision for doubtful accounts			(830	)			26,620				90,000
Provision for excess and obsolete inventory			85,329				117,000				36,027
Provision for warranty			442,195				1,293,657				361,058
Stock compensation expense			1,138,845				—				625,714
Deferred insurance settlement proceeds			(192,448	)			(98,485	)
Deferred income taxes			(1,167,924	)			(525,503	)			727,892
Stock option tax benefit			—				2,142,559				11,321,554
Change in assets and liabilities:
Accounts receivable			(4,645,192	)			3,011,465				(3,145,779	)
Inventory			762,261				(3,459,333	)			(3,750,104	)
Prepaids and other assets			676,028				(1,147,323	)			(863,571	)
Insurance settlement proceeds receivable			575,000				—				—
Accounts payable and accrued liabilities			256,625				(3,601,040	)			4,654,004
Deferred revenue			1,611,782				393,871				897,487
Accrued litigation settlement			9,750,000				—				—
Other liabilities			199,999				—				—
Customer deposits			(18,764	)			88,090				(83,637	)
Net cash provided by operating activities			7,481,822				1,067,704				30,304,180
Cash Flows from Investing Activities:
Purchases of investments			(82,610,518	)			(87,829,476	)			(35,273,292	)
Proceeds from investments			81,123,775				95,554,648				—
Purchases of property and equipment			(1,839,815	)			(7,812,220	)			(11,322,299	)
Purchases of intangible assets			(229,375	)			(104,066	)			(195,397	)
Net cash used in investing activities			(3,555,933	)			(191,114	)			(46,790,988	)
Cash Flows from Financing Activities:
Payments under capital leases			(43,111	)			(31,343	)			(14,236	)
Payments on notes payable			—				—				(250,000	)
Repurchase of common stock			(2,208,957	)			—				—
Proceeds from warrants exercised			—				—				2,545,065
Proceeds from options exercised			747,955				749,503				13,084,812
Net cash (used in) provided by financing activities			(1,504,113	)			718,160				15,365,641
Net (Decrease) Increase in Cash and Cash Equivalents			2,421,776				1,594,750				(1,121,167	)
Cash and Cash Equivalents, beginning of period			16,351,909				14,757,159				15,878,326
Cash and Cash Equivalents, end of period		$	18,773,685			$	16,351,909			$	14,757,159
Supplemental Disclosure:
Cash paid for interest		$	7,281			$	103			$	1,364
Cash (refunded) paid for income taxes — net		$	229,424			$	(19,627	)		$	(264,026	)
Non Cash Transactions—
Insurance settlement proceeds receivable		$	—			$	575,000			$	—
Property and equipment acquired under capital lease		$	—			$	146,000			$	—
Property and equipment purchases in accounts payable		$	—			$	74,233			$	—
Increase to deferred tax asset related to shares of stock obtained from the exercise of stock options (with a related increase to additional paid in capital of $0, $2,142,559 and $37,346,000 in 2006, 2005 and 2004, respectively)		$	—			$	—			$	26,024,446