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, without limitation, 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 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, airline, and private citizen self-defense markets; and (6) our target business model. 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 ADVANCED TASER product; (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 resulting from alleged product related injuries and death; (9) media publicity concerning allegations of deaths occurring after use of the TASER device and the negative effect this publicity could have on sales; (10) TASER device tests and reports; (11) product quality; (12) implementation of manufacturing automation; (13) potential fluctuations in quarterly operating results; (14) financial and budgetary constraints of prospects and 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; and (21) other factors detailed in our filings with the Securities and Exchange Commission, including, without limitation, those factors detailed in Exhibit 99.1 to this report.

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

Overview

      TASER International, Inc. (the “Company” or “we” or “us”) began operations in Arizona in 1993 for the purpose of developing and manufacturing non-lethal self-defense devices. From inception until the introduction in 1994 of our first product, the AIR TASER device, we were in the developmental stage and focused our efforts on product development, raising capital, hiring key employees and developing marketing materials to promote our product line.

      In 1995 and 1996, we concentrated our efforts on promoting retail sales and establishing distribution channels for the AIR TASER product line which was sold to private citizens for self defense. In fact, our marketing efforts were limited by a non-compete agreement that prohibited the marketing or sale of our products to the U.S. law enforcement and military markets. In 1998, the non-compete agreement that had precluded sales to the law enforcement and military markets expired. In anticipation of its expiration, we focused our research and development efforts on the ADVANCED TASER product line. Our change in focus from the private citizen market to the law enforcement market resulted from a market analysis that suggested it was critical to first prove the effectiveness of our technology in the professional law enforcement community. In December 1999, we introduced the ADVANCED TASER device for sale in the law enforcement market.

      The first full year of ADVANCED TASER product line sales was 2000. Although we had limited financial resources, we spent the year building the distribution channel for marketing the product line and developing a nationwide training program to introduce the product line to law enforcement agencies, primarily

in North America. In 2001, we made significant changes to support the growing demand for the ADVANCED TASER product line. We developed a manufacturing infrastructure inclusive of direct assembly and material management to support product demand. We also completed in 2001 an initial public offering of 800,000 units, at $13.00 per unit, each unit consisting of one and one half shares of common stock and one and one half warrants to purchase one share of common stock with net proceeds to us of approximately $8.4 million. Proceeds from the offering were used to retire debt, increase inventory and working capital and fund future sales and marketing programs. During 2001, we relocated our corporate headquarters to a larger, more modern facility, expanded our sales and marketing efforts, and sold or provided ADVANCED TASER devices to more than 1,000 police agencies worldwide.

      In 2002, Company management worked with officials from United Airlines and a Washington lobbying firm to assist with safety studies and to initiate legislative changes which would allow the ADVANCED TASER device to be deployed on board commercial aircraft. On November 25, 2002, Congress approved The Homeland Security Act of 2002 allowing individual carriers to apply to the Undersecretary of Transportation for Security, on a case by case basis, to deploy our weapon system. As of January 2003, two commercial carriers, United Airlines and Mesa Airlines, had submitted these applications to the Transportation Security Administration (TSA) for approval. In November 2004, the TSA granted approval for the first commercial airline to deploy TASER devices on flights.

      In April 2002, the Company was notified that it had received a grant from the Office of Naval Research to aid the U.S. Government with the development of non-lethal weapons for the military. This grant provided us with added funding for our research and development efforts, and also validated our position as a leader in non-lethal technologies. In September 2002, our grant funding was augmented with an additional $349,000 to pursue the concepts developed in Phase I of the award, bringing the total award under this grant to $479,000. The Company received a grant for an additional $515,000 from the Office of Naval Research at the end of 2004. At the close of 2002, three years following our initial introduction of the ADVANCED TASER device, we had more than 2000 law enforcement agencies worldwide testing and deploying our M26 weapon system. This number of agencies includes 134 departments who have either purchased, or are in the process of purchasing, one unit for each patrol or line level officer. This list of 134 departments includes two major departments, the City of Phoenix, a top-ten law enforcement agency in the U.S., and the Ohio State Troopers, a leader in the highway patrol community.

      In 2003, we remained focused on expanding our manufacturing and sales infrastructure to support the growing demand for our product. We continued developing new product capabilities, and we added new resources to expand our technology base. In May 2003, we introduced the TASER X26 device at our annual tactical conference. This product incorporated the strengths of its predecessor, the ADVANCED TASER device but also introduced to the market a new “shaped pulse” technology, and a new smaller form factor. The product design was completed, comprehensive medical safety testing was conducted, and the first weapons began shipping in September 2003.

      On June 26, 2003, we purchased the assets of Electronic Medical Laboratory Inc., doing business as Taser Technologies Inc., formerly Tasertron, a competitor in the manufacture and sale of Taser conducted energy weapons to law enforcement at the time. This purchase provided us with clear title to the “TASER” Trademark and a number of patents, eliminated litigation and market confusion, and enabled us to enter into a teaming relationship with General Dynamics.

      The protection of our intellectual property was also a priority for our engineering and legal team during 2003. After acquiring the assets of Tasertron, the next step in our strategy to build strong barriers to entry for new competitors was to strengthen our patent protection on both existing technologies, and those in varying stages of development. On October 21, 2003, we were granted a fundamental patent on our ADVANCED TASER waveform. This patent protects us against competing product development using electrical impulses ranging from half the energy of the M26 to five times the energy of the M26, or the range of electrical output capable of immobilizing a human without affecting critical organs. In addition, we purchased eight additional patents allowing us to expand our current product capabilities into new areas of weapon systems, including

area denial systems, or TASER “landmine” type devices known as TASER Anti-Personnel Munition (TAPM).

      In 2003, we shipped our products to key United States Military command posts, and worked with several key international police and military forces to conduct safety and reliability testing for future deployment. These test programs included the United Kingdom, Australia and Canada. We also received Congressional approval for $1.0 million of appropriations to be used to purchase TASER brand weapons for the United States Military. And, we had our first major sale to a foreign military agency in alliance with the U.S. in the war against terror.

      In 2004, the Company continued to expand, growing its revenue internally by 177% compared to 2003. In 2004, the Company also announced its new TASER X26 ^C Citizen Defense System, targeted to the private citizen self-defense market, and began shipments of this product late in the third quarter. The Company booked the largest order in its history when it sold $3.7 million of TASER products to the city of Houston, TX. The Company also booked significant sales to the United States Military and the National Guard. In addition, the Company completed the development of the X-rail system to attach a TASER X26 to the stock of an M-16 assault rifle using the Picatinny rail system as well as the launch of an extended range cartridge that improved the maximum range of TASER devices to 25 feet.

      The Company also achieved several important legislative and safety approvals for its products. In July 2004, the State of Massachusetts passed legislation allowing TASER devices to be used by police (prior legislation precluding the use of TASER devices was overturned). The Transportation Security Administration approved the use of TASER devices on commercial aircraft in November 2004. The United States Department of Defense Human Effects Center of Excellence (HECOE) concluded an extensive review of TASER devices concluding that, while additional studies would be helpful, TASER devices are generally safe and effective, and that data indicated TASER devices reduce injuries to police officers and suspects when compared to alternatives along the force continuum. Several international governments also approved the use of TASER devices, including the United Kingdom, Finland, Sweden, and South Korea. Finally, the Company established the TASER Foundation for the families of fallen law enforcement officers in the fourth quarter of 2004. The TASER Foundation was funded with initial commitments for over $700,000 from TASER International, Inc. employees. The TASER Foundation is a structured means for TASER International to give back to the community in a very targeted fashion to support the law enforcement community which has helped us to build our company.

Products

      Our devices use compressed nitrogen to shoot two small, electrified probes up to a maximum distance of 25 feet. The probes and compressed nitrogen are stored in a replaceable cartridge attached to the base of the device. Our proprietary replacement cartridges are sold separately.

      After firing, the probes discharged from our cartridges remain connected to the device by high-voltage 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 temporarily overwhelm the normal electrical signals within the body’s nerve fibers, impairing 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 up to ten seconds and the charge can be repeated for up to approximately ten minutes by repeatedly firing the device, if required.

      Since all our devices use the same cartridges, we can support multiple platforms and still achieve economies of scale in cartridge production. Our cartridges 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 devices 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.

      We introduced our initial product, the AIR TASER, in 1994. We designed the AIR TASER to look like a cellular telephone rather than a gun to target the consumer electronics market. During its life cycle, the AIR TASER product line consisted of the AIR TASER, a cartridge that shoots two small, electrified probes up to 15 feet, an optical laser sight, and a number of holstering accessories. However, in 2003, we discontinued the manufacture of this model after building all available units from raw material inventory, and are continuing to sell off available units into the private citizen market.

      We developed the ADVANCED TASER product line, launched in December 1999, primarily for the law enforcement and corrections market. The ADVANCED TASER device is one of our primary products. We sell the M26 version of this device exclusively to law enforcement, military, corrections agencies and to the commercial airline industry. Currently, the ADVANCED TASER product line consists of the ADVANCED TASER device (there are three versions: the M26, the M18 and the M18-L), various cartridges that shoot two small, electrified probes up to 25 feet, rechargeable batteries, a battery recharging system, data download package, extended warranty packages, and a number of holstering accessories.

      In addition to the law enforcement line of ADVANCED TASER products, we also developed a slightly less powerful private citizen version of the ADVANCED TASER device for the private citizen self defense market. This line includes the ADVANCED TASER M18L, with integrated laser sight, the ADVANCED TASER M18 without an integrated laser sight, a cartridge that shoots two small, electrified probes up to 15 feet, and a number of holstering accessories.

      In 2003, we introduced the TASER X26, with Shaped Pulse Technology. This device uses a highly refined energy pulse that concentrates a small portion of energy to first penetrate the clothing barrier, while the majority of electrical charge is held in reserve, flowing freely through the barrier once the leading edge has been penetrated. The TASER X26 product line consists of the TASER X26 (there are two versions: the law enforcement X26 and the private citizen X26 ^C ), various cartridges that shoot two small, electrified probes up to 25 feet, a digital power magazine, data download package, extended warranty packages, and holstering accessories.

      Our products are sold primarily through our network of distributors at a wide range of prices and directly to law enforcement agencies across the United States. Our most inexpensive private citizen product is the entry-level ADVANCED TASER M18 product with a retail price of $299.95. Our high-end private citizen model, the X26 ^C , was introduced during the third quarter of 2004 and is sold in a kit which 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. The ADVANCED TASER device was our best selling item in 2003. In 2004, the Company’s X26 product was its best selling product. Law enforcement distributors sell the ADVANCED TASER M26 to police and corrections agencies for $399. The TASER X26 was introduced to law enforcement in 2003, and is sold to police and corrections agencies for $799. Retail cartridge prices range from $16 for law enforcement to $30 per unit for private citizen purchases.

      The Company also introduced its X-Rail system in 2004, which allows the X26 conducted energy 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. In 2004, the Company also had successful field trials of its TASER Anti-Personnel Munition (TAPM) area denial device which is being developed with General Dynamics.

      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 is designed to disable an attacker for up to 30 seconds, and we encourage private citizens to leave the unit and flee after firing it. 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. Warranty costs under the AIR TASER replacement policy have been minimal to date. Historically, approximately 2% of the AIR TASERs sold by us were returned by end users in connection with a warranty claim.

      We offer a one year no-questions-asked replacement policy on the ADVANCED TASER devices and TASER X26 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 on a time and materials basis. These fees are intended to help defray the handling and repair costs associated with product returns. This policy is attractive to our law enforcement and corrections agency customers. In particular, it avoids disputes regarding the source or cause of any defect.

      It is our policy to maintain a warranty reserve equivalent to estimated future warranty claims for products sold. 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. Warranty costs under the ADVANCED TASER device and TASER X26 device replacement policy totaled $361,000 in 2004 and $302,000 in 2003. And as of December 31, 2004, our reserve for warranty returns was $458,000 compared to the $313,000 reserved in 2003.

Markets

      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 7,000 law enforcement agencies have made initial purchases of our TASER brand devices for testing or deployment. These agencies include the Unites States Secret Service, Los Angeles Police Department, Los Angeles County Sheriff’s Department, New York Police Department, Chicago Police Department, Las Vegas Metropolitan Police Department, Seattle Police Department, the Royal Canadian Mounted Police, Miami Police Department, Denver Police Department, Houston (TX) Police Department, Fort Worth (TX) Police Department, Orange County (FL) Sheriff’s Department, Chandler (AZ) Police Department, Philadelphia Police Department, and Minneapolis Police Department. In addition, 1,468 police departments, including Phoenix (AZ) Police Department, Ohio State Troopers, Cincinnati, San Diego, Reno, Houston (TX), Sacramento, Albuquerque, Citrus County (FL) Sheriff’s Office and Clay County (FL) Sheriff’s Office 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 and the State of Wisconsin.

      Military police forces in the United States and overseas represent another key market for TASER devices. During 2004, we saw our non-lethal weapon systems deployed to key strategic locations for our United States Military and allies abroad. In several cases, they were used to reduce civilian and prisoner casualties resulting from combat operations in populated regions, and for prison control. In addition, new TASER prototype devices were tested by strategic military personnel for performance and field suitability. In total, we have shipped military users approximately 5,400 TASER devices to date. These shipments include one large order to a foreign military of 3,348 ADVANCED TASER M26’s. In 2004, the Company had its single largest order from the United States Military for $1.8 million which included TASER devices and cartridges. In addition, the Company had a $440,000 order for X26 conducted energy devices and cartridges which shipped to the United States National Guard during 2004. The Company also introduced its X-Rail system in 2004, which allows the X26 conducted energy device to be attached to assault rifles via a Picatinny rail giving the user lethal and non-lethal options on the same device.

      On September 30, 2003, President Bush signed into law the 2004 Fiscal Year Defense Appropriations Bill providing $1.0 million toward the purchase of TASER non-lethal conducted energy devices by the Department of Defense. As of December 31, 2004, all funds under this budget line item have been spent.

      In April 2002, we were awarded the first phase of a four-phase cost-plus-profit grant from the Office of Naval Research. The grant was to fund the development of non-lethal weapon systems for the United States Military, and provided approximately $130,000 of capital for our research and development efforts. In

September 2002, our funding was increased by an additional grant of $349,000, which provided total funding of $479,000. As of December 31, 2003, we completed and recognized revenue equal to 95% of this project, or $456,000. Due to our success in the first and second phase of this research, the Company was awarded a $515,000 grant for phases three and four of the project in late 2004.

      In addition to our work with the Office of Naval Research, we have also begun working with General Dynamics on the development of area denial systems, utilizing TASER core technologies, for the United States Military. The TAPM (TASER Anti-Personnel Munition) was successfully trialed for the United States Military at the Picatinny Arsenal during 2004, and the Company is now working with General Dynamics on producing prototypes for the military to test.

      The commercial airlines became a new market for us in 2001. Following the events of September 11, 2001, the commercial airline industry implemented added security measures to protect its passengers and crew. These measures, some voluntary and some mandated by the federal government, included reinforcement of cockpit doors, increased airport security, and the testing of effective devices for storage and use on airlines.

      Initially, the Company’s management believed approval of non-lethal devices for airline use would occur in 2002. However, because of an overwhelming array of security issues and programs demanding TSA approval, this item was delayed. Two commercial carriers, United Airlines and Mesa Airlines supported the use of our TASER device for on-board security. And both, in accordance with the Homeland Security Act of 2002, applied to the TSA for formal approval to deploy the ADVANCED TASER M26 device platform. TSA completed in May 2003 a Congressional mandated study on non-lethal weapons. The study affirmed that the ADVANCED TASER M26 would be an appropriate weapon for on board aircraft use and the TSA formally approved a major airline’s application to carry the device on its flights in November 2004.

      In addition, the Vision 100 — Century of Aviation Reauthorization Act which was signed into law on December 12, 2003 (Public Law 108-176), contained a sense of Congress that “members of flight deck crew of cargo aircraft should be armed with a firearm or TASER device to defend the cargo aircraft against an attack by terrorists that could result in the use of the aircraft as a weapon of mass destruction or other terrorist purposes.” As of December 2004, management was not aware of any cargo carriers that are pursuing the deployment of either the ADVANCED TASER M26 or TASER X26 device aboard cargo aircraft.

      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. They represent a broad range of individuals, including bodyguards, commercial and government building security guards, commercial money carrier employees and many others, and represent a large potential market.

      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 dropped to a range of $1.0 to $1.7 million per year. The Company introduced a private citizen version of the X26 device (X26 ^C ) during the third quarter of 2004 and agreed to a distribution agreement with one of its distributors to distribute the X26 ^C to federal firearms licensed dealers (FFL) for public sale in December 2004. During 2004, private citizen sales increased due to the introduction of the X26 ^C to approximately $1.7 million. We believe private citizen sales could become a more meaningful portion of our revenues going forward depending on the success of the X26 ^C product and legislation relating to the purchase 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, his 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. Although the Company has focused on three primary markets, we have been able to expand our customer base to thousands of end users within these markets. In 2004, we shipped a total of 16,612 orders at an average sale price of $4,072 per shipment. This compares to 9,580 orders shipped in 2003, at an average sales price of $2,553 per order.

      Since the introduction of the ADVANCED TASER device in 1999, the Company has used several types of media to communicate the costs and benefits of deploying its device systems. These campaigns have included the development of CD/DVD packages geared toward law enforcement leaders in the community, advertisements in law enforcement publications, and the use of more than 1,000 training classes conducted around the world. The Company also targets key regional and national law enforcement trade shows where it can demonstrate the TASER devices to leading departments. The Company also held its fifth annual U.S. tactical conference for the trained master instructors, and law enforcement training officers, and conducted its third European tactical conference to reach customers in more than 30 countries, including the United Kingdom, Germany, 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 2004 and 2003 was to introduce and train the officers in the use of the TASER X26, and to introduce the new XP Cartridge for law enforcement use.

      The Company plans to continue investment in the area of law enforcement trade shows and conferences in 2005, as it has provided the ability to market its products to a 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. We have developed a private citizen version of our ADVANCED TASER device for individual use. These models, the M18L and M18, offer the private citizen the same features sold to law enforcement, but with a shorter wire length for cartridge deployment and a slightly reduced power setting. We introduced the private citizen version of our TASER X26 system during the third quarter of 2004.

      With the exception of several accounts to which we sell directly, the vast majority of our law enforcement agency sales in the Unites States occur through our network of 28 law enforcement distributors. In addition, we added one military and government contracting distributor in 2003. These distributors were selected based upon their reputation within their respective industries, their credit worthiness, and their distribution network. We maintain tight controls over our law enforcement distributors to help ensure that our service standards are achieved. We also reserve the right to take any large agency order directly to secure our credit interest.

      Sales in the private citizen market are made through web sales and through 25 commercial distributors. In December 2004, the Company entered into an distribution agreement with one of its existing law enforcement distributors to distribute the X26 ^C to federal firearms licensed dealers (FFL) for public sale.

      Due to the confidential nature of the 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.

      We concentrated our marketing resources on penetrating the United States law enforcement and corrections market since the development of the ADVANCED TASER device in late 1999. Our international

sales efforts prior to 2004 were limited to select presentations and training seminars conducted by TASER personnel. These presentations included the introduction of TASER devices in Europe and parts of the Middle East, South America and Asia. Our focus in 2004 was on the countries which were furthest along in the process. These countries included the United Kingdom, France, Australia, and South Korea. The United Kingdom completed a three year study of TASER brand conducted energy devices during 2004. Their study ended in September with the Home Office Secretary, David Blunkett, approving their use by all firearms officers. Total UK sales accounted for 46 percent of our total international sales in fiscal 2004. With the approval coming late in the year, we expect total UK sales to increase in 2005. Similarly, Australia completed pilot programs in seven of its states and wrote favorable reports on TASER brand products. France initiated its testing early in the year and had many widely publicized uses. These uses resulted in favorable feedback from law enforcement unions, officers, and government officials. The results of their pilot program are expected to become available sometime in 2005. French sales accounted for approximately 4.5 percent of our total international sales in 2004. We plan to continue to focus our efforts in territories that are moving in the direction of non-lethal weaponry. During 2005, we plan to bolster our international presence by expanding our focus to a larger number of countries. We also plan to establish more of a global presence by attending many large international tradeshows. In December 2004, we also appointed a Vice President of International Sales who we expect to focus his energies in growing the export markets for our products.

      We continue to work through a network of international distributors that work in a specific territory. Our international distributors buy our products and resell them to dealers and end users. These distributors generally work under short term exclusive agreements. Our 53 distributors get direct support from us with customer service, tradeshows, and training classes. We shipped products to approximately 43 countries during fiscal 2004. Sales volume ranged from $400 to just under $1 million. Our sales outside the U.S. accounted for approximately 4% of our sales in 2004 and 12% of our total sales in 2003. The lower percentage of international sales in 2004 is attributable primarily to the growth in the United States market in 2004.

      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 and corrections agency trainers as instructors in the use of the TASER devices. As of December 31, 2004, approximately 18,922 law enforcement officers around the world have been trained and certified as instructors in the proper use of TASER brand devices. This includes approximately 18,102 officers in the United States and 822 in other countries.

      Currently, 347 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 these organizations. 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. These instructors can independently organize and promote their own training sessions or teach at training classes arranged by the Company. The Company provides logistical support for the training classes in both instances. 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. We pay master instructors a per-session training fee for each session they conduct. We conducted over 350 training courses in 2004 and, as of December 31, 2004, we have conducted a cumulative 1,006 training courses during which we have trained more than 17,700 individuals in the use of TASER products. The Company has 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 a X26 ^C certified instructor. The Company has over 400 instructors certified to give the X26 ^C training.

      During 2002, we created a Training Board, consisting of Hans Marrero, our Chief Master Instructor, four active duty police officers, and one retired law enforcement trainer to coordinate the growing demands of our training program. In 2003 the Board was expanded to include a representative from the commercial airline industry, and one additional active duty police officer. 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. The Company created the new position of Director of Training during 2004 and this person also serves on the Training Board. In order to gain new perspectives on the training, the Company added five new members to its training board in late 2004. The new members replaced four training board members who rotated off the training board.

Manufacturing

      We conduct manufacturing and final assembly operations at our headquarters in Scottsdale Arizona and we own 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, on two shifts, we are able to produce approximately 80,000 cartridges per month, and more than 7,500 TASER devices. We can expand our production capabilities by adding additional personnel 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. During 2005 and 2006, we intend to automate more functions in our production process by including other processes in the cartridge and high-voltage assembly lines.

      We currently purchase finished circuit boards and injection-molded plastic components from suppliers located in the Phoenix area. Although we currently obtain these components from single source suppliers, 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 Arizona, 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

      The primary competitive factors in the law enforcement and corrections market include a weapon’s cost, effectiveness, 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 the Company. The two companies are expected to launch their products during the first quarter of 2005. The Company believes that its strong relationship with customers, its large installed base of products, and the significant amount of medical and safety testing done on its product will provide the Company with a competitive advantage over the 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 Jaycor, Inc. 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.

      On June 26, 2003, we purchased the assets of Electronic Medical Research Laboratories, Inc., doing business as Taser Technologies, Inc., formerly Tasertron. Prior to our purchase, Taser Technologies was the sole remaining manufacturer of the original Taser device introduced in the 1970’s. It is our opinion that as of the date of acquisition, fewer than 200 police departments deployed Taser Technologies weapons, with fewer than 5,000 total weapons in the field. As of December 31, 2004, more than 7,000 departments had purchased in the aggregate more than 130,000 of the Company’s TASER brand devices. Some of these agencies previously deployed Taser Technologies weapons.

      In the military markets, both 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 two 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. The Company is the only supplier providing conducted energy weapons to these agencies. There is indirect competition from pepper spray and impact weapons sold by companies such as Armor Holdings, Inc., and Jaycor, Inc.

      Conducted energy weapons 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, and ease of use. The widespread adoption of the Company’s TASER devices by prominent law enforcement agencies may help us overcome the historical perception of a lack of private citizen confidence in conducted energy weapons.

      In the private citizen market, the AIR TASER formerly competed with a conducted energy weapon introduced by Bestex, Inc. in 1996, called the Dual Defense, and indirectly competed with other non-lethal alternatives. In July 2002, the Company purchased U.S. Patent No. 5,078,117 from Mr. John Cover. This patent covers the propulsion system of our air cartridge. Prior to our purchase, Mr. Cover 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, as the continued manufacture by Bestex of the existing Dual Defense product beyond such date would be an infringement of our patent rights.

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 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 device systems.

      In 2002 through 2004, we worked with several law enforcement agencies, government agencies and distributors to overturn prior legislation preventing the sale of TASERs to law enforcement agencies in certain regions of the U.S. In August 2004, the Commonwealth of Massachusetts changed its laws to allow law enforcement agencies to deploy TASER devices. These combined efforts were successful in changing the legislation in the states of Hawaii, Massachusetts and Michigan. We consider this to be a dramatic change in regulations as, 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:

      Our device systems are considered a crime control product by the United States Department of Commerce. Accordingly, the export of our device systems 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 device systems. 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 regulations which may affect our weapon systems 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, New Zealand, the Netherlands, Norway, Serbia, and Pakistan.

      Additionally, Australia, Canada, Greece, India, Latvia, Lithuania, South Korea, Sweden, and Switzerland 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, 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. To date, there have been several successful outcomes involving the use of TASER devices reported by the police forces deploying the weapons system.

      TASER device sales to civilians are permitted in Austria, Bahamas, Bulgaria, Costa Rica, Croatia, Czech Republic, Ecuador, France, Germany (device must look like a gun and not have a laser sight), Mexico, Poland, Romania, Slovenia, and South Africa.

Intellectual Property

      We protect our intellectual property with U.S. and foreign patents and trademarks. In addition, we use confidentiality agreements with employees, consultants and key suppliers to help ensure the confidentiality of our trade secrets.

      The Company owns the following U.S. Patents: Patent No. 5,078,117, which expires in 2010, applies to cartridges for the M26 and X26, specifically, use of a compressed gas cylinder to store the propellant for the darts. The Bureau of Alcohol, Tobacco, Firearms, and Explosives classification of firearms does not apply to the M26 and X26 because the propellant for the darts in the M26 and X26 is not gunpowder but compressed nitrogen gas. Patent No. 6,636,412, which expires in 2019, applies to the M26, specifically, circuitry and operating methods for producing the ADVANCED TASER electrical output waveform. Patent No. 5,698,815, which expires in 2015, applies to a non-lethal electronic projectile fired from a conventional weapon. Patent No. 5,654,867, which expires in 2014, applies to weapons for immobilization, specifically, an arrangement for two laser sights, one for each dart. Patent No. 5,936,183, which expires in 2017, applies to non-lethal area denial devices, such as land mines that deploy cartridges as described above. Patent No. 5,955,695, which expires in 2017, applies to non-lethal area denial devices, such as land mines, capable of automatic aiming of deployed cartridges. Patent No. 6,269,726, which expires in 2017, applies to remotely controlled non-lethal weapons operated via video camera for protection of facilities and vehicles against personnel. Patent No. 6,256,916, which expires in 2019, applies to hand-held stun devices that do not propel darts.

      Foreign patents owned by the Company include the following. European Regional Patent No. EP 960048 provides the basis for granted patents in six countries (Great Britain, Belgium, France, Germany, Switzerland, and Italy) which expire in 2017 and apply to non-lethal area denial devices. These patents correspond to U.S. Patent No. 5,936,183, discussed above. European Regional Patent No. EP 993403 provides the basis for granted patents in each of the same six countries which expire in 2017 and apply to automatic aiming of cartridges deployed, for example, from a land mine. These patents correspond to U.S. Patent 5,955,695, discussed above.

      The Company continues to apply for U.S. and foreign patents to protect its technologies. Pending patent applications apply to the ADVANCED TASER M26, the TASER X26, and planned new products.

      Registered trademarks used in connection with current products and services and owned by the Company include ADVANCED TASER (U.S. Reg. No. 2,797,467), TASER (Japan Reg. No. 4826928 and South Africa Reg. No. 95/11583), and our globe with lightning bolt logo (Japan Reg. No. 4826503). Additionally, the Company has pending trademark applications in the U.S. and several foreign countries. The Company owns the internet domain name “Taser.com”.

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 funded by the Office of Naval Research. Both categories focus on next generation technology, yet are differentiated by their time to 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. The work being done for the Office of Naval Research has been focused on developing weapon systems to be used in military combat or policing activities. These projects are more long-term in nature, and involve several outside resources. Both avenues of research are led by our internal personnel and make use of specialized consultants when necessary. These 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 $824,000 in 2004 and $498,000 in 2003. The increase in expenditures for 2004 was driven by increased headcount in the R&D area as the Company added staff to develop new products in the pipeline. The research funded by the Office of Naval Research (ONR) has been completed on a cost-plus-profit basis, and the grant proceeds in 2004 were approximately $12,000 compared to $277,000 in 2003. The decrease in research funding is partially a timing difference as the Company did not receive its grant for phases 3 and 4 of the extended range projectile project until late 2004. Periodically as work is completed, an invoice summarizing the reimbursable expenses is submitted to the ONR for payment. The payment request details the costs expensed in the period and adds a nominal profit. Because this project generates profit for the Company, the reimbursement is recognized as a component of revenue, and the associated expenditures are expensed as a component of cost of products sold.

      As we progress with projects underway, we expect that our research and development expenditures will increase as a percentage of sales. This is due to the addition of personnel in our research and development department and the costs associated with conducting and preparing biomedical studies, and contracting for the services of medical experts to review our product developments. The Company expects to have a prototype of its Extended Range Projectile ready to test in 2005. The Company also plans to produce prototypes of the TASER Anti-Personnel Munition in 2005.

      During 2003, two products were introduced to our customer base. The first was the TASER X26, the next generation TASER device and the other was a new 21 foot cartridge for our law enforcement customers. The new cartridge, called the XP, was developed to address heavy clothing penetration requirements encountered in colder climates and during the winter months. This cartridge was further improved in 2004 by increasing its range to 25 feet and changing the dart body to an assembly of aluminum and brass.

      During 2004, our Operations Division was reorganized to expedite the development of new products, to streamline the production of existing products, and ready the manufacturing division to accept new technologies coming out of research and development. This reorganization included the expansion of our existing Research and Development and Manufacturing Engineering teams and the creation of a new Quality Assurance Department.

Employees

      As of December 31, 2004, we had 226 full-time employees and 23 temporary manufacturing employees. The breakdown by department is as follows: 169 direct manufacturing employees and 80 administrative and manufacturing support employees. Of the 80 administrative and manufacturing support employees; 26 were involved in sales, marketing, communication and training; 13 were employed in research, development and engineering; 21 were employed in administrative functions inclusive of executive management, legal, finance, accounting and investor relations; 4 were employed in the information systems technologies; and 16 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.

Corporate Information

      We were incorporated in Arizona in September 1993 as ICER Corporation. We changed our name to AIR TASER, Inc. in December 1993 and to TASER International, Incorporated in April 1998. In February 2001, we reincorporated in Delaware as TASER International, Inc. Our website is located at www.taser.com. The information on, or that can be accessed through, our website is not part of this Annual Report on form 10-KSB.

Principal Location, Corporate Headquarters and Manufacturing Facilities

      We conduct our operations from a 11,800 square-foot leased facility in Scottsdale, Arizona. The monthly rent for this facility is approximately $15,000. Our lease expires on December 31, 2005. In addition to our main building, we have leased three additional office suites adjacent to our building. The three auxiliary buildings total approximately 14,000 square feet, and cost the Company approximately $21,000 per month for rent. The leases for the three facilities expired on December 31, 2004 and we are currently renting the three facilities on a month to month basis. The Company is close to completing the construction of a new 100,000 square foot facility to house our operations in Scottsdale, Arizona. This building is expected to be completed and ready for occupancy by April 2005, at which time we expect to consolidate all of the U.S. operations into such facility. The Company has been paying for the construction of the facility as the work has been completed and it anticipates that it will own the building without any mortgage or other obligations when it is completed.

Investment Policies

      Our investment policy to date has been to focus resources on the development of our core business. To that end, our capital investments are made in the areas of fixed assets that will generate income through improved productivity or advanced technology. The Company’s investment choices are limited based on the Portfolio Investment Objectives which were approved by the audit committee of the Company’s board of directors. Cash reserves are invested mostly in interest bearing accounts and government sponsored securities. As of December, 2004, the Company had $14.8 million in cash and cash equivalents, and short-term and long-term investments of $35.3 million.

Securities Litigation

      On January 10, 2005, a securities class action lawsuit was filed in the United States District Court for the District of Arizona against the Company and certain of its officers and directors, captioned Malasky v. TASER International, Inc., et al. , Case No. 2:05 CV 115. Since then, numerous other securities class action lawsuits were filed against the Company and certain of its officers and directors. The majority of these lawsuits were filed in the District of Arizona. Four actions were filed in the United States District Court for the Southern District of New York. The parties in three of the New York actions have agreed to transfer the cases to the District of Arizona, and defendants are in the process of seeking the transfer of the fourth New York action to the District of Arizona. The parties have submitted a proposed order to consolidate all actions in the District of Arizona under the Malasky case file.

      These actions are filed on behalf of the purchasers of the Company’s stock in various class periods, beginning as early as May 29, 2003 and ending as late as January 14, 2005. The complaints allege, among other things, violations of Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5, promulgated thereunder, and seek unspecified monetary damages and other relief against all defendants. The complaints allege generally that the Company and the individual defendants made false or misleading public statements regarding, among other things, the safety of the Company’s products and the Company’s ability to meet its sales goals, including the validity of a $1.5 million sales order with one of the Company’s distributors in the fourth quarter of 2004.

      Pursuant to a proposed order, which has been submitted to the court, defendants need not respond to any of the complaints originally filed in these actions. Plaintiffs will file an amended consolidated complaint after lead plaintiff and lead counsel are chosen. Defendants will then respond to the amended consolidated complaint.

Shareholder Derivative Litigation

      On January 11, 2005, a shareholder derivative lawsuit was filed in the United States District Court for the District of Arizona purportedly on behalf of the Company and against certain of its officers and directors, captioned Goldfine v. Culver, et al. , Case No. 2:05 CV 123. Since then, five other shareholder derivative lawsuits were filed in the District of Arizona, two shareholder derivative lawsuits were filed in the Arizona Superior Court, Maricopa County, and one shareholder derivative lawsuit was filed in the Delaware Chancery Court. On February 9, 2005, the shareholder derivative actions pending in federal court were consolidated into a single action under the caption, In re TASER International Shareholder Derivative Litigation, Case No. 2:05 CV 123. Pursuant to the consolidating order, defendants will not respond to any of the complaints originally in these actions. Instead, defendants will respond to plaintiffs’ consolidated amended complaint. Defendants have not responded to the cases filed in the Arizona Superior Court or in Delaware Chancery Court.

      The complaints in the shareholder derivative lawsuits generally allege that the defendants breached the fiduciary duties owed to the Company and its shareholders by reason of their positions as officers and/or directors of the Company. The complaints claim that such duties were breached by defendants’ disclosure of allegedly false or misleading statements about the safety and effectiveness of Company products and the Company’s financial prospects. The complaints also claim that fiduciary duties were breached by defendants’ alleged use of non-public information regarding the safety of Company products and the Company’s financial condition and future business prospects for personal gain through the sale of the Company’s stock. The Company is named solely as a nominal defendant against which no recovery is sought.

Securities and Exchange Commission Informal Inquiry

      The Securities and Exchange Commission has initiated an informal inquiry into Taser with respect to the basis for the Company’s public statements concerning the safety and performance of the Company’s products, disclosure issues, and the accounting for certain transactions. The inquiry is ongoing.

Contract Litigation

      In March 2000, Thomas N. Hennigan, a distributor of our products from late 1997 through early 2000, sued us in the United States District Court, Southern District of New York. We had previously sued him in February 2000 but had not served him. After the New York case was dismissed in February 2001 for lack of personal jurisdiction, Mr. Hennigan brought a counterclaim in the United States District Court for the District of Arizona. Mr. Hennigan claims the exclusive right to sell our products to many of the largest law enforcement, corrections, and military agencies in the United States. He seeks monetary damages that may amount to as much as $400 million against us allegedly arising in connection with his service to us as a distributor. His claims rest on theories of our failure to pay commissions, breach of contract, promissory estoppel, breach of fiduciary duty, and on related theories. No written contract was ever signed with Mr. Hennigan. We also believe that he has no reasonable basis for claims based on informal or implied contractual rights and will be unable to prove his damages with reasonable certainty. Mr. Hennigan died in April 2001 and the case is now being prosecuted by his estate. On May 24, 2002, H.A. Russell was permitted to proceed as an additional defendant-counterclaimant. The Company filed various motions in November 2002 for partial summary judgment including a motion to dismiss his claims. On September 30, 2003, the Court issued an order granting the Company’s motion for partial summary judgment to dismiss Mr. Russell’s claims and struck Hennigan’s jury demand. On April 14, 2004, the Court issued an opinion partially granting the Company’s motion for partial summary judgment on certain joint venture, post-termination, post-death and exclusivity claims. A pretrial conference was held on February 18, 2005 and no trial date has been set.

      In September 2004, the Company was served with a summons and complaint in the matter of Roy Tailors Uniform Co., Inc. v. TASER International in which the plaintiff alleges that it is entitled to commissions for disputed sales that were made to customers that are claimed to be plaintiff’s customers for which plaintiff is seeking monetary damages. Plaintiff failed to sign a distributor agreement with the Company and did not have distribution rights with the Company. This case is in the discovery phase and a trial date has not been set.

Product Liability Litigation

      From April 2003 to March 2005, the Company was named as a defendant in 18 lawsuits in which the plaintiffs alleged either wrongful death or personal injury in situations in which the TASER device was used by law enforcement officers or during training exercises. One case has been dismissed with prejudice, another case has been dismissed without prejudice and the balance of the cases are pending. With respect to each of these 18 cases, the table below lists the name of plaintiff, the date of the suit, the jurisdiction in which the case is pending, the type of claim and the status of the matter. In each of these lawsuits, the plaintiff is seeking monetary damages from the Company. We have submitted the defense of each of these lawsuits to our insurance carriers as we maintained during these periods and continue to maintain product liability insurance coverage with varying limits and deductibles. The Company’s product liability insurance coverage during these periods ranged from $5,000,000 to $10,000,000 in coverage limits and from $10,000 to $250,000 in deductibles. The Company is defending each of these lawsuits vigorously. Although the Company does not expect the outcome in any individual case to be material, the outcome of any litigation is inherently uncertain and there can be no assurance that any liability that may ultimately result from the resolution of these matters will not be in excess of amounts provided by insurance coverage and will not have a material adverse effect on our business, operating results or financial condition.

Other Litigation

      In early April 2001, a patent licensee sued us in the United District Court, Central District of California. The lawsuit alleges that certain technology used in the firing mechanism for our devices infringes upon a patent for which the licensee holds a license, and seeks injunctive relief and unspecified monetary damages. While the court awarded summary judgment in our favor, the plaintiff has filed a notice of appeal. An

outcome that is adverse to us, costs associated with defending the lawsuit, and the diversion of management’s time and resources as a result of the claim could harm our business and our financial condition.

      In January 2005, the Company filed litigation in U.S. District Court for the Western District of North Carolina against Stinger Systems, Inc. and Robert Gruder alleging false advertising and a violation of the Lanham Act. The defendants have filed a counterclaim against the Company alleging defamation. This case is in the discovery phase and no trial date has been set.

      In February 2005, the Company filed litigation in Superior Court for Maricopa County, Arizona against its former patent attorney, Thomas G. Watkins III, alleging breach of fiduciary duty and estoppel arising out of ownership and inventorship claims Mr. Watkins has made against a patent he filed for the Company for certain technology utilized in the TASER X26 product. This case is in the discovery phase and no trial date has been set.

      None.