Stinger Systems (STYS) 10-Q 2006 Q3 Quarterly report

United States Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2006

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

For the transition period from                    to                    

Commission File Number 000-51822

STINGER SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

NEVADA	30-0296398
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification Number)
2701 N. Rocky Point Drive, Suite 1130
Tampa, Florida	33607
(Address of principal executive offices)	(Zip Code)

(813) 281-1061
(Registrant’s telephone number, including area code)

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. Yesþ Noo

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 filero      Accelerated filero     Non-accelerated filerþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

There were 15,068,500 shares outstanding of the issuer’s common stock, par value $0.001 per share, as of September 30, 2006.

STINGER SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
TABLE OF CONTENTS

	Page
PART I—FINANCIAL INFORMATION		3
ITEM 1. Financial Statements (unaudited)		3
Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005 (audited)		3
Consolidated Statements of Operations for the three and nine months ended September 30, 2006 (unaudited) and September 30, 2005 (unaudited)		5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 (unaudited) and September 30, 2005 (unaudited)		6
Notes to Consolidated Financial Statements (unaudited)		7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk		13
ITEM 4. Controls and Procedures		13
PART II — OTHER INFORMATION		14
ITEM 1. Legal Proceedings		14
ITEM 1A. Risk Factors		14
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		19
ITEM 3. Defaults Upon Senior Securities		19
ITEM 4. Submission of Matters to a Vote of Security Holders		19
ITEM 5. Other Information		19
ITEM 6. Exhibits		20
SIGNATURES		21
INDEX TO EXHIBITS
EX-31.1 Section 302 Certification of the CEO
EX-31.2 Section 302 Certification of the CFO
EX-32.1 Section 906 Certification of the CEO
EX-32.2 Section 906 Certification of the CFO

2

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

STINGER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS

	September 30,		December 31,
	2006		2005
	(Unaudited)
CURRENT ASSETS
Cash	$	70,357	$	2,408,556
Accounts Receivable, net of $1,800 allowance for uncollectible accounts in 2006 and 2005		50,884		32,591
Inventories, at cost		406,708		199,765
Prepaid Expenses and Other Current Assets		152,706		653,132
TOTAL CURRENT ASSETS		680,655		3,294,044
EQUIPMENT AND FURNITURE
Equipment and Furniture, net of accumulated depreciation of $62,205 and $14,685 in 2006 and 2005		516,747		353,388
OTHER ASSETS
Intangible Assets, net of accumulated amortization of $668,165 and $381,813 in 2006 and 2005		2,434,454		2,720,807
Other Assets		11,496		6,711
TOTAL OTHER ASSETS		2,445,950		2,727,518
TOTAL ASSETS	$	3,643,352	$	6,374,950

The accompanying notes are an integral part of these consolidated financial statements.
(Continued)

3

STINGER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ EQUITY

	September 30,			December 31,
	2006			2005
	(Unaudited)
CURRENT LIABILITIES
Accounts Payable	$	1,327,535		$	542,406
Accrued Liabilities		64,032			175,997
Insurance Note Payable		—			267,635
Notes Payable-Related Parties		562,500			62,500
TOTAL CURRENT LIABILITIES		1,954,067			1,048,538
COMMITMENTS AND CONTINGENCIES		—			—
STOCKHOLDERS’ EQUITY
Common Stock, $0.001 Par Value, 50,000,000 Shares Authorized, 15,068,500 and 14,993,500 Shares Issued and Outstanding at September 30, 2006 and December 31, 2005, respectively		15,069			14,994
Additional Paid-In Capital		25,860,744			24,227,414
Retained Deficit		(24,186,528	)		(18,915,996	)
TOTAL STOCKHOLDERS’ EQUITY		1,689,285			5,326,412
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,643,352		$	6,374,950

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

4

STINGER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
REVENUES
Sales	$	109,843		$	126,601		$	338,733		$	396,207
Cost of Product Sold		80,607			157,296			215,980			577,198
GROSS MARGIN (LOSS)		29,236			(30,695	)		122,753			(180,991	)
SELLING EXPENSES		28,087			105,583			166,563			263,641
GENERAL AND ADMINISTRATIVE EXPENSES
Employee Salaries		250,167			218,159			702,317			596,902
Employee Acquisition Cost		—			957,182			10,686			3,475,000
Employee Severance Cost		—			—			895			719,346
Other		558,520			1,032,230			3,656,644			2,152,580
Depreciation and Amortization		126,550			102,171			336,141			299,476
Research and Development		140,082			571,659			531,519			1,039,344
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES		1,075,319			2,881,401			5,238,202			8,282,648
LOSS FROM OPERATIONS		(1,074,170	)		(3,017,679	)		(5,282,012	)		(8,727,280	)
INTEREST INCOME		1,401			35,164			24,790			71,791
INTEREST EXPENSE		(2,910	)		(3,759	)		(13,309	)		(5,302	)
LOSS BEFORE INCOME TAXES		(1,075,679	)		(2,986,274	)		(5,270,531	)		(8,660,791	)
PROVISION FOR INCOME TAXES		—			—			—			—
NET LOSS	$	(1,075,679	)	$	(2,986,274	)	$	(5,270,531	)	$	(8,660,791	)
BASIC AND DILUTED LOSS PER COMMON SHARE	$	(0.07	)	$	(0.20	)	$	(0.35	)	$	(0.58	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
Basic and Diluted		15,068,500			14,993,500			15,031,000			14,998,500

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

5

STINGER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	Nine Months Ended September 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(5,270,531	)	$	(8,660,791	)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Depreciation and Amortization		336,141			299,476
Stock Option Expense		1,466,530			—
Stock Issued for Services		166,875			1,550,000
Deferred Compensation Amortization		—			1,925,000
Loss on Sale of Assets		3,381			—
Changes in Operating Assets and Liabilities
Accounts Receivable		(18,293	)		(12,633	)
Inventory		(206,943	)		(100,621	)
Inventory Deposits		—			139,190
Prepaid Expenses		736,804			(60,476	)
Other Assets		(4,785	)		(5,578	)
Accounts Payable		931,408			281,296
Accrued Liabilities		(111,965	)		361,289
NET CASH USED IN OPERATING ACTIVITIES		(1,971,378	)		(4,283,848	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment		(217,685	)		(208,983	)
Purchase of Patent		—			(75,000	)
Proceeds from Sale of Assets		1,157			—
NET CASH USED IN INVESTING ACTIVITIES		(216,528	)		(283,983	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of Common Stock		—			(50,000	)
Proceeds from issuance of Notes Payable		353,721			—
Payments on Insurance Notes Payable		(504,014	)		(351,070	)
NET CASH USED IN FINANCING ACTIVITIES		(150,293	)		(401,070	)
NET DECREASE IN CASH		(2,338,199	)		(4,968,901	)
CASH BALANCE, BEGINNING OF PERIOD		2,408,556			9,093,634
CASH BALANCE, END OF PERIOD	$	70,357		$	4,124,733
NON-CASH INVESTING AND FINANCING ACTIVITIES
Additional Paid-In Capital from Deferred Compensation		—			1,925,000
Deferred Compensation from Stock Issued to an Employee		—			(1,925,000	)
Prepaid Insurance		(268,797	)		(882,357	)
Insurance Note Payable		268,797			882,357
Accounts Payable		(146,279	)		—
Notes Payable-Related Parties		146,279			—
	$	—		$	—
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash Paid During the Year For:
Interest	$	9,066		$	3,360
Taxes	$	—		$	—

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

6

STINGER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1: BASIS OF PRESENTATION

ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements for Stinger Systems, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal and recurring nature. These financial statements should be read in conjunction with the audited financial statements as of December 31, 2005. Operating results as of September 30, 2006 for the three-month and nine-month periods then ended are not necessarily indicative of the results that may be expected for the year ended December 31, 2006.

Management of the Company has determined that the Company’s operations are comprised of one reportable segment as that term is defined by SFAS No. 131“Disclosures About Enterprise and Related Information.”, therefore, no separate segment disclosures have been included in the accompanying notes to the financial statements.

Reclassifications

Certain reclassifications have been made to the 2005 consolidated financial statements in order to conform to the 2006 presentation.

Loss per Share

Basic loss per share is determined based on the weighted average number of common shares outstanding during each period. Diluted loss per share is the same as basic loss per share as all common share equivalents are excluded from the calculation, as their effect is anti-dilutive. The weighted average number of shares of common stock outstanding for the three month period ended September 30, 2006 and September 30, 2005 was 15,068,000 and 15,053,500, respectively. The weighted average number of shares of common stock outstanding for the nine-month period ended September 30, 2006 and 2005, was 15,031,000 and 14,998,500, respectively. Options and warrants to purchase 2,300,000 and 1,750,000 shares of common stock were outstanding at September 30, 2006 and 2005, respectively, and were excluded from the computation of diluted earnings per share as the effect of these options and warrants would have been anti-dilutive.

NOTE 2: USE OF ESTIMATES

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts in the consolidated financial statements. Therefore, actual results could differ materially from those estimates used in the preparation of these financial statements.

NOTE 3: REVENUE RECOGNITION

The Company recognizes revenue when delivery of the product has occurred or services have been rendered, title has been transferred, the price is fixed and collectibility is reasonably assured. Sales of goods are final, with no right of return.

NOTE 4: INVENTORIES

Inventories are stated at the lower of average cost or market. Inventories consisted of the following at September 30, 2006 and December 31, 2005:

	September 30,		December 31,
	2006		2005
	(Unaudited)
Raw Materials and Work-In Progress	$	332,952	$	175,882
Finished Goods		73,756		23,883
	$	406,708	$	199,765

7

NOTE 5: STOCK BASED COMPENSATION

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)) which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including stock option grants, based on estimated fair values. SFAS 123(R) supersedes previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), for periods beginning in fiscal year 2006.

SFAS 123(R) requires companies to estimate the fair value of stock-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Operations. The Company adopted SFAS 123(R) using the modified prospective transition method that requires the application of the accounting standard starting on January 1, 2006, without restatement of prior years. The Company’s unaudited Consolidated Financial Statements, as of and for the three and nine months ended September 30, 2006, reflect the impact of SFAS 123(R). Stock-based compensation expense for the three and nine months ended September 30, 2006 totaled $158,646 and $1,466,530, respectively. This stock-based compensation expense is related to zero and 595,000 stock options granted to employees and directors during the three and nine months ended September 30, 2006, respectively, accounted for under SFAS 123(R). Stock options were granted at an exercise price equal to the Company’s stock price at the date of grant.

Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). Under the intrinsic value based method, stock-based compensation expense for employee stock options was recognized in the Company’s Consolidated Financial Statements as the difference in the exercise price of the option and the Company’s stock price at the date of grant.

The Company has selected the Black-Scholes option-pricing model as the most appropriate method for determining the estimated fair value for stock-based awards.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123(R) in 2005:

	Three Months Ended			Nine Months Ended
	September 30, 2005			September 30, 2005
Net loss as reported	$	(2,986,274	)	$	(8,660,791	)
Deduct: stock based compensation costs, Net of taxes under SFAS 123		(90,255	)		(181,533	)
Pro forma net income loss	$	(3,076,529	)	$	(8,842,324	)

	Three Months Ended			Nine Months Ended
	September 30, 2005			September 30, 2005
Per share information:
Basic, as reported	$	(0.20	)	$	(0.58	)
Basic, pro forma	$	(0.21	)	$	(0.59	)
Diluted, as reported	$	(0.20	)	$	(0.58	)
Diluted, pro forma	$	(0.21	)	$	(0.59	)

The fair value of the stock-based awards was estimated using the Black-Scholes model with the following weighted average assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Estimated fair value	$	2.74		$	2.74		$	2.74		$	3.44
Expected life (years)		4.64			2.50			4.64			2.50
Risk free interest rate		4.65	%		4.25	%		4.65	%		4.34	%
Volatility		136.4	%		93.0	%		136.4	%		95.0	%
Dividend yield		—			—			—			—

8

NOTE 6: GENERAL AND ADMINISTRATIVE EXPENSES, OTHER

General and Administrative Expenses — Other includes the following:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Legal and Professional Fees	$	204,374	$	139,959	$	870,777	$	369,852
Stock Option Expense		158,646		—		1,466,530		—
Liquidated Damages to Investors		—		542,640		—		833,114
Insurance Expense		116,387		150,645		759,569		281,291
Other		79,113		198,986		559,768		668,323
	$	558,520	$	1,032,230	$	3,656,644	$	2,152,580

NOTE 7: NOTES PAYABLE-RELATED PARTIES

In September 2006, the Company issued a note payable to a related party for $500,000 in which the related party paid a vendor $146,279 on the Company’s behalf and the remaining proceeds of $353,721 were advanced to the Company. The terms of the note payable include a principal balance of $500,000, 10% interest per annum, and the note is due on demand.

Subsequently, in October 2006, the Company issued a note payable to the same related party for $200,000 in which the proceeds were advanced to the Company. The terms of the note payable include a principal balance of $200,000, 10% interest per annum, and the note is due on demand.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis of the Company’s financial condition and results of operations should be read together with the financial statements and related notes appearing in Item 1 of this Part I and the financial statements and notes thereto and the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

Forward-Looking Statements

     The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the consolidated financial statements, related notes, and other detailed information included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (this “Form 10-Q”). This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements other than historical information or statements of current condition. We generally identify forward-looking statements by the use of terms such as “believe”, “intend”, “expect”, “may”, “should”, “plan”, “project”, “contemplate”, “anticipate”, or other similar statements. Examples of forward looking statements in this Quarterly Report on Form 10-Q include, but are not limited to statements concerning: (a) the timely development and acceptance of new products, (b) sources of supply and concentration of customers, (c) acceptance in the marketplace, establishment and expansion of our distribution channels, (d) endorsement of opinion leaders in the law enforcement community, (e) implementation risks of manufacturing automation, (f) risks associated with rapid technology change, (g) impact of media publicity, (h) dependence upon sole or limited source suppliers, (i) existing or potential lawsuits, (j) risks of governmental regulations and (k) dependence upon key employees and other factors detailed in the Company’s filings with the SEC. These factors should not be considered exhaustive. We undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. We caution you not to put undue reliance on these forward-looking statements. These forward-looking statements relate to our plans, objectives and expectations for future operations. In light of the risks and uncertainties inherent in all such projected operational matters, the inclusion of forward-looking statements in this Form 10-Q should not be regarded as a representation by us or any other person that our objectives or plans will be achieved or that any of our operating expectations will be realized. Our actual financial results realized could differ materially from the statements made herein, depending in particular upon the risks and uncertainties described in our filings with the SEC.

9

Executive Summary

     We are in the business of producing and marketing less-lethal electronic restraint products to law enforcement, correctional facilities, professional security and military sectors. We purchased Electronic Defense Technologies, LLC (“EDT”) in September 2004 based on the anticipated value of the EDT licenses and patents, prototype projectile stun gun, existing product lines and track record in serving the law enforcement community. Our products include the Ultron II^® handheld contact stun gun, the Ice-Shield electronic immobilization riot shield, and the Bandit / REACT system, an electronic immobilizing restraint. Our primary focus is the “Stinger” projectile stun gun and our success is largely dependent upon the commercialization of this product.

     Since the acquisition of EDT, we have extensively redesigned our projectile stun gun with the goal of providing a weapon with the feel and size of a traditional firearm, but offering a unique look that would not readily be confused with a traditional firearm. After the design was essentially completed, mold design and redesign of the electronics began. The electronics needed to be reduced to incorporate an overall smaller electronics package than existed in the predecessor gun, and to incorporate a number of additional features including data capture and display of the time and date of use, ambient temperature, duration of use and number of cycles fired. The Stinger S-400 shipped during the second quarter of 2006. Our ability to generate future revenues is dependent upon the overall market reception of the Stinger product and the volume of production and sales that we are able to generate. We also expect to incur significant marketing costs over the next twelve months. It is possible that the Stinger product lines will require further modifications even after commercial shipments commence.

     During the fourth quarter of 2006, the Company anticipates introducing an additional projectile stun gun model to be called the Stinger S-200. The Stinger S-200 will be a single cartridge projectile stun gun that is intended to compete directly with other single cartridge stun gun products. The Stinger S-200 is aimed at day-to-day law enforcement professionals who have limited duty belt space, and therefore, prefer a smaller sized stun gun.

     We use third parties to manufacture components for our products and assemble the products. We are under no contractual obligation with these parties. While we hope to manufacture the Stinger and its components in the United States, there can be no assurances that we will be able to do so. We believe that electronics are easily sourced throughout the world and we will continually seek best pricing and highest quality components for its products. We expect to continue handling the shipment of our products.

     Our success will be dependent upon our ability to attract high quality distributors and manufacturer’s representatives to market our products. To date, we have been able to attract distributors and manufacturer’s representative groups with a solid track record selling firearms to the law enforcement, correctional, and/or military community. We are unable to provide forecasts as to the number of Stingers’ we anticipate selling. As of September 30, 2006, we had distribution agreements with fifteen U.S. distributors, eighteen international distributors, and two U.S. manufacturers’ representative groups. The major terms of the contracts are: (a) an 18% discount for distributors and 7% commissions to manufacturer’s representatives; (b) non-exclusive territories; (c) termination upon 30 day notice and; (d) no maximum purchase requirements or sales goals. We have trained all our U.S. distributors and manufacturers representatives in the use of our products.

     Due to the limited sales volume of our existing products, we reported a net loss of $1,075,679 and $5,270,531 for the three and nine months ending September 30, 2006, respectively (net loss of $0.07 and $0.35 per share, respectively). In addition, we reported a net loss of $10,085,529 for the year ending December 31, 2005 (net loss of $0.67 per share) and a net loss of $8,830,467 for the year ending December 31, 2004 (net loss of $0.70 per share).

     We, after the acquisition of EDT, required funds to support current operations and to provide future working capital. We have met our financial needs through our operations and through the sales of our securities. At the present time, we do not generate sufficient revenues from our operations to support our operating costs. Management believes that we will need additional outside sources of funding in the future to continue the production and promotion of our products.

Results of Operations

     Revenues.Revenue decreased $16,758 or 13% to $109,843 for the three months ended September 30, 2006 compared to $126,601 for the three months ended September 30, 2005 and $57,474 or 15% to $338,733 for the nine months ended September 30, 2006 compared to $396,207 for the nine months ended September 30, 2005. The decrease from 2005 to 2006 was due to the limited sales volume of our existing products in the third quarter of 2006.

10

     Cost of Goods Sold.Cost of Goods Sold decreased $76,690 or 49% to $80,607 for the three months ended September 30, 2006 compared to $157,296 for the three months ended September 30, 2005 and $361,218 or 63% to $215,980 for the nine months ended September 30, 2006 compared to $577,198 for the nine months ended September 30, 2005. The decrease from 2005 to 2006 was due to an inventory write-off in 2005 for obsolete raw materials in our inventory. The cost of production for the three months ended September 30, 2006, includes manufacturing costs such as materials, labor and identifiable overhead related to finished goods and components.

     Gross Margin. Gross margin increased $59,931 to $29,236 for the three months ended September 30, 2006 compared to $(30,695) for the three months ended September 30, 2005 and increased $303,744 to $122,753 for the nine months ended September 30, 2006 compared to $(180,991) for the nine months ended September 30, 2005. The increase in gross margin for the nine month period was principally due to an increase in the costs of goods sold related to an inventory write-off for obsolete raw materials in 2005.

     Selling Expenses.Selling Expenses decreased $77,496 to $28,087 for the three months ended September 30, 2006 compared to $105,583 for the three months ended September 30, 2005 and $97,078 to $166,563 for the nine months ended September 30, 2006 compared to $263,641 for the nine months ended September 30, 2005. The decrease was based primarily on decreased expenses related to our efforts to promote current products and the branding of the Stinger name.

     General and Administrative Expenses.General and Administrative (G&A) expenses decreased $1,806,082 or 63% to $1,075,319 for the three months ended September 30, 2006 compared to $2,881,401 for the three months ended September 30, 2005 and $3,044,446 or 37% to $5,238,202 for the nine months ended September 30, 2006 compared to $8,282,648 for the nine months ended September 30, 2005. Employee acquisition costs for the three months ended September 30, 2006 decreased by $957,182 to $0 compared to $957,182 for the three months ended September 30, 2005 and $3,464,314 to $10,686 for the nine months ended September 30, 2006 compared to $3,475,000 for the nine months ended September 30, 2005. The decrease from 2005 to 2006 was primarily due to employee acquisition costs and employee severance costs during 2005. We did, however, incur stock based compensation expense of $158,646 for the three months ended September 30, 2006 and $1,466,530 for the nine months ended September 30, 2006 related to the grant of stock options to our employees and directors as further explained in Note 5 in the Notes to Financial Statements. Additionally, other operating expenses for the three months ended September 30, 2006, include legal and professional fees of $204,374, insurance expense in the amount of $116,387, expenses related to stock options in the amount of $158,646, and other costs in the amount of $79,113 compared to legal and professional fees of $139,959, insurance expense in the amount of $150,645, liquidated damages to investors in the amount of $542,640 and other costs in the amount of $198,986 for the three months ended September 30, 2005. Other operating expenses for the nine months ended September 30, 2006, include legal and professional fees of $870,777, insurance expense in the amount of $759,569, expenses related to stock options in the amount of $1,466,530, and other costs in the amount of $559,768 compared to legal and professional fees of $369,852, insurance expense in the amount of $281,291, liquidated damages to investors in the amount of $833,114 and other costs in the amount of $668,323 for the nine months ended September 30, 2005.

     Research and Development Expenses.Research and Development (R&D) expenses decreased $431,577 or 76% to $140,082 for the three months ended September 30, 2006, compared to $571,659 for the three months ended September 30, 2005, and $507,825 or 49% to $531,519 for the nine months ended September 30, 2006 compared to $1,039,344 for the nine months ended September 30, 2005. The Company’s decrease in R&D expense is attributable to the advanced stages of product development, and the accumulated engineering knowledge associated with improving the design of the Stinger projectile stun gun product line. The Company expects to have ongoing research and development costs associated with future generations of the projectile stun gun product line.

     Interest Income.Interest income decreased $33,763 to $1,401 for the three months ended September 30, 2006, compared to $35,164 for the three months ended September 30, 2005 and $47,001 to $24,790 for the nine months ended September 30, 2006 compared to $71,791 for the nine months ended September 30, 2005. The decrease from 2005 to 2006 was due to a reduction in working capital.

     Net Loss.Net loss decreased by $1,910,595 or 64% to $(1,075,679) or $(0.07) per common share for the three months ended September 30, 2006 compared to a net loss of $(2,986,274) or $(0.20) per common share for the three months ended September 30, 2005 and $3,390,260 or 39% to $(5,270,531) or $(0.35) per common share for the nine months ended September 30, 2006 compared to a net loss of $(8,660,791) or $(0.58) per common share for the nine months ended September 30, 2005. The improvement in the net loss was due primarily to a decrease in cost of goods sold, as well as a decrease in employee acquisition expenses and employee severance costs related to 2005. These expenses were offset by an increase in stock option expense due to our adoption of SFAS 123(R) in 2006, increased research and development expenses, legal and professional fees, and insurance expense.

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Liquidity and Capital Resources

     Based on our current plans and market conditions, management does not believe that our existing cash and current operations will be sufficient to satisfy our anticipated cash requirements for the next twelve months. We, however, are unable to provide assurance that our planned levels of revenue, costs and expenses will be achieved. If our operating results fail to meet our expectations or if we fail to manage our inventory, accounts receivable or other assets, it will have a negative impact on our liquidity and we will be required to seek additional funding through public or private financings or other arrangements. In addition, due to the planned expansion of our product offerings, marketing efforts, channels and geographic presence, we may require additional working capital. If this were to occur, it is possible that adequate funds may not be available when needed or may not be available on favorable or commercially acceptable terms, which could have a negative effect on our business and results of operations.

     At September 30, 2006, we had negative working capital of approximately $(1,273,000), including a cash balance of approximately $70,000. This represents a decrease in working capital of approximately $940,000 from working capital of $(333,000) at June 30, 2006 and a cash balance of approximately $314,000. This decrease in working capital is principally due to research and development efforts and engineering activities to improve the Stinger projectile stun gun product line and future generation projectile stun guns, and an increase in insurance expense, as well as increased legal and professional fees and employee related expenses. Operating activities for the nine months ended used cash of $1,971,378 and $4,283,848 during 2006 and 2005, respectively. The decrease in the negative cash flow from operating activities during the nine months ended September 30, 2006, as compared to 2005, was primarily due to liquidated damages paid to investors, employee severance costs, and higher research and development expenses in 2005. The Company had a decrease of 57% in general and administrative expenses (excluding depreciation, amortization, and stock option expense).

     The long-term continuation of our business plan is dependent upon generation of sufficient revenues from our products to offset expenses. In the event that we do not generate sufficient revenues, we will be required to obtain additional funding through public or private financing, if available, and/or reduce certain discretionary spending. Management believes certain operating costs could be reduced if working capital decreases significantly and additional funding is not available. Failure to generate sufficient revenues, raise additional capital and/or reduce certain discretionary spending could have a material adverse effect on our current operations and our ability to achieve our intended long-term business objectives.

Critical Accounting Policies

     We have identified the following policies as critical to our business operations and the understanding of our results of operations. The preparation of these financial statements require us to make estimates and assumptions that effect 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 where such policies affect our reported and expected financial results.

     Revenue Recognition. Our revenue recognition policy is significant because our revenue is a key component of our results of operations. We recognize revenue when delivery of the product has occurred or services have been rendered, title has been transferred, the price is fixed and collectibility is reasonably assured. Sales of goods are final, with no right of return.

     Warranty Costs. We warrant our products against manufacturing defects for a period of one year. As of September 30, 2006, we have had no significant warranty claims on products sold. Once significant volume sales of our stun gun commence, we expect to make an accrual for warranty claims based on our sales volumes and warranty cost experience.

     Intangible Assets. We have substantial intangible assets. Our estimate of the remaining useful life of these assets and the amortization of these assets will affect our gain from operations. Since we do not have a method of quantifying the estimated number of units that may be sold, we have elected to amortize these intangibles over a seven year period beginning in the first quarter of 2005.

     Purchase Accounting. Our purchase accounting policy is to record any acquisitions in accordance with current accounting pronouncements and allocate the purchase price to the net assets. We evaluate the fair market values of tangible and intangible assets based on current market conditions, and financial and economic factors. Intangible assets are valued using several cash flow projection models and financial models to establish a baseline for their respective valuations. We valued our acquisition of the stun gun technology based on the competitive advantage the technology provides. These competitive advantages are analyzed in relation to the current market and may include valuation techniques, such as the cost to develop the technology, the cost of designing around the claims of the patent or technology, comparable transactions of like-kind patents or technology, and discounted cash flows of future incremental profits that may be generated. We valued our intangible assets, including our stun gun technology, utilizing the

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aforementioned techniques. We valued our stun gun technology by comparing current competitor’s revenue and assumed a 10% market penetration of this revenue. We also assumed a factor for the increase in the general use of this stun gun technology, the estimated economic life of this current technology of approximately seven years, and the anticipated profit margins that we believed was achievable. Our policy is to expense in-process research and development costs at acquisition.

     Stock Options. We have a stock option plan under which options to purchase shares of our common stock may be granted to employees, consultants and directors at a price no less than the fair market value on the date of grant. Prior to January 1, 2005, we accounted for grants to employees in accordance with the provisions of APB No. 25,Accounting for Stock Issued to Employees (“APB No. 25”). Under APB No. 25, compensation expense is based on the difference, if any, on the date of the grant between the fair value of our stock and the exercise price of the option and is recognized ratably over the vesting period of the option. Because our options must be granted with an exercise price equal to the quoted market value of our common stock at the date of grant, we recognized no stock compensation expense at the time of the grant in accordance with APB No. 25. As discussed more fully in Note 5 of the Notes to our Consolidated Financial Statements, as a result of the issuance of SFAS No. 123(R) in December 2004, we began to expense the fair value of our options as of January 1, 2006. The amount of compensation expense recognized using the fair value method requires us to exercise judgment and make assumptions relating to the factors that determine the fair value of our stock option grants. We account for equity instruments issued to non-employees in accordance with SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.

     Limited Trading Market. Until February 22, 2006, our common stock was only traded on the Pink Sheets. An investment in a security quoted on the Pink Sheets is speculative and involves a high degree of risk. Many Pink Sheet securities are relatively illiquid, or “thinly traded,” which tends to increase price volatility. Illiquid securities are often difficult for investors to buy or sell without dramatically affecting the quoted price. In some cases, the liquidation of a position in a Pink Sheet security may not be possible within a reasonable period of time. Reliable information regarding issuers of Pink Sheet securities, their prospects, or the risks associated with the business of any particular issuer or an investment in the issuer’s securities may not be available. As a result, it may be difficult to properly value an investment in a Pink Sheet security. Pink Sheets is not a securities exchange or a broker-dealer. Pink Sheets is an electronic quotation and information service provided to registered broker-dealers to facilitate efficient transactions in Pink Sheet securities. Investors must contact an SEC registered broker-dealer that is a member of the National Association of Securities Dealers (NASD) to invest in a security quoted on the Pink Sheets. We used the Pink Sheet price to determine fair market value at the date of the respective transactions in order to value the transactions to best reflect the financial valuation of those parties involved in the transactions. Since February 23, 2006, our stock has been quoted on the OTC Bulletin Board.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

     Our exposure to market risk is currently confined to our cash and cash equivalents and restricted cash. We currently do not hedge interest rate exposure. We have not used derivative financial instruments for speculation or trading purposes. Because of the short-term maturities of our cash, cash equivalents and marketable securities, we do not believe that an increase in market rates would have any significant impact on the realized value of our investments, but may increase the interest expense associated with any future debt.

     Our most liquid assets are cash and cash equivalents. Because of their liquidity, these assets are not directly affected by inflation. We also believe that we have intangible assets in the value of our intellectual property. Due to the nature of this intellectual property, we believe that these intangible assets are not affected by inflation. Because we intend to retain and continue to use our equipment, furniture and fixtures and leasehold improvements, we believe that the incremental inflation related to replacement costs of such items will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and contract services, which could increase our level of expenses and the rate at which we use our resources.

ITEM 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

     Our management, including our principal executive and principal financial officers, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in this report has been appropriately recorded, processed, summarized and reported. Based on that evaluation, our principal executive and principal financial officers have concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

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(b) Changes in Internal Controls Over Financial Reporting

     Our management, including our principal executive and principal financial officers, has evaluated any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this report and has concluded that there was no change that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

     On December 17, 2004, Taser International filed a case against Stinger Systems, Inc. and its CEO, Robert Gruder. Stinger Systems is a party in Case Number 3:04CV620K styledTaser International, Inc. v. Stinger Systems, Inc. and Robert F. Gruder, pending in the United States District Court for the Western District of North Carolina. In the suit, Taser asserts a claim for false advertising under 15 U.S.C. Section 1125(a) and seeks injunctive relief, monetary damages in an unspecified amount, trebling of damages, attorneys fees and destruction of certain advertising material. Based upon a review of the pleading, Taser alleges that the Stinger projectile stun gun did not exist at the time Stinger made certain representations about the stun gun, and therefore Stinger Systems’ statements about its existence and capabilities are false and misleading. Stinger Systems moved to dismiss Taser’s claims, responded to the allegations and countersued Taser for defamation. Stinger Systems is seeking monetary damages, punitive damages and attorney fees.

     Stinger has been responding to an investigation by the Securities and Exchange Commission (“SEC”), which commenced in December 2004. In connection with the investigation, Stinger has received a “Wells Notice” from the SEC indicating that the staff intends to recommend that the SEC institute an action against the Company, alleging that the Company violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933.

     The proposed allegations relate to purported representations that the Company made about one of the Company’s products regarding when the Company would be shipping the product, the product’s status with the Bureau of Alcohol, Tobacco, and Firearms, the performance of the product, and where the Company’s stock was trading. The allegations further related to the lack of registration for sales of stock in late 2004 made by three individuals who are not officers, directors, or employees of the Company. Under the Wells process established by the SEC, we were provided an opportunity to respond in writing before the staff makes a formal recommendation to the SEC regarding any action. Stinger has responded to the Wells Notice and is fully cooperating with the SEC to resolve this matter as promptly as practicable. A judgment from this action adverse to our interest could jeopardize our business operations and exhaust the Company’s cash reserve and investors may lose their entire investment.

ITEM 1A. Risk Factors.

     You should carefully consider the risks and uncertainties described below in addition to the other information contained in this annual report. If any of the following risks actually occur, our business, financial condition or operating results could be harmed. In that case, the trading price of our common stock could decline and investors may lose part or all of your investment. In the opinion of management, the risks discussed below represent the material risks known to the company. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also impair our business operations and adversely affect the market price of our common stock.

We have a history of operating losses and anticipate future operating losses until such time as we can generate additional sales.

     Since beginning operations in September 2004, we have sustained substantial operating losses. At the present time, we do not generate sufficient revenues to support our operating expenses. In addition, we expect the Company to continue its research and development expenses, as appropriate, to complete the advanced stages of product development, and ultimately realize value from the accumulated engineering knowledge associated with improving the design of the Stinger projectile stun gun. We expect to have ongoing research and development costs associated with future generations of its projectile stun guns.

If we do not obtain additional funding as needed, we may be unable to fund our re-engineering and production activities and to adequately pursue our business plan.

     Our business plan requires significant ongoing expenditures for product engineering and testing and for the marketing of our products. It is likely that we will need additional outside funding sources in the future to continue the production and the promotion of

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our products. If we are not successful in obtaining additional funding for operations, if and when needed, we may have to discontinue some or all of our business activities and our stockholders might lose all of their investment.

Our failure to properly design the Stinger projectile stun gun would have a material adverse effect on our operations.

     We will be devoting our capital and management efforts to the design, production and marketing of the Stinger brand projectile stun gun. There is no assurance that our current design will meet our targeted specifications and tolerances, or that we will be able to manufacture the Stinger stun gun on a timely basis at a competitive price. The initial design of the electrical components made the Stinger stun gun difficult and time consuming to assemble. Additionally, both the original mold for the Stinger stun gun and the mold for the ammunition needed to be redesigned to provide better fit and allow for mass production on an economical basis. While we are currently addressing these issues, failure to timely resolve these issues will delay the rollout of the Stinger stun gun. Failure to introduce the Stinger stun gun on a timely basis would have a material adverse effect on us and investors could lose their entire investment.

If we fail to convince the market place that we have competitive products, we will not be commercially successful.

     Even if we are successful in designing products competitive to those of our competitors, it will be necessary for us to educate and convince the market place of that competitiveness. If we are unable to do so, we will not be able to achieve the market penetration necessary to become commercially successful and our investors may lose their investments.

If third party manufacturers do not perform in a commercially reasonable manner, we may not be successful.

     We rely entirely on third parties to manufacture our products. We do not have long-term supply contracts with these third party manufacturers and instead work on an order-by-order basis. By not having long-term supply contracts, we run the risk that our current suppliers will opt to discontinue their relationship with us thereby interrupting the flow of products and significantly limiting our ability to operate our business. If alternative third party manufacturers could not be located in a timely manner, we would go out of business and investors would lose their entire investment.

     We own all of the rights, drawings, and intellectual property regarding schematics of the electronics of our products. Circuit board manufacturing and transformer winding companies are a common business throughout the world. We have already examined alternative sourcing and intend to eventually have multiple suppliers providing transformers and circuit boards when economies of scale merit such sourcing. We do not anticipate any business interruption if any of our suppliers could no longer supply or work with us on our terms.

Our primary competitor, Taser International Inc., has an established name in the marketplace with both distributors and the end-users of stun products.

     Taser International, Inc. is the dominant player in our industry. Taser has been able to successfully launch its products, and penetrate the marketplace. While we hope to design a product that is competitive with those offered by Taser, there is no assurance that we will be able to do so or that we will be able to successfully market such products if we are successful in designing them. Unless we are able to persuade distributors or manufacturer’s representatives and end-users of the competitiveness of our products, we will be unable to generate sufficient sales of our products to become viable. Further, Taser already has contracts with a number of distributors and end-users, who may be unwilling or unable to distribute or purchase our products, respectively.

Negative publicity about less-lethal stun weapons may negatively impact sales of our products.

     There have been a number of negative articles about the use and abuse of less-lethal weapons by law enforcement and correctional officers. There have also been accusations that stun guns have caused the deaths of subjects who have been stunned. The safety of such less-lethal weapons has become a matter of some controversy and continued negative publicity about the use of less-lethal stun devices may negatively impact the sale of our products.

The sale and use of our products may result in claims against us.

     As noted above, the use of stun weapons has been associated with injuries, some serious and permanent, including death. While we are attempting to design the Stinger projectile stun gun to diminish the risk of injury, there can be no assurance that injuries will not occur from the use of the product. Such injuries could result in claims against us. Although we intend to maintain liability insurance

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for our products, there can be no assurance that the coverage limits of our insurance policies will be adequate. Claims brought against us, whether fully covered by insurance or not, will likely have a material adverse effect upon us.

We have been sued by Taser International, Inc. which could result in a judgment against us that could negatively impact our operations.

     We are a defendant in a lawsuit brought by Taser International, Inc. pending in the United States District Court for the Western District of North Carolina. In the suit, Taser principally asserts a claim for false advertising and seeks injunctive relief, monetary damages in an unspecified amount, trebling of damages, attorney’s fees and destruction of certain advertising material. A judgment in the suit adverse to our interests could jeopardize our business operations and exhaust our cash reserve and investors may lose their entire investment.

We have received a “Wells Notice” from the SEC.

     We have been responding to an investigation by the Securities and Exchange Commission (“SEC”), which commenced in December 2004. In connection with the investigation, we have received a “Wells Notice” from the SEC indicating that the staff intends to recommend that the SEC institute an action against us, alleging that we violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933. The proposed allegations relate to purported representations that we made about one of our products regarding when we would be shipping the product, the product’s status with the Bureau of Alcohol, Tobacco, and Firearms, the performance of the product and where our stock was trading. The allegations further related to the lack of registration for sales of stock in late 2004 made by three individuals who were not officers, directors, or employees of us. Under the Wells process established by the SEC, we were provided an opportunity to respond in writing before the staff makes a formal recommendation to the SEC regarding any action. We responded to the Wells Notice and are fully cooperating with the SEC to resolve this matter as promptly as practicable. A judgment from this action adverse to our interests could jeopardize our business operations and exhaust our cash reserve and investors may lose their entire investment.

Claims by others that our products infringed their patents or other intellectual property rights could adversely affect our financial condition.

     Any claim of patent or other proprietary right infringement brought against us would be time consuming to defend and would likely result in costly litigation, diverting the time and attention of our management. Moreover, an adverse determination in a judicial or administrative proceeding could prevent us from developing, manufacturing and/or selling some of our products, which could harm our business, financial condition and operating results. Claims against our patents may cost us significant expenses to defend and if our patents are not upheld, we may not be able to continue operations and investors may lose their entire investment.

We may not be able to protect our patent rights, trademarks, and other proprietary rights.

     We believe that our patent rights, trademarks, and other proprietary rights are important to our success and our competitive position. While we have patents and licenses with respect to certain of our products, there is no assurance that they are adequate to protect our proprietary rights. Accordingly, we plan to devote substantial resources to the establishment and maintenance of these rights. However, the actions taken by us may be inadequate to prevent others from infringing upon our rights which could compromise any competitive position we may develop in the marketplace.

Law enforcement, correction and military operations are government agencies which are subject to budgetary constraints, which may inhibit sales.

     Government agencies are generally subject to budgets which limit the amount of money that they can spend on weapons procurement. It may be that although a government agency is interested in acquiring our products, it will be unable to purchase our products because of budgetary constraints. Further, the lead time for an agency acquiring new weapons and receiving approval to acquire them may delay sales to such agencies. Any such delay will have an adverse effect upon our revenues.

There exist some state, local and international regulations and/or prohibitions on less-lethal weapon systems which will make it more difficult or impossible to market our products in those jurisdictions thereby limiting potential revenues.

     Some states prohibit the sale of less-lethal weapon systems. Additional negative publicity with respect to less-lethal weapon systems may cause other jurisdictions to ban or restrict the sale of our products. Internationally, there are some countries which restrict and/or prohibit the sale of less-lethal weapon systems. Further, the export of our less-lethal weapon systems is regulated. Export licenses must be obtained from the Department of Commerce for all shipments to foreign countries other than Canada. To the extent

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that states, local governments or other countries impose restrictions or prohibitions on the sale and use of our products or to the extent we are unable to obtain export licenses for the sales of our weapons to international customers, our sales could be materially adversely impacted.

If we cannot retain or hire qualified personnel, our programs could be delayed.

     Our business is a technical and highly specialized area of the firearms industry. We are dependent on the principal members of the management and technical staff. The loss of key employees could disrupt our research and development and product promotion activities. We believe that our future success will depend in large part upon our ability to attract and retain highly skilled, scientific and managerial personnel. We face intense competition for these kinds of personnel from other companies and organizations. We might not be successful in hiring or retaining the personnel needed for our company to be successful.

Because our common stock is quoted only on the OTC Bulletin Board and the Pink Sheets, your ability to sell your shares in the secondary trading market may be limited.

     Our common stock is traded only on the OTC Bulletin Board and the Pink Sheets. Consequently, the liquidity of our common stock is impaired, not only in the number of shares that are bought and sold, but also through delays in the timing of transactions, and coverage by security analysts and the news media, if any, of our company. As a result, prices for shares of our common stock may be different than might otherwise prevail if our common stock was quoted or traded on a national securities exchange such as the New York Stock Exchange, NASDAQ or the American Stock Exchange.

Our stock price has been volatile and your investment in our common stock could suffer a decline in value.

     Our common stock is quoted for trading only on the OTC Bulletin Board and the Pink Sheets. The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control. These factors include:

• sales of the Stinger projectile stun gun;

• announcements of technological innovations or new products by us or our competitors;

• government regulatory action affecting our products or our competitors’ products;

• developments or disputes concerning patent or proprietary rights;

• actual or anticipated fluctuations in our operating results;

• changes in our financial estimates by securities analysts;

• broad market fluctuations; and

• economic conditions in the United States.

     During 2005, the closing sales price of our stock has ranged from $3.90 to $46.00. Our stock closed on September 29, 2006 at $1.10 per share.

Trading of our stock may be restricted by the SEC’s penny stock regulations, which may limit a stockholder’s ability to buy and sell our stock.

     The SEC has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with

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current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.

NASD sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.

     In addition to the penny stock rules described above, the NASD (National Association of Securities Dealers Inc.) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for its shares.

Sales of a substantial number of shares of our common stock in the public market could lower our stock price and impair our ability to raise funds in stock offerings and impair the ability of stockholders to receive a return on their investment in Stinger Systems.

     Future sales of a substantial number of shares of our common stock in the public market, or the perception that such sales could occur, could adversely affect the prevailing market price of our common stock and could make it more difficult for us to raise additional capital through the sale of equity securities and reduce the chances of persons who have invested in us of receiving a return on their investment. In addition, substantially all of the outstanding shares of our common stock are freely tradable or eligible for sale under Rule 144, subject to volume limitations.

Exercise of outstanding options, warrants and convertible securities will dilute existing shareholders and could decrease the market price of our common stock.

     As of September 30, 2006, we had 15,068,500 shares issued and outstanding, 1,620,000 shares of common stock that could be issued upon the exercise of options, warrants, grants and convertible securities, and 680,000 shares that could be issued pursuant to the exercise of options outstanding under the Stinger Systems, Inc. Employee Stock Option & Stock Bonus Plan. There can be no guarantee that any or all of the warrants, grants, options or convertible securities will be exercised or converted. To the extent these underlying shares are ultimately issued, there will be further dilution to investors. The existence or exercise of the outstanding options, grants, warrants or convertible notes may adversely affect the market price of our common stock and the terms under which we could obtain additional equity capital.

We likely will issue additional equity securities which will dilute your share ownership.

     We likely will issue additional equity securities through the exercise of options, grants, convertible notes, or warrants that are outstanding or may be outstanding, and possibly to raise capital. These additional issuances will dilute your share ownership.

Any short selling of our stock could depress the stock’s price and have a negative impact on the investments in us by our stockholders.

     Downward pressure on our stock price could result from the occurrence of any of the risk factors set forth herein as well as from other factors that relate generally to stocks that trade in the securities markets. Downward pressure on our stock could result in short sales of stock that could further depress the price. The further depression of the stock price could then encourage additional short selling with the end result being a downward spiral of our stock price. If short selling of our stock should commence in the market, the net effect could be an overall drop in share price thereby having a negative effect on any person owning shares of our stock.

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We do not intend to pay any cash dividends on our common stock in the foreseeable future and, therefore, any return on your investment in our common stock must come from increases in the fair market value and trading price of our common stock.

     We have never paid a cash dividend on our common stock. We do not intend to pay cash dividends on our common stock in the foreseeable future and, therefore, any return on your investment in our common stock must come from increases in the fair market value and trading price of our common stock.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable.

ITEM 3. Defaults Upon Senior Securities. Not applicable.

ITEM 4. Submission of Matters to a Vote of Security Holders. Not applicable.

ITEM 5. Other Information. Not applicable.

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ITEM 6. EXHIBITS

Exhibit No.	Description
31.1	Section 302 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2	Section 302 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1	Section 906 Certification of the Chief Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Section 906 Certification of the Chief Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	STINGER SYSTEMS, INC. (Registrant)
Date: November 14, 2006	/s/ Robert F. Gruder
	Robert F. Gruder
	Chief Executive Officer (Principal Executive Officer)

Date: November 14, 2006	/s/ David J. Meador
	David J. Meador
	Chief Financial Officer (Principal Financial and Accounting Officer)

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Index to Exhibits

Exhibit No.	Description
31.1	Section 302 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2	Section 302 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1	Section 906 Certification of the Chief Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Section 906 Certification of the Chief Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.