10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

FORM 10-K

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

 X       

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

For the Fiscal Year Ended December 31, 2007

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

For the transition period from __________ to __________

Commission File No. 000-28238

GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

(Exact Name of Registrant As Specified In Its Charter)

Delaware	54-1521616
(State Or Other Jurisdiction Of Incorporation Or Organization)	(I.R.S. Employer Identification No.)

516 Herndon Parkway, Suite A, Herndon, Virginia  20170

(Address of Principal Executive Offices and Zip Code)

Registrant’s Telephone Number, Including Area Code: (703) 464-5495

Securities registered pursuant to Section 12(b) of the Exchange Act:  None

Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value per share

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes ___ No  ü 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer [  ]    Accelerated Filer [  ] Non-Accelerated Filer [  ] Smaller Reporting Company [ü ]

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

 Yes __ No  ü

The aggregate market value of the voting common equity held by non-affiliates based upon the average of bid and asked prices for the Common Stock on June 30, 2007, the last business day of the registrant’s most recently completed second fiscal quarter as reported on the OTC Bulletin Board was approximately $30,744,354.  

The number of shares outstanding of the registrant’s common stock, as of April 2, 2008, was 43,467,412.

DOCUMENTS INCORPORATED BY REFERENCE

None.  

NOTE REGARDING FORWARD-LOOKING STATEMENTS

Our disclosure and analysis in this report contains forward-looking statements which provide our current expectations or forecasts of future events.  Forward-looking statements in this report include, without limitation: information concerning possible or assumed future results of operations, trends in financial results and business plans, including those related to earnings growth and revenue growth; statements about the level of our costs and operating expenses relative to our revenues, and about the expected composition of our revenues; statements about expected future sales trends for our products; statements about our future capital requirements and the sufficiency of our cash, cash equivalents, and available bank borrowings to meet these requirements; information about the anticipated release dates of new products; other statements about our plans, objectives, expectations and intentions; and other statements that are not historical fact.

Forward-looking statements generally can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “intends, “plans,” “should,” “seeks,” “pro forma,” “anticipates,” “estimates,” “continues,” or other variations thereof (including their use in the negative), or by discussions of strategies, plans or intentions.  Such statements include but are not limited to statements under Item 1A - Risk Factors, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 1 – Business and elsewhere in this report.  A number of factors could cause results to differ materially from those anticipated by such forward-looking statements, including those discussed under Item 1A - Risk Factors and Item 1 – Business. The absence of these words does not nece ssarily mean that a statement is not forward-looking.  Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements.  Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including factors described in Item 1A. - Risk Factors of our Form 10-K for the year ended December 31, 2007.  You should carefully consider the factors described in Item 1A - Risk Factors in evaluating our forward-looking statements.

You should not unduly rely on these forward-looking statements, which speak only as of the date of this report.  We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this report, or to reflect the occurrence of unanticipated events.  You should, however, review the factors and risks we describe in the reports we file from time to time with the Securities and Exchange Commission (“SEC”).

     GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

TABLE OF CONTENTS

PART I

ITEM 1.     BUSINESS

OVERVIEW

Guardian Technologies International, Inc. was incorporated in the State of Delaware in February 1996. Guardian Technologies International, Inc., and its subsidiaries are collectively referred to herein as the “Company,” “Guardian,” “us,” “we,” or “our.”

We are a technology company that designs and develops “imaging informatics” solutions for delivery to our target markets: aviation/homeland security and healthcare. We utilize imaging technologies and advanced analytics to create integrated information management technology products and services that address critical problems in healthcare and homeland security for corporations and governmental agencies.  Each product and service can improve the quality and velocity of decision-making, organizational productivity, and efficiency within the enterprise.  Our product suite is a platform for innovation that efficiently integrates, streamlines, and distributes business and clinical information and images across the enterprise.

Our core technology is an “intelligent imaging informatics” (“3i”) engine that is capable of extracting embedded knowledge from digital images, as well as the capacity to analyze and detect image anomalies.  The technology is not limited by digital format.  It can be deployed across divergent digital sources such as still images, video and hyper-spectral imagery.  The technology has been tested in the area of threat detection for baggage scanning at airports and has resulted in the development of our PinPoint and PinPoint nSight products.  Also, we have conducted preliminary research and development in the areas of detection for cargo scanning, people scanning, military target acquisition in a hyper-spectral environment, and satellite remote sensing ground surveys.  Further, we have engaged in the preliminary research and development of certain products for use in the imaging field of diagnos tic radiology, a product we refer to as Signature Mapping.  Product development in these areas is ongoing, and while there can be no assurance, we believe the current results of internal testing indicate that the technology should produce results equal to or greater than those currently achieved in baggage scanning.  Our ability to develop or further develop our products will depend upon our ability to continue to raise additional financing or to obtain grant funding and there can be no assurance we will be successfully in such efforts.

Currently, we are focused on providing technology solutions and services in two primary markets, aviation/homeland security and healthcare.  However, as we develop new or enhanced solutions, we expect to expand into other markets such as military and defense utilizing hyper-spectral technology, and imaging diagnostics for the medical industry.

Aviation/Homeland Security Technology Solution - PinPoint

Our PinPoint product is an intelligent imaging informatics technology for the detection of guns, explosives, and other threat items at airport baggage areas.  PinPoint can identify threat items, notify screeners of the existence of threat items, speed the security process by eliminating unnecessary baggage checks, provide the screener with an instantaneous second opinion, and reduce processing time spent on false positives (baggage selected for security review that contains no threat items). We are marketing and seeking to license our PinPoint product primarily to the Transportation Services Administration for use in airports and to foreign airport authorities and foreign governments.

We expect that our PinPoint product will need to complete certain testing by the TSA’s Transportation Security Laboratory and by other foreign aviation regulatory authorities before we are able to license and install the products in the U.S. and any such foreign airports.   Currently, there are limited standards within the aviation security marketplace for the testing and validation of software technology solutions.  Our challenge with the PinPoint product is to assist in the establishment of the testing and certification standards, to validate through independent parties the efficacy of PinPoint as an automated threat detection solution, and to convince the appropriate governmental authorities to commit financial resources to purchase PinPoint.  To date, the results of such testing have been favorable, however, there can be no assurance that we will be successful in our efforts to gain acceptance for PinPoint a s a threat detection software solution in the U.S. or in any foreign jurisdiction. We continue to develop PinPoint to address the market for contraband detection and undergo certain required testing.  To date, we have received limited revenue from the licensing of our PinPoint product.

We are pursuing an additional market opportunity using our 3i™ platform technology, adding to our detection family of products.  PinPoint nSight™ provides visualization enhancements that allow bomb technicians and investigators to assess the presence of explosives more rapidly and accurately using single-energy x-ray scanners.  In May 2006, we entered into a Distribution Agreement with Logos Imaging LLC, a manufacturer of portable bomb scanning equipment, with regard to the distribution of PinPoint nSight™. During fiscal 2007, we sold to Logos 10 licenses for our threat assessment software technology for bomb detection scanners, PinPoint nSight™. We are also continuing to develop other distributor relationships in an effort to increase market penetration for PinPoint nSight™.

We compete with manufacturers of baggage screening, luggage and large parcel screening, people screening for weapons and explosive detection, container and vehicle screening, and cargo screening equipment and certain software companies and academic institutions that are developing solutions to detect threat items.  

Healthcare 3i Technology Solution

In an effort to expand upon the use of our core technology 3i™ “intelligent imaging informatics,” we have been migrating and adopting our threat detection algorithms and quantitative imaging capabilities for use in the imaging field of diagnostic radiology.  The technology for this developmental project is called Signature Mapping™.  Our Signature Mapping™ technology is in development and, currently, we do not have a product that we may market and sell in the U.S.  Furthermore, any Signature Mapping™ product we do develop will be subject to Food and Drug Administration (“FDA”) review and approval, including with regard to its safety and effectiveness, before we may begin marketing and selling any such product in the U.S. Such approval may require us to obtain extensive data from clinical studies to demonstrate such safety or effectiveness.  Also, we may be subject to similar regulatory requirements in any foreign country in which we seek to market and sell our CAD products.  There can be no assurance we will be successful in obtaining any such approval from the FDA and such approval may take approximately two years to obtain.

The challenge for modern radiology is to improve the quality of clinical care while simultaneously reducing costs and improving patient outcomes.  To accomplish this goal, radiology has greatly expanded its use of various imaging modalities to include Nuclear Medicine, Ultrasound, Computer Tomography (“CT”), Magnetic Resonance Imaging (“MRI”), Positron Emission Tomography, and Digital Radiography (X-ray”).

While significant improvements in diagnostic radiology have occurred using these imaging modalities, the same degree of technological advancements has not been available to help radiologists to accurately interpret and quantify the rapidly expanding number and diversity of imaging cases generated each day, and coupled with the level of difficulty in reading the image, radiologists are also prone to interpretation subjectivities, misreads, and the enormous patient loads and time constraints radiologists face each day. Studies and other literature indicate that radiologists are about 80% accurate at best in reading screening x-ray breast examinations - 75% accurate for women in their 40s. Certain studies have found that lesions are simply not detected 10 to 15% of the time.  Such knowledge has resulted in a tendency towards additional procedures, such as biopsies which sometimes prove unnecessary.

While traditional computer-aided detection (“CAD”) assists radiologists by marking anomalies without providing additional visualization or analytical tools, CAD applications have certain characteristics that limit their capabilities. CAD results are associated with high false positive rates. The pattern recognition algorithms employed by CAD restrict their functionality to searching for a specific disease within a specific imaging modality. Guardian is developing a new approach for medical image analysis called Signature Mapping™.  It is the first image-analysis-based technology that is expected to be capable of “characterizing tissues” across a broad range of digital imaging modalities. The software has been designed to work seamlessly with Digital Imaging and Communication in Medicine (“DICOM”) images generated from any existing imaging modality.  It can be integrated into a PACS network, a stand-alone digital imaging modality, a diagnostic workstation or a clinical review workstation.

Similar to a person’s fingerprint, each tissue has a unique structure. Each structure creates a unique pattern or “signature” that can be extracted from an image to differentiate, locate, identify, and classify by using our Signature Mapping™ technology.  Signature Mapping™ is expected to further help radiologists by visualizing the various structures within a particular tissue so they can be examined and quantified. This capability is expected to provide a next-generation image analysis, clarification, visualization and Signature Mapped “tissue characterization” and detection.  Management believes that it will add significant clinical value to a wide range of difficult to detect diseases in diagnostic radiology by distinguishing and characterizing different tissue types in images regardless of the modality that generated the image.

Based on its unique properties, Signature Mapping is expected to be capable of being used to analyze images generated across all imaging modalities without the need for new image capture hardware costs.  It will serve as a software-based, multi-modality approach to image analysis, when combined with Signature Mapping’s unique” tissue characterization” and detection. As a result, Signature Mapping is expected to differentiate the contrast resolution between different tissue types, even when the material or tissue in the image is very diffuse or obscured by other objects, such as is the case where diseased lung tissue is located behind a rib in an x-ray chest examination. It is capable of displaying these ‘signatures’ in a way that empowers radiologists to make a more informed and confident diagnosis, even for hard to disting uish structures such as masses in dense breast tissue.

Rather than solely analyzing the pixel values in an original image, the Signature Mapping process applies a series of proprietary algorithms to iteratively impact the image and cause pixels associated with each material or tissue type to react collectively producing a unique signature.

Multiple iterations of the Signature Mapping process can be employed to process a single image. An initial phase is used to isolate specific tissues (segmentation), while additional processes discriminate structures within the tissue.  For example, a first process may be used to locate and isolate the prostate in an MRI scan while a second process may reveal a signature indicating the presence of a tumor within the prostate.

Signature Mapping appears to provide advantages for providing the knowledge for automatic detection.  The development of a “tissue characterization” and detection model employs the use of supervised machine learning and contextual image analysis to analyze and classify the features associated with the newly created “signatures.”  The fusion of these three technologies is known as Guardian’s Intelligent Imaging Informatics 3i™. Unlike other pattern recognition methodologies, the 3i solution can reveal and differentiate inherent structures for all materials in an image regardless of:

·

The imaging modality used to create the image,

·

Location within the image,

·

Shape or texture, and

·

Object orientation even if obscured by its relationship to other materials.

Clinical Experience and Medical Accomplishments

While Signature Mapping is expected to be capable of use in a wide range of medical image analysis applications, our initial application product development efforts are focused in three areas:

·

Breast imaging using x-ray mammography, MRI and ultrasound.

·

Neurological imaging through the detection and quantification of:

o

acute intracranial hemorrhage using non-contrast CT,

o

normal pressure hydrocephalus,

o

multiple sclerosis using MRI.

·

Chest radiography targeted at tuberculosis and silicosis detection using digital X-ray and sputum samples.

In July 2007, we entered into an agreement with the Medical Imaging Informatics (MI2) at the Keck School of Medicine, University of Southern California to conduct a multiple-phase process to clinically evaluate, and give feedback on potential enhancements to, our 3i “intelligent imaging analysis” solutions as applied to medical radiology imaging.  Our 3i product segments clarifies, distinguishes and identifies organic objects even when masked by one or more other objects of similar density and chemical composition.  This is an expected product extension of our 3i-based computer-aided detection technology in adapting scientific principles employed for explosives detection to medical image analysis.  We continued our collaboration relationship with a new agreement dated July 19, 2007 for a one year term, to include clinical studies for our Signature Mapping™ product.  The first half of the collab oration focused on image-based visualization and CAD solutions for the detection of breast cancer on mammograms, and the second half of the collaboration will be for the detection of small acute intracranial hemorrhage (“AIH”) on CT.

Including the above research with the MI2, we have to-date performed five pilot programs and studies conducted under the direction or use of: (i) Image Processing and Informatics Laboratory at the University of Southern California (USC) using clinical data and images provided by USC, (ii) Howard University School of Engineering as well as their Cancer Center, and (iii) South Florida Clinical Mammography Data Base.

We expect to compete with existing CAD manufactures such as iCAD, Hologic, Medipatten, Confirma, Siemens, or Carestream Health, each of which is better capitalized and has greater marketing, personnel and other resources than Guardian and are well established in the healthcare market..  We may also partner with one or more of these existing CAD manufacturers, or an emerging company with new technology for the CAD arena.  Once our products are commercially viable, we anticipate marketing and selling our products through original equipment manufacturers (“OEM”), or system integrators.

Healthcare Technology Solution - FlowPoint

Our FlowPoint products consist of a web-enabled Radiology Information System (RIS) and Picture Archiving & Communication System (PACS) which manages radiology workflow, patient information, treatment history, and billing information. It also manages digital images through image viewers, compression technologies, storage, image archiving, image retrieval and transfer.  

Due to the increased efforts and focus in developing our Signature Mapping imaging technology, we have discontinued active marketing of our FlowPoint products and seek licensing arrangements with other software or hardware providers that may use our RIS and PACS systems to complement their existing product line.  Accordingly, during January 2008, we entered into the first such licensing arrangement with Rogan-Delft for a perpetual, nonexclusive and nontransferable license to use, modify, create derivative works from, market and sublicense our FlowPoint Radiology Information System (“RIS”) product.

Financial Condition and Going Concern Uncertainties

As of December 31, 2007, our revenue generating activities have not produced sufficient funds for profitable operations and we have incurred operating losses since inception.  In view of these matters, realization of certain of the assets in the accompanying consolidated balance sheet is dependent upon continued operations of the Company which, in turn, is dependent upon the Company’s ability to meet its financial requirements, raise additional financing on acceptable terms to the Company, and the success of its future operations.  

Our independent registered public accounting firm’s reports on the consolidated financial statements included in our annual report on Form 10-K for the years ended December 31, 2005 and 2006, and in this annual report on Form 10-K for the year ended December 31, 2007, contain an explanatory paragraph wherein they expressed an opinion that there is substantial doubt about our ability to continue as a going concern. Accordingly, careful consideration of such opinions should be given in determining whether to continue or become a stockholder of the Company.  

During Fiscal 2007, the Company raised $169,300 from the exercise of employee stock options, received $815,641 net proceeds from the exercise of common stock purchase warrants, received $100,000 from a promissory note, received gross proceeds of $2,550,000 (net proceeds of $2,540,000 after payment of sales commissions to a broker) from the issuance of common stock and warrants in a private placement offering, and completed the second closing of our Series A Debenture and Series D Warrant financing (the debenture financing). Gross proceeds from the second closing were $2,575,000, with net proceeds of $2,217,747 (after payment of sales commissions to a broker and related transaction costs).  In addition, the Company made: (i) $100,000 in principal repayment to Mr. Trudnak, the Company’s Chief Executive Officer, towards his outstanding noninterest-bearing loans, with the remaining net outstanding being $202,000 at December 31, 20 07, and (ii) $800,000 in principal repayment to a bridge note holder.

Management believes that the cash balance of $101,136 at December 31, 2007, and subsequently $29,079 of collections on outstanding trade receivables, $15,000 received from the exercise of stock options, $4,850,000 received from the sale of securities, and outstanding subscriptions receivable of $1,650,000 due on or about May 30, 2008, to be sufficient to fund the Company’s operations, absent any cash flow from operations, until approximately the end of February 2009.  The Company is currently spending approximately $480,000 per month on operations and the continued research and development of our 3i technologies and products.  Although there can be no assurance, management believes that with the

cash balance and other sources of funds received to-date, the Company may not require additional financing to fund the Company’s existing operations through December 31, 2008. This assumes that the Company will be unable to generate sufficient operating cash flow to fund its operations during this period.  Also, this assumes that holders of our outstanding debentures convert such debentures into shares of our common stock prior to November 7, 2008, the date we are required to pay the principal amount of such debentures.  We may be required to raise additional capital through an equity or debt financing or though bank borrowing, in the event the debenture holders do not convert such debentures, partially convert such debentures, or effect the buy-in provision of the warrants related to the debentures.  We are also seeking research grant funding from sources in connection with the development of our Medical CAD product. There can be no assurances that the Company will be successful in its efforts to secure such additional financing, any bank borrowing or any grant funding.

During fiscal 2007, the Company’s total stockholders’ deficit increased by $4,344,347 to $7,343,647.  Notwithstanding the foregoing discussion of management’s expectations regarding future cash flows, the Company’s deepening insolvency continues to increase the uncertainties related to its continued existence.  Both management and the Board of Directors are carefully monitoring the Company’s cash flows and financial position in consideration of these increasing uncertainties and the needs of both creditors and stockholders.

In view of the foregoing, from time-to-time, management is required to seek additional capital through one or more equity or debt financings in the event that the cash on hand, collections from customers, and sales of our products do not provide sufficient cash to fund operations.    If adequate funds are not available to us, we may be required to curtail operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies or products.  If we raise additional capital through the sale of equity or equity-related securities, the issuance of such securities could result in dilution to our current stockholders.  No assurance can be given that we will have access to the capital markets in the future, or that financing will be available on terms acceptable to satisfy our cash requirements or to imple ment our business strategies.  If we are unable to access the capital markets or obtain acceptable financing, our results of operations and financial condition could be materially and adversely affected. We may be required to raise substantial additional funds through other means.   We have not begun to receive material revenues from our commercial operations associated with the software products.  Moreover, under the terms of the 2006 and 2007 convertible debentures and warrant financing, we may not be able to issue additional shares of our common stock or common stock equivalents (except for certain  issuances excepted from this requirement) for up to three years following the April 2007 second closing of the convertible debenture and warrant financing, engage in certain financings in which the conversion, exercise, exchange rate or other price of the securities is based upon the trading price of our securities after the date of issuance of such securities.  These provisions m ay limit our ability to raise additional financing through the issuance of common stock or common stock equivalents during the period such restrictions are effective.

We anticipate we will need to increase the current workforce significantly to achieve commercially viable sales levels.  There can be no guarantee that these needs will be met or that sufficient cash will be raised to permit operations to continue.  If Guardian is unable to raise sufficient cash to continue operations at a level necessary to achieve commercially viable sales levels, the liquidation value of Guardian’s noncurrent assets may be substantially less than the balances reflected in the financial statements and we may be unable to pay our creditors.

We did not make timely payment of the interest due under our Series A 10% Senior Convertible Debentures on January 1, 2008.  However, the Company has paid all of the interest and late fees due to debenture holders as of April 8, 2008.  The debentures provide that any default in the payment of interest, which default is not cured within five trading days of the receipt of notice of such default or ten trading days after the Company becomes aware of such default, will be deemed an event of default.  If an event of default occurs under the debentures, the debenture holders may elect to require the Company to make immediate repayment of the mandatory default amount, which equals the sum of (i) the greater of either (a) 120% of the outstanding principal amount of the debentures, plus accrued but unpaid interest, or (b) the outstanding principal amount plus accrued but unpaid interest divided by the conversion price on the date the mandatory default amount is either (1) demanded or otherwise due or (2) paid in full, whichever has the lower conversion price, multiplied by the variable weighted average price of the common stock on the date the mandatory default amount is either demanded or otherwise due, whichever has the higher variable weighted average price, and (ii) all other amounts, costs, expenses, and liquidated damages due under the debentures. Also, interest under the debentures accrues at a rate of 18% per annum or the maximum amount allowed under the law and the Company may be subject to a late fee equal to the lesser of 18% per annum or the maximum rate permitted by law.  As of the date of this report, the debenture holders have not made an election requiring immediate repayment of the mandatory amount, although there can be no assurance they will not do so. In

anticipation of such an election and measured as of December 31, 2007, the additional amount due is approximately $645,641, and is recorded as an increase to the carrying value of the debentures.

RECENT DEVELOPMENTS

Recent Financings

During the period of February 5, 2007, through April 4, 2008, the Company held a series of closings with regard the sale of units of its securities (the “Units”), each Unit consisting of 142,857 shares of the Company’s Common Stock and 214,285 Class H Warrants for a purchase price of $100,000 per Unit.  At such closings, the Company sold an aggregate of 66 Units for gross proceeds to the Company of approximately $6,600,000, including $100,000 upon conversion of a convertible promissory the Company issued on December 11, 2007.  The Company expects to receive approximately $1,650,000 of such gross proceeds at a closing to be held on or about May 30, 2008.  The Company issued, or agreed to issue, an aggregate of approximately 9,428,562 shares of Common Stock and approximately 14,142,810 Class H Warrants at such closings.  The Class H Warrants are exercisable at a price of $0.70 per share for a period of f ive years from the date of issuance.  The Class H Warrants are redeemable by the Company at a price of $.001 per warrant if for ten (10) consecutive trading days the closing bid or sale price of the Company’s Common Stock on the trading market for the Common Stock equals or exceeds $5.00.  The Class H Warrants contain certain anti-dilution provisions and other customary provisions.

During December 2007, the Company accepted direct investment from existing accredited investors of $200,000 and issued 285,714 shares of common stock.   In addition, we issued an aggregate of 428,570 common stock purchase warrants exercisable at a price of $0.70 per share that contain a conditional call provision if the market price of each share exceeds $5.00. The warrants expire in December 2012. Because of the reset provision of the Series A 10% Senior Convertible Debenture, the Company cannot ascertain whether sufficient authorized shares exist to settle the contract, the warrants are classified as a liability. The initial fair value of the 428,750 warrants on the date of issuance was $167,143. The fair value of the warrants decreased $12,857 from the date of issuance to the balance sheet date, resulting in the fair value as of December 31, 2007 of $154,286.

During 2007, employees of the Company exercised 368,000 stock options that resulted in the issuance of 368,000 shares of common stock for cash proceeds to the Company of $169,300.

During 2007, in accordance with the terms of the Company’s outstanding Series A Debentures, certain debenture holders converted approximately $1,921,795 in principal amount of such debentures into an aggregate of 2,585,582 shares of common stock.  In connection with this conversion, the fair value of the derivative instrument related to the embedded conversion feature was decreased by $406,595, and the related unamortized discounts for the debenture and deferred financing costs were reduced by $707,053, resulting in a net interest expense charge of $300,458.

On December 11, 2007, the Company issued a promissory note in the principal amount of $100,000 and warrants to purchase 10,000 shares of our common stock. The warrants are exercisable during the sixty (60) month period commencing on the date of issuance at a price of $0.70 per share.  The proceeds of the sale of the note were used by the Company for working capital purposes. Because the Company cannot ascertain whether sufficient authorized shares exist to settle the contract, the warrants are classified as a liability. The initial fair value of the warrants on the date of issuance was $4,580. The fair value of the warrants decreased $980 from the date of issuance to the balance sheet date, resulting in the fair value as of December 31, 2007 of $3,600.  The note bears interest at 10% per annum and is repayable in full upon receipt of proceeds from a future financing.  In addition, the noteholder has the right, up to and t hrough January 15, 2008, or any extension that may be granted, to convert the principal portion of the repayment into a unit on the same terms as provided other investors in a pending financing transaction. The pending financing is expected to include units, with a minimum investment of $100,000, with each unit including: (1) 142,857 common shares priced at $0.70 per common share and (2) 214,285 Class H Common Stock Purchase Warrants. Each warrant is convertible into one common share. The Company closed on the pending financing during the periods of December 21, 2007 through April 4, 2008 for total gross proceeds of $6.8 million, including the conversion of the $100,000 promissory note on April 4, 2008.  The securities will be “restricted securities” within the meaning of Rule 144 under the Securities Act.  The warrants expire 60 months following the issue date, and have a conditional redemption price of $.001, when the stock price equals or exceeds $5.00 per share.

On November 29 2007, an investor exercised 60,075 warrants to purchase common stock that resulted in the issuance of 60,075 shares of common stock for cash proceeds to the Company of $45,056.  Common stock was increased by $60 for the par value of the shares and $44,996 to paid-in capital.  Upon exercise of the warrants, the fair value of the warrant liability was reduced and paid-in capital increased by $22,829.

On October 21 2007, an investor exercised 60,000 warrants to purchase common stock that resulted in the issuance of 60,000 shares of common stock for cash proceeds to the Company of $45,000.  Common stock was increased by $60 for the par value of the shares and $44,940 to paid-in capital.  Upon exercise of the warrants, the fair value of the warrant liability was reduced and paid-in capital increased by $22,800.

On August 6, 2007, the Company closed on an equity financing transaction for gross proceeds to the Company of approximately $2,950,000, of which $600,000 is due within 10 days upon execution of an agreement by Guardian with an investment bank related to a financing.  As a result of the contingency, no subscription receivable was recorded on the balance sheet.  The Company subsequently cancelled the outstanding subscription as the specific related financing did not occur.  Under the terms of the financing, the Company received aggregate proceeds of $2,350,000 ($2,340,000 net of broker commissions) from six investors and issued an aggregate of: (i) 2,937,500 shares of common stock; (ii) 2,937,500 Class F Common Stock Purchase Warrants exercisable at a price of $0.80 per share, expiring thirty-six months from the date of issuance, and containing a cashless exercise provision and other customary pro visions; and (iii) 2,937,500 Class G Common Stock Purchase Warrants exercisable at a price of $1.75 per share, expiring sixty months from the date of issuance, redeemable when the Company’s closing bid or sale price of its common stock exceeds $5.00 per share for ten (10) consecutive trading days, and containing other customary provisions. Because of the reset provision of the Series A 10% Senior Convertible Debentures previously described, the Company cannot ascertain whether sufficient authorized shares exist to settle the contract, the warrants are classified as a liability. As the $3,642,500 fair value of the warrants on the date of issuance exceeded the net proceeds from the financing transaction, the entire amount of the net proceeds was allocated to the warrants. The excess fair value of the warrants over the net proceeds, representing approximately $1,302,500, was charged to earnings immediately as interest expense. The fair value of the warrants decreased $1,938,750 from the date of issuance to December 31, 2007.  The change in fair value was recorded as a decrease in interest expense for the fiscal year. The fair value of the warrants, as measured at December 31, 2007 is $1,703,750.

On July 10, 2007, an investor exercised 864,798 Series D Common Stock Purchase Warrants to purchase an aggregate of 864,798 shares of common stock for gross proceeds to the Company of $644,534.  After payment of $38,949 for bank fees and commissions to Midtown Partners & Co., LLC, the Company realized net proceeds of approximately $605,585.  In connection with the warrant exercise and as an inducement for such exercise, the Company issued to the investor 864,798 Class E Common Stock Purchase Warrants to purchase an aggregate of 864,798 shares of common stock, exercisable at a price of $1.17 per share during a term of five years from the date of issuance, and containing certain piggy-back registration rights and other customary provisions.  Also, the Company issued to Midtown Partners & Co., LLC as compensation, 47,564 Class E Common Purchase Warrants to purchase an aggregate of 47,564 shares of common stock, upon the same terms as issued to the investor.  Because of the reset provision of the Series A 10% Senior Convertible Debenture, the Company cannot ascertain whether sufficient authorized shares exist to settle the contract, the warrants are classified as a liability. The initial fair value of the 914,362 warrants on the date of issuance was $839,373. The fair value of the warrants decreased $538,294 from the date of issuance to the balance sheet date, resulting in the fair value as of December 31, 2007 of $301,079.

During June of 2007, in accordance with the original terms of the Company’s outstanding convertible notes, certain bridge note holders converted notes to 300,000 shares of common stock.  Common stock was increased by $300 for the par value of the shares and paid-in capital was increased by $327,750.  In connection with the conversion of these notes and payment of $600,000 on another convertible note, the fair value of the derivative instrument related to the embedded conversion feature was decreased by approximately by $383,135, and resulted in a corresponding decrease in interest expense.

During May of 2007, investors exercised certain warrants to purchase common stock that resulted in the issuance of 160,000 shares of common stock for cash proceeds to the Company of $120,000.  Common stock was increased by $160 for the par value of the shares and $119,840 to paid-in capital.

On November 3, 2006, we entered into a securities purchase agreement with certain selling stockholders.  Under that agreement, we sold an aggregate of $5,150,000 in principal amount of our Series A 10% Senior Convertible Notes with a maturity date of November 7, 2008, and Series D Common Stock Purchase Warrants to purchase an aggregate of 4,453,707 shares of our common stock.  We issued an aggregate of $2,575,000 in principal amount of debentures and 4,453,707 Series D Warrants at a first closing held on November 8, 2006, and due to conversion feature embedded in the notes and the warrants, the transaction was recognized as a liability under generally accepted accounting principles.  We issued an additional $2,575,000 in principal amount of debentures at a second closing held on April 12, 2007. The proceeds from the second closing were allocable to the embedded conversion features of the Debentur es and Series D Warrants and recognizable as a liability under generally accepted accounting principles. One-half of the Series D Warrants became exercisable on November 8, 2006, and the remaining one-half will became exercisable on April 12, 2007.. We analyzed the provisions of the convertible debentures host contracts and concluded that the convertible note contracts should be analyzed under the provisions of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and the embedded derivative features should be bifurcated and separately measured at fair value.  We also considered Emerging Issues Task Force Issue 00-19 (EITF 00-19), “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”  The fair value allocated to the warrants in consideration of financing is $1,515,142 for warrants issued to the deben ture holders, and $112,421 for the warrants issued to the broker, and was recorded as an increase to derivative liabilities. The fair value of the embedded conversion feature in the debentures is estimated at $844,764 and was recorded as an increase to derivative liabilities. Changes in the fair value of these derivative liabilities are recorded as interest expense. The resulting discount on the convertible debentures of $2,472,237 is being amortized to interest expense over the twenty-four (24) month term of the debentures.  Therefore, the fair value of the instruments was recorded as a derivative liability.

The embedded conversion features in the warrants and the embedded conversion options in the host contracts (the debentures), reset based on not achieving certain milestones included in the related agreements. A conversion price of $1.15634 was in effect at year end 2006; however, due to the reset provisions potentially triggered by the milestones, Guardian cannot make a determination on the conversion price and, therefore, cannot determine the number of additional shares to be issued upon conversion. The notes also contain a conditional redemption that is dependent on the sustained level of common stock price, as defined in the agreements that is not currently operational. We also have the option of paying interest on the notes in common stock based on the conversion price at that point in time.

During August and September 2006, we entered into a series of purchase agreements with four previous investors of Guardian, under which convertible promissory notes in the aggregate amount of $1,100,000 and warrants to purchase 1,100,000 shares of our common stock were issued.  The warrants are exercisable during the twelve (12) month period commencing on the date of issuance at a price of $1.60 per share.  The proceeds of the sale of the notes were used by us for working capital purposes.  The notes bear interest at 15% per annum and were repayable 180 days after the date of issuance of the notes (maturity date).  The warrants contain certain anti-dilution provisions in the event of a stock dividend, capital reorganization, consolidation or merger of Guardian.   The bridge notes matured during February and March 2007.  The four noteholders agreed to extend the maturity date for an additional six month s and the interest rate continues at 15% per annum.  We analyzed the provisions of the convertible note host contracts and concluded that the convertible note contracts should be analyzed under the provisions of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and embedded derivative features should be bifurcated and separately measured at fair value.  The relative fair value allocated to the warrants in consideration of the convertible note is $631,734 and, after considering the relevant provisions of EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock,” accordingly, increased paid-in capital.  Fair value of the embedded conversion option in the notes was determined using the Black-Scholes method for valuing options at approximately $468,266 and was recorded as a derivative liability.  Changes in the fair value of the embedded conversion option are recorded as interest expense. The resulting discount on the convertible notes of $1,100,000 is being amortized to interest expense over the six month term of the notes. During 2007, $800,000 of the $1,100,000 convertible promissory note was repaid and $300,000 was converted to equity.

During July 2006, we accepted direct investment from existing accredited investors of $439,000 and issued 274,374 shares of common stock.  Common stock was increased by approximately $274 for the par value of the stock, and $ 438,726 to paid-in capital.  In addition, we issued an aggregate of 146,719 warrants to purchase common stock, exercisable at a price of $3.00 per share that contains a cashless exercise provision.  The warrants expire in July 2008.

During May 2006, we accepted direct investment from accredited investors of $382,208 and issued 238,880 shares of common stock.  In addition, we issued an aggregate of 59,720 warrants to purchase common stock, exercisable at a price of $3.00 per share that contains a cashless exercise provision.  The warrants expire in May 2008.

During 2006, Company employees exercised 600,000 incentive stock options that resulted in the issuance of 600,000 shares of common stock for cash proceeds to the Company of $300,000.  Common stock was increased by $600 for the par value of the shares and $299,400 to paid-in capital.

During 2005, we also accepted direct investment from various accredited investors of $475,000 and issued 250,000 shares of common stock, at an average price per share of $1.90.

During 2005, the Company’s employees exercised a total of 400,000 incentive stock options that resulted in the issuance of 400,000 shares of common stock for total cash proceeds to the Company of $200,000. Common stock was increased by $400 for the par value of the shares and $199,600 to paid-in capital.

During September 2005, a group of investors in the 2004 Private Placement exercised 906,797 stock purchase warrants that resulted in the issuance of 906,797 shares of common stock for cash proceeds to the Company of $2,161,335 in September 2005, and net proceeds of $241,815 in October 2005.

During September 2005, the Company accepted direct investment in lieu of commission from two accredited investors of $52,124 and issued 26,062 shares of common stock.  

During August 2005, the placement agent for the 2004 Private Placement exercised 1,000 stock purchase warrants that resulted in the issuance of 1,000 shares of common stock for cash proceeds to the Company of $1,920.

During July and August 2005, we closed on a private placement of our common stock for aggregate proceeds of approximately $4,650,000 (before deductions of $129,500 for certain investment banking fees and expenses).  We issued to the investors 2,325,000 shares of common stock.  As part of this private placement, the placement agent received 92,500 stock purchase warrants with an exercise price of $3.00 per share for a period of five years from the date of issuance, containing certain anti-dilution provisions, a piggy-back registration right, a cashless exercise provision, and other customary provisions.  The Company also issued 38,000 warrants to placement agents as compensation for the transaction.

During July 2005, a group of investors in the 2004 Private Placement exercised 3,125 stock purchase warrants that resulted in the issuance of 3,125 shares of common stock for cash proceeds to the Company of $8,281.

On April 15, 2005, pursuant to the terms of a units purchase agreement, we closed on a private placement of our securities for gross proceeds of $1,200,000 (before deductions of $117,560.75 for certain fees and expenses).   We issued 120,000 units of securities, each unit consisting of four shares of our common stock and one Class B Common Stock Purchase Warrant (“Class B Warrant”) to purchase one share of common stock.  The Class B Warrants are exercisable commencing on the date of issuance and ending August 15, 2006, at a price of $3.00 per share.  In addition, the placement agent for the transaction received the following compensation: (i) 48,000 warrants to purchase shares of common stock equal to 10% of the shares issued in the offering, exercisable at a price of $3.00 per share for a period of five years from the date of issuance, (ii) commissions and non-accountable expense reimbursement in the aggre gate amount of approximately $96,000, and (iii) contain anti-dilution provisions,  piggy-back registration rights, cashless exercise provision, and other customary provisions.

During March 2005, an investor in our 2004 private placement exercised 2,342 stock purchase warrants that resulted in the issuance of 2,342 shares of common stock for cash proceeds to the Company of $6,206.  

During January 2005, the Company accepted direct investment, previously subscribed in December 2004, from an accredited investor of $1,000,000 and issued 500,000 shares of common stock.  

Recent Acquisitions

Acquisition of Wise Systems, Limited

On July 27, 2004, we completed the acquisition of Wise Systems Ltd.   Wise is a developer of advanced radiology information systems (RIS) with principal offices located in Corsham, Wiltshire, UK.  Through this acquisition, Guardian augmented its healthcare informatics offering of image compression technologies while increasing its global market potential. Guardian gained a number of important assets from the transaction, including Wise Systems’ RIS and the recently introduced picture archiving and communication system (PACS) that captures images and integrates them with other radiology information, making available to the healthcare enterprise a complete radiology patient record ready for distribution to caregivers where and when critical information is needed for optimal patient care. This seamless RIS/PACS software package keeps all of the critical information related to digital studies, such as MRI and CT scans, t ogether in an electronic patient record package, allowing healthcare providers to share patient information under electronically secure methodologies and to comply with the Health Insurance Portability and Accountability Act (HIPAA) requirements.

Under the terms of a stock purchase agreement, Guardian acquired all of Wise’s stock from Wise’s two shareholders, Martin Richards and Susan Richards.  Guardian paid to Wise’s two stockholders an aggregate of U.S. $1,929,500 in cash and issued to them shares of Guardian Technologies’ common stock in the amount of $500,000.  $929,500 of the cash purchase price was paid at closing and the remaining $1,000,000 of the cash purchase price was paid by means of the issuance of an interest bearing promissory note due 90 days after closing.  The deferred portion of the cash purchase price was paid upon maturity of the promissory note.  Guardian issued an aggregate of 106,739 shares of its common stock as the stock portion of the purchase price. The shares were valued on the basis of the average high and low sales prices of the stock for the 30 business day period which ended two days prior to the closing o f the transaction.  At closing, the shares were deposited in escrow and are subject to forfeiture in the event Guardian Healthcare Systems Division does not achieve certain revenue thresholds over the three years following closing.  In the three annual performance periods ended July 28, 2007, Guardian’s Healthcare Division did not achieve the revenue threshold.  Therefore, a total of 106,739 shares were forfeited and returned to the Guardian out of escrow and such shares were cancelled.  The shares of stock were subject to a three year lock-up.  In addition, Guardian repaid an outstanding loan of one of the directors of Wise in the amount of $79,500.  At closing, the co-founder of Wise, Mr. Martin Richards, entered into an employment agreement with Guardian as Vice President of European Operations at a base salary of $210,250 per annum for a period of two years following closing which, expired on July 28, 2006.  Also, Mr. Martin Richards and Ms. Susan Richards resigned their positions as officers of Wise and as members of Wise’s Board of Directors, and have entered into non-compete agreements with Guardian Technologies for a period of three years following closing.  Furthermore, effective as of the closing, Mr. Martin Richards was released from personal guarantees for certain of Wise’s bank debt obligations and of Wise’s real property lease obligations. The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition:

SUMMARY OF NET ASSETS ACQUIRED AND LIABILITIES ASSUMED
Cash	$                609
Accounts receivable	89,513
Other current assets	725
Equipment, net	55,225
Goodwill	119,191
Intangible assets, net	2,264,630
Total assets acquired	$      2,529,893
Accounts payable	$         299,501
Total liabilities assumed	299,501
Net assets acquired	$      2,230,392

Acquisition of Certain Assets of Difference Engines

On October 23, 2003, the Company entered into an agreement with Difference Engines Corporation (Difference Engines), a Maryland corporation, pursuant to which Guardian agreed to purchase certain intellectual property (IP) owned by

Difference Engines, including but not limited to certain compression software technology, described as Difference Engine’s Visual Internet Applications or DEVision, as well as title and interest in the use of the name and the copyright of Difference Engines.

Under the terms of an Asset Purchase Agreement, Guardian issued 587,000 shares of its common stock as consideration for the purchase of the IP from Difference Engines Corporation.  The 587,000 shares of common stock were subject to a two (2) year lock up.  Upon expiration of the two (2) year lock up period, in the event that the shares are not eligible for resale under “Rule 144” and have not been registered under the Securities Act, the holder of the shares may demand redemption of the shares.  The redemption price is to be calculated on the basis of the average of the closing bid and asked prices of Guardian’s common stock for the twenty (20) consecutive business days ending on the day prior to the date of the exercise of the holder’s right of redemption.  Under SEC Accounting Series Release (“ASR”) 268, “Presentation in Financial Statements of ‘Preferred Redeemable Stock 6;,” such freestanding financial instruments are to be classified as temporary equity and measured at the value of the redemption right.  The redemption value of the common stock issued in the Difference Engines asset purchase was calculated and reclassified from permanent equity to temporary equity the redemption value of $2,044,228.

During the Fiscal year ended December 31, 2007, the temporary equity account was decreased and the permanent equity account increased by $88,466, for the change in the estimated redemption value of the outstanding shares held by the shareholders of Difference Engines Corporation. Also, the Company reclassified from temporary equity to permanent equity, the redemption value of $78,556, due to the sale of Guardian stock held by the shareholders of Difference Engines Corporation.

OUR BUSINESS

Introduction

Guardian is a technology company that designs and develops “imaging informatics” solutions for delivery to its target markets:  aviation/homeland security and healthcare. We utilize imaging technologies and advanced analytics to create integrated information management technology products and services that address critical problems in healthcare and homeland security for corporations and governmental agencies.  Each product and service can improve the quality and velocity of decision-making, organizational productivity, and efficiency within the enterprise.  We consider our product suite to be a platform for innovation that efficiently integrates, streamlines, and distributes business and clinical information and images across the enterprise.

We understand the challenges facing our clients such as staffing shortages, declining revenues, declining reimbursements, integration complexities, information accuracy across systems, and competitive pressures.  We develop our solutions and services to help our clients meet those challenges head on by accelerating their productivity so they can work more efficiently with the same staff.

Each of Guardian’s target markets share certain common characteristics:

·

Each is large, growing, and underserved.

·

Each faces significant current and ongoing problems related to exponential data volume growth versus decreasing information quality.

·

Each requires new approaches to its challenges, as previous solutions have become less effective.

·

Each faces an evolving regulatory environment.

·

Each requires sophisticated solutions that build on a common platform that can be easily customized.

·

Each requires the ability to derive intelligent, timely, and useful informational value from digital images.

·

Most importantly, Guardian’s core competencies and newly developed techniques apply with little modification across all of the market problems we are addressing.

Currently, we are focused on providing technology solutions and services in two primary markets, healthcare and aviation/homeland security.  However, as we develop new or enhanced solutions we expect to expand into other markets,

such as military and defense utilizing hyper-spectral technology and imaging diagnostics for the medical industry.  We may also engage in one or more acquisitions of businesses that are complementary to our business.

Our Business Strategy

Our strategic vision is to position our core technology as the de facto standard for digital image analysis, knowledge extraction, and detection.  Our strategy is based upon the following principal objectives:

·

Maintain product development and sales/marketing focus on large, underserved, and rapidly growing markets with a demonstrated need for intelligent imaging informatics.

·

Leverage Guardian’s technology, experienced management team, research and development infrastructure, and access to capital to acquire/develop complementary technologies/products.

·

Focus our talents on solving highly challenging information problems associated with digital imaging analysis.

·

Establish an international market presence through the development of a significant OEM/Reseller network.

·

Build and maintain a strong balance sheet to ensure the availability of capital for product development, acquisitions, and growth.

·

Seek to broaden our investment appeal to large institutions.

To achieve our strategic vision, we are aware of the need to exercise financial and operational discipline necessary to achieve the proper blend of resources, products and strategic partnerships.  These efforts will accelerate our ability to develop, deploy and service a broad range of intelligent imaging informatics solutions directly to our target markets and indirectly through OEM/value added reseller (“VAR”) partners.  During 2007, we continued implementing changes across the spectrum of our business. We refined our marketing strategy and enhanced our PinPoint^TM and Signature Mapping^TM product offerings.   

Our Strategic Achievements During 2007

In line with our strategic plan, during fiscal 2007, we accomplished the following:

PinPoint™:

·

Initiated our global sales/marketing strategy through the development of relationships with international security companies including:

o

We entered into a Strategic Alliance and Joint Development Agreement with Control Screening, LLC, d/b/a AutoClear, to deliver a fully integrated, automated threat detection hardware and software solutions for the homeland security marketplace.  AutoClear is a leader in the design and production of advanced X-ray scanners, explosive detection devices, and metal/weapons detectors. AutoClear’s global distribution network is expected to integrate our image analysis technologies into their comprehensive line of security x-ray scanners and, if such integration is achieved, will be the first to do so.

o

We entered into a non-exclusive Marketing License Agreement with EGC Informatics, Inc., d/b/a International Threat Detection Systems (“ITDS”) to pursue opportunities for both PinPoint and nSight.  Although there are no geographical limitations or requirements under the agreement, we expect ITDS will focus their marketing efforts in Spain, Portugal, Southern France and Latin America. ITDS recently entered into a key reseller and systems integration agreement with a multinational security company, Madrid-based Prosegur Group. Prosegur employs more than 75,000 employees worldwide that includes three out of every five security employees in Spain’s airports and 100% of the employees in Portugal’s airports. Prosegur is expected to reduce the time and effort normally required to access proper government authorities for the distribution of Guardian’s PinPoint product line. Prosegur has established relationships an d offices in Spain, Portugal, France, Italy, and Romania in Europe; and Mexico, Colombia, Peru, Brazil, Argentina, Paraguay, Uruguay and Chile in Latin America.

o

We entered into an agreement with Hi-Tec Aviation Safety & Security Systems Pvt. Ltd. for the sale, installation and servicing of our PinPoint™ and nSight™ products in India and the adjacent countries with common boundaries, except China.  Hi-Tec will be the exclusive reseller for India, and a non-exclusive reseller for the adjacent countries within the territory.

o

On June 26, 2007, we entered into a perpetual, non-exclusive nontransferable software licensing agreement with NAST to use our PinPoint™ product at their location in Moscow, Russia. NAST agrees that in the process of certifying our product and documentation, that they will not reverse engineer, decompile, disassemble or extract, as applicable, any idea, algorithms or procedures for the software or documentation for any reason, and shall not copy the software.

·

Renewed the Cooperative Research and Development Agreement (CRDA) with the federal Transportation Security Laboratory (TSL) to evaluate the Company's PinPoint™ threat-detection technology for an additional six month, and subsequently in February 2008 for an additional year. CRDA programs under the TSL mission are conducted to accelerate and expand promising technologies to the point of operational test and evaluation. Under the terms of the extended agreement, TSL will perform an independent assessment of PinPoint,

·

We completed a live homemade explosives image data collection project for the Spanish government, hosted by TEDAX and supported by Prosegur at a special facility near Madrid, Spain. With the completion of the data collection initiative, the Company developed unique signature qualities necessary to detect a range of homemade explosive compounds that have been identified as among the gravest terrorist threats by security agencies throughout the European Union. While we have experienced some unexpected delays in progressing to a final test, we believe that approval by the Spanish government for PinPoint™ will occur prior to the end of second quarter 2008.

Signature Mapping™:

·

Developed relationships with organizations for the continued development of Signature Mapping™ including:

o

We signed a joint development agreement with the Aurum Institute, a leading international research institute in South Africa that is committed to the detection and treatment of HIV, malaria and tuberculosis. Together, we expect to work towards the development of a fully automated imaging analysis system for the early identification of tuberculosis and malaria.

o

We entered into a Teaming and Joint Development Agreement with Rogan-Delft Diagnostic Imaging, a major innovator and a division of Dutch software development company Rogan-Delft.  Delft is a leader in x-ray screening devices for tuberculosis and has installed over 30,000 systems worldwide. The agreement establishes a strategic development program providing for Guardian's Signature Mapping™ computer-aided-detection with visualization software to be fully integrated into the Delft Odelca-DR™ digital chest x-ray system. In the event an integrated product is developed, Delft Imaging Systems will be positioned with a turnkey solution for the mass screening of patients and the digital storing, transmission and diagnostic viewing of images. The system is expected to be designed with special attention to the clinical imaging requirements for detection of tuberculosis in the developing world.

o

We began a collaboration relationship with the Medical Imaging and Informatics Laboratory at the University of California (USC) to further validate our Signature Mapping™ application for breast cancer, and to develop a prototype that we expect will serve as a model for future use by radiologists. The clinical evaluation was led by Dr. H.K. Huang and his team who evaluated feedback provided by leading radiologists from USC regarding potential enhancements to Signature Mapping™ visualization tools and integration methodology as it applies to medical radiological imaging workflow.  Initial results of the study showed a 95% positive detection of breast cancer using Signature Mapping™.

·

Submitted a new patent filing for a vital component of the Company's Signature Mapping™ software solution. The new patent filing wraps additional technological imaging advancements around Guardian's existing eleven patents to enable an industry-first product that detects threatening tissue smaller than those a radiologist can see with the

naked eye, enabling earlier treatment, dramatically reducing unnecessary biopsies and potentially increasing survival rates.

·

Successfully completed a clinical study involving the evaluation of our Signature Mapping™ software solution product using the University of Florida’s Digital Data Base for Screening Mammography (“DDSM”), a well-known and clearly defined online database of mammographic x-ray exams for use in the research community.  

Other activities:

·

Received net proceeds of approximately $2,540,000 from certain private placements of our securities, $169,300 from employee stock options exercised, $815,641 from the exercise of common stock purchase warrants, and $2,217,747 from a convertible debenture financing following the April 2007 effectiveness of a registration statement under the Securities Act.  We reduced our short-term loans by $800,000, including $100,000 towards loans from an executive officer and $700,000 towards convertible notes.

·

Formed an Advisory Board that will focus on strategic positioning of new technological developments, future product development, industry trends, and potential research collaborations with third parties. When fully assembled, the Board will consist of five members, who will serve in one-year terms.  The members are expected to include certain internationally recognized scientists and industry professionals that bring a wide range of expertise in imaging analysis capabilities.  The Company has appointed as Chairman of the Advisory Board, Ronald R. Polillo who is also a member of our Board of Directors.  We also appointed Ronald B. Schilling, Ph.D. as a member.

·

Appointed two Board members to replace two directors who resigned their positions during 2007, as follows: (i) Mr. Ronald R. Polillo, a world-renowned expert in aviation security technologies, and (ii) Mr. Henry A. Grandizio, a named partner at Grandizio, Wilkins, Little & Mathews, who brings financial experience to the Chairmanship of our Audit Committee.

·

District Court for the Fourth Judicial District of the State of Minnesota ordered that all claims against Guardian and its co-defendants, Thomas E. Ramsay and Nancy C. Goetzinger, in the lawsuit entitled VisualGold v. Thomas E. Ramsay, Nancy Goetzinger and Guardian Technologies International, Inc., be dismissed with prejudice.

·

Incorporated Applied Visual Sciences, Inc., as a wholly-owned subsidiary that will be focused on accelerating the commercialization of the Company's next-generation disease detection technology for the healthcare industry.

Management believes that our future growth will be based upon a continued concentration on the core aspects of our business:  targeted sales/marketing activities with broader geographic coverage and product offerings, expanded international OEM/VAR relationships, product innovations designed to enhance knowledge extraction and anomaly detection within the digital imaging arena, exceptional professional services and expanded strategic partnerships that complement our internal efforts.

Vital to our business strategy are partnerships that contribute to our product innovation efforts or expand the distribution of our products. Our goal is to have partners in certain target markets, primarily the international markets, focused on distributing and servicing our PinPoint and Signature Mapping software products as they become commercially viable. In addition, we propose to develop and leverage additional technology partnerships to expand our product offerings or enhance our existing products to appeal to a specific market.  

Our Products

Our Core Technology - 3i Engine

Guardian is a technology company that designs and develops imaging informatics solutions for delivery to its target markets:  aviation/homeland security and healthcare.  The Company utilizes imaging technologies and analytics to create integrated information management technology products and services that address critical problems in healthcare and homeland security for corporations and governmental agencies.  Each product and service can improve the quality and

response time of decision-making, organizational productivity, and efficiency within the enterprise.  Our product suite integrates, streamlines, and distributes business and clinical information and images across the enterprise.

Guardian’s core technology is an “intelligent imaging informatics” (“3i”) engine that is capable of extracting embedded knowledge from digital images, and has the capacity to analyze and detect image anomalies. The technology is not limited by type of digital format.  It can be deployed across divergent digital sources such as still images, x-ray images, video and hyper-spectral imagery. To date, the technology has been tested in the area of threat detection for baggage scanning at airports and for bomb squad applications. Varying degrees of research and development have been conducted in the areas of detection for cargo scanning, people scanning, military target acquisition in a hyper-spectral environment, and satellite remote sensing ground surveys.  Further, we have engaged in the preliminary research and development of certain products for use in the imaging field of diagnostic radiology, a product we refer to as Signature Mapping. Product development in these areas is ongoing, and while there can be no assurance, we believe that the technology should produce results equal to or greater than those currently achieved in baggage scanning.

Currently, we are focused on providing technology solutions and services in two primary markets, healthcare and aviation/homeland security.  However, as new or enhanced solutions are developed, we expect to expand into other markets such as military and defense utilizing hyper-spectral technology, and imaging diagnostics for the medical industry.  We may also engage in one or more acquisitions of businesses that are complementary to our business.  Further, we may form wholly-owned subsidiaries to operate within defined vertical markets.

Our Principal Products

Our principal products are:

Aviation/Homeland Security Technology Solution - PinPoint

Combining proprietary technology platforms in imaging and knowledge extraction, we have developed an “intelligent imaging informatics” solution, PinPoint, that can identify threat items; notify screeners of the existence of threat items; and speed the security process by eliminating unnecessary baggage checks, provide the screener with an instantaneous second opinion, and reduce processing time spent on false positives (baggage selected for security review that contains no threat items).  

Our objective is to become the leading provider of contraband detection systems worldwide and to extend our technology expertise to address broader applications for detection. Specific elements of our growth strategy are to enhance our technological leadership, expand our sales and marketing organization, leverage our detection technology expertise to enter new markets for detection, and selectively pursue strategic relationships and acquisitions.

In summary, the principal features of our PinPoint product are as follows:

·

Intelligent imaging informatics technology for the detection of guns, explosives, and other threat items at airport baggage areas.

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Operates on a UNIX platform, contains an application interface for ease of use and connectivity, and is hardware agnostic.

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We have 16 pending patent applications (U.S. and foreign) covering the implementation of our core 3i technology.

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Independently tested to high levels of reliability.  Outperformed current technologies by increasing detection rates and lowering false positives (current performance data based on reports by industry experts).

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Multi-process application built on a foundation of algorithms, image filters, statistics, and physics.

We believe PinPoint has not reached technological feasibility as certain high-risk development issues are not addressed until PinPoint is integrated with manufacturers’ scanning equipment.  On November 14, 2005, an extended alpha version (test version beyond internal testing) working model of PinPoint was completed and delivered to East Lin Group, Tarcusskaya Street, 8A, Moscow, Russian Federation  for testing  that was conducted at Domodedevo Airport in Moscow

and the subsequent certification process started. In June 2007, the Company completed the necessary laboratory study by an accredited Russian laboratory.  In October 2007, the laboratory provided a full report to the Russian Federation representing the final step in the certification process.  We are awaiting approval of our application as the final step in the certification process.

While we are currently seeking to license our PinPoint product, we do not anticipate any sales of PinPoint until we are able to seamlessly integrate with a manufacturer’s scanning equipment. Accordingly, in October 2007, we entered into a Strategic Alliance and Joint Development Agreement with Control Screening (d/b/a. AutoClear) that provides for certain joint development with a view to integrating our PinPoint technology with AutoClear’s threat detection hardware (AutoClear 6040 baggage scanner and multi-view AT prototype scanner).

The “intelligent imaging informatics” engine, which serves as the foundation for the PinPoint product, adapts readily to the analysis and detection of objects of interest across divergent digital sources:  still images, video, and hyper-spectral images.  The 3i technology platform can be deployed across many automated detection applications:  cargo scanning, body scanning, military target acquisition, healthcare disease detection and anomaly identification, and to perform satellite remote sensing ground surveys.  Our research and development activities to adapt our 3i technology to many of these detection applications have already commenced.  Most of the fundamental ‘ground truths’ associated with baggage scanning hold true for body scanning; however, the hardware technology for body scanning is not as advanced as the baggage scanners due to their potential physical impact on hu mans.  Our research and development work has also included, on a preliminary basis, the development of 3i technology for deployment in the hyper-spectral environment.  One such use within the hyper-spectral environment would be a military use for target acquisition.

We are also pursuing an additional market opportunity using our 3i platform technology, adding to our detection family of products.  PinPoint nSight™ (nSight) provides visualization enhancements that allow bomb technicians and investigators to assess the presence of explosives more rapidly and accurately using single-energy x-ray scanners.  The technology adds textural and color components to such images, helping bomb investigation technicians to detect threats that would otherwise be unseen by the human eye. The PinPoint nSight product is currently being evaluated at the Federal Bureau of Investigation (FBI) Hazardous Device School at Redstone Arsenal, Alabama.  In May 2006, we entered into a Distribution Agreement with Logos Imaging LLC, a manufacturer of portable bomb scanning equipment, with regard to the distribution of PinPoint nSight™.  During fiscal 2007, we sold to Logos 10 licenses for our threa t assessment software technology for bomb detection scanners, PinPoint nSight™.  We’re also continuing to develop other distributor relationships in an effort to increase market penetration of our PinPoint nSight ™ product.

Healthcare 3i Technology Solution – “Tissue Characterization” advancing Medical Computer Aided Detection (Medical CAD)

In an effort to expand upon the use of our core technology 3i™ “intelligent imaging informatics,” we have been migrating and adopting our threat detection algorithms and quantitative imaging capabilities for use in the imaging field of diagnostic radiology.  The technology for this developmental project is called Signature Mapping™.  Our Signature Mapping™ technology is in development and, currently, we do not have a product that we may market and sell in the U.S. medical market.  Furthermore, any Signature Mapping™ product we do develop will be subject to Food and Drug Administration (“FDA”) review and approval, including with regard to its safety and effectiveness, before we may begin marketing and selling any such product in the U.S. Such approval may require us to obtain extensive data from clinical studies to demonstrate such safety or effectiveness.  Also, we may be subject to similar regulatory requirements in any foreign country in which we seek to market and sell our CAD products.  There can be no assurance we will be successful in obtaining any such approval from the FDA and such approval may take approximately two years to obtain.

The challenge for modern radiology is to improve the quality of clinical care while simultaneously reducing costs and improving patient outcomes.  To accomplish this goal, radiology has greatly expanded its use of various imaging modalities to include Nuclear Medicine, Ultrasound, Computer Tomography (“CT”), Magnetic Resonance Imaging (“MRI”), Positron Emission Tomography, and Digital Radiography (X-ray”).

While significant improvements in diagnostic radiology have occurred using these imaging modalities, the same degree of technological advancements has not been available to help radiologists to accurately interpret and quantify the rapidly expanding number and diversity of imaging cases generated each day; and coupled with the level of difficulty in reading the image, radiologists are also prone to interpretation subjectivities, and misreads given the enormous patient loads

and time constraints radiologists face each day. Studies and other literature indicate that radiologists are about 80% accurate at best in reading screening x-ray breast examinations - 75% accurate for women in their 40s. Certain studies have found that lesions are simply not detected 10 to 15% of the time.  Such knowledge has resulted in a tendency towards additional procedures, such as biopsies which sometimes prove unnecessary.

While traditional computer-aided detection (“CAD”) assists radiologists by marking anomalies without providing additional visualization or analytical tools, CAD applications have certain characteristics that limit their capabilities. CAD results are associated with high false positive rates. The pattern recognition algorithms employed by CAD restrict their functionality to searching for a specific disease within a specific imaging modality. Guardian is developing a new approach for medical image analysis called Signature Mapping™.  It is the first image-analysis-based technology that is expected to be capable of “characterizing tissues” across a broad range of digital imaging modalities. The software has been designed to work seamlessly with Digital Imaging and Communication in Medicine (“DICOM”) images generated from any existing imaging modality.  It can be integrated into a PACS network, a stand-alone digital imaging modality, a diagnostic workstation or a clinical review workstation.

Similar to a person’s fingerprint, each tissue has a unique structure. Each structure creates a unique pattern or “signature” that can be extracted from an image to differentiate, locate, identify, and classify by using our Signature Mapping™ technology.  Signature Mapping™ is expected to further help radiologists by visualizing the various structures within a particular tissue so they can be examined and quantified. This capability is expected to provide a next-generation image analysis, clarification, visualization and Signature Mapped “tissue characterization” and detection.  Management believes that it will add significant clinical value to a wide range of difficult to detect diseases in diagnostic radiology by distinguishing and characterizing different tissue types in images regardless of the modality that generated the image.

Based on its unique properties, Signature Mapping is expected to be capable of being used to analyze images generated across all imaging modalities without the need for new image capture hardware costs.  It will serve as a software-based, multi-modality approach to image analysis when combined with Signature Mapping’s unique” tissue characterization” and detection. As a result, Signature Mapping is expected to differentiate the contrast resolution between different tissue types, even when the material or tissue in the image is very diffuse or obscured by other objects, such as is the case where diseased lung tissue is located behind a rib in an x-ray chest examination. It is capable of displaying these ‘signatures’ in a way that empowers radiologists to make a more informed and confident diagnosis, even for hard to distinguish structures such as mas ses in dense breast tissue.

Rather than solely analyzing the pixel values in an original image, the Signature Mapping process applies a series of proprietary algorithms to iteratively impact the image and cause pixels associated with each material or tissue type to react collectively producing a unique signature.

Multiple iterations of the Signature Mapping process can be employed to process a single image. An initial phase is used to isolate specific tissues (segmentation), while additional processes discriminate structures within the tissue.  For example, a first process may be used to locate and isolate the prostate in an MRI scan while a second process may reveal a signature indicating the presence of a tumor within the prostate.

Signature Mapping appears to provide advantages for providing the knowledge for automatic detection.  The development of a “tissue characterization” and detection model employs the use of supervised machine learning and contextual image analysis to analyze and classify the features associated with the newly created “signatures.”  The fusion of these three technologies is known as Guardian’s Intelligent Imaging Informatics 3i™. Unlike other pattern recognition methodologies, the 3i solution can reveal and differentiate inherent structures for all materials in an image regardless of:

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The imaging modality used to create the image,

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Location within the image,

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Shape or texture, and

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Object orientation even if obscured by its relationship to other materials.

Clinical Experience and Medical Accomplishments

While Signature Mapping is expected to be capable of use in a wide range of medical image analysis applications, our initial application product development efforts are focused in three areas:

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Breast imaging using x-ray mammography, MRI and ultrasound.

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Neurological imaging through the detection and quantification of:

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acute intracranial hemorrhage using non-contrast CT,

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normal pressure hydrocephalus,

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multiple sclerosis using MRI.

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Chest radiography targeted at tuberculosis and silicosis detection using digital X-ray and sputum samples.

In July 2007, we entered into an agreement with the Medical Imaging Informatics (MI2) at the Keck School of Medicine, University of Southern California to conduct a multiple-phase process to clinically evaluate, and give feedback on potential enhancements to, our 3i “intelligent imaging analysis” solutions as applied to medical radiology imaging.  Our 3i product segments clarifies, distinguishes and identifies organic objects even when masked by one or more other objects of similar density and chemical composition.  This is an expected product extension of our 3i-based computer-aided detection technology in adapting scientific principles employed for explosives detection to medical image analysis.  We continued our collaboration relationship with a new agreement dated July 19, 2007 for a one year term, to include clinical studies for our Signature Mapping™ product.   The first half of the collaboration focused on image-based visualization and CAD solutions for the detection of breast cancer on mammograms, and the second half of the collaboration will be for the detection of small acute intracranial hemorrhage (“AIH”) on CT.

Including the above research with the MI2, we have to-date performed five pilot programs and studies conducted under the direction or use of: (i) Image Processing and Informatics Laboratory at the University of Southern California (USC) using clinical data and images provided by USC, (ii) Howard University School of Engineering as well as their Cancer Center, and (iii) South Florida Clinical Mammography Data Base.

Breast Cancer

The Disease

Breast cancer is the most commonly diagnosed cancer and the second leading cause of cancer deaths among women in the US.  Although the overall morbidity rate of breast cancer is lower among African American Women (AAW) than Caucasian Women, the morbidity rate among AAW younger than 50 years old is higher than Caucasian Women and has resulted in substantially higher mortality rates (31/100,000 vs. 27/100,000). The table below shows annual demographics for breast cancer statistics in the U.S.

Breast imaging procedures	About 35 million screening exams
Biopsy procedures	About 1.5 million biopsies conducted
12% of biopsies are positive	168,000 detected cancers
Mortality rate	About 40,950 women
Biopsy per procedure cost	$1,000 - $3,000 dollars
Annual gross national biopsy cost	$1.5 -  $4.5 billion dollars
A 10% reduction in biopsies would save approximately	$150 - $500 million dollars

Source: Breast Cancer Fund, “The Demographics of Breast Cancer in the U.S. 2003.”

Detection

Early detection is a critical factor for controlling survival. Early detection provides increased therapeutic options and improved probability of survival. Mammography is a reliable and cost-effective screening technology. When properly conducted, mammography has been estimated to reduce breast cancer mortality by 20-30%.  Currently, ductal carcinoma-in-situ (DCIS) represents 25%-30% of all reported breast cancers.  Approximately 95% of all DCIS are diagnosed because radiologists identify them in mammograms. However, reading mammograms is difficult and prone to misinterpretation, subjectivity, and misreads.  Studies have found that screening x-ray exams are about 80% accurate at best and that lesions are simply not detected 10% to 15% of the time. The National Cancer Institute reported that 25% of breast tumors are missed in women in their forties. (See Liu B, Z. M., Document J (2005, "Ut ilizing data grid architecture for the backup and recovery of clinical image data." Comput Med Imaging Graph. 29(2-3): 95-102, and National Cancer Institute, "Cancer in African American Women.")

Dense breasts pose a greater challenge to cancer detection using mammograms, especially early-stage breast cancers. Approximately 25% of women have dense breasts; thus a large number of mammograms, especially in AAW, are more difficult to clinically interpret. The risk of breast cancer associated with the highest category of density is estimated to be two to six times greater than for women with the lowest category of breast density.

Clinical Value of Signature Mapping

On the basis of our initial studies, the signatures of malignant tumors in mammograms exhibit significant differences when compared with cysts, benign lesions, or dense breast tissue after being processed with Signature Mapping.  Measurable differences exist among different breast structures in both the spatial and frequency domains.  Signatures of different tissues vary in their entropy, linearity, boundary gradients, and homogeneity. As a result, the internal structure of masses in dense breast tissue can be characterized and identified and displayed radiographically to the clinician. Signature Mapping is expected to visually display levels within the tumor and distortions in the breast geometry outside the tumor.

The effectiveness of these algorithms was evaluated through a pilot study conducted with the Norris Cancer Center at the University of Southern California. The study consisted of two sets of mammographic cases, a training set and a testing set.  Both sets contained 40 normal and 40 confirmed solid cancer masses and were matched for levels of interpretation difficulty and patient age, variations in breast density, and types of tumors. Guardian used the training set for the development of its algorithms and for training the participating radiologists in the study.  The test set was used in the pilot study to gain clinical feedback and determine the effectiveness of the radiologist’s interpretations using Signature Mapping. Preliminary clinical results based on the visual performance of five highly-skilled and experienced mammographers using the mammography-specific Signature Mapping process demonstrated imp roved accuracy and ease of use in the study.

Clustered microcalcifications may be the only visually detectable manifestation of early breast cancer. Mammography is very responsive to the presence of micro-calcifications, however, the specificity of mammography remains low.  Benign calcifications cannot always be distinguished from those indicating malignancy resulting in a large population of women who do not have cancer, but are subjected to biopsy.  Using Signature Mapping we expect that the miniscule structures within micro-calcifications can be characterized and their potential for pathology identified by the radiologists.

While carcinomas are rarely found in cysts, they are difficult to accurately diagnose through the use of mammography because they cannot be distinguished from other well circumscribed solid masses unless they display several characteristic patterns of calcification. Guardian is optimizing Signature Mapping for the accurate characterization of cysts as part of ongoing development that includes an early-onset cancer detection model.

Traumatic Brain Injury

The Disease

Traumatic Brain Injury (TBI) and acute stroke are two patient populations extremely likely to present in emergency room settings. Each requires immediate, accurate determination of the presence of bleeding for treatment and optimal outcome. However, detection and diagnosis of acute intracranial bleeding can be extremely challenging for the emergency room physician. In the U.S., traumatic brain injury is the major cause of death in children, and stroke is the third leading cause of death in the adult population.  The following are pertinent statistics.

Traumatic Brain Injury

Stroke	Incidence - Hemorrhagic Incidence - Ischemic       Total	1,500,000
112,500 637,500 750,000	Deaths	50,000
160,000	Long Term Disabilities	90,000
295,000	Economic Impact	$56.3 Billion annually
$62.7 Billion annually

Source: Center for Integration of Medicine and Innovative Technology.

Detection

For acute stroke patients, non-contrast head CT scanning is mandatory for rapidly distinguishing ischemic from hemorrhagic infarction and for defining the anatomical distribution of the stroke.  Patients with acute ischemic stroke may be triaged to receive thrombolytic therapy to break the clot, while patients with hemorrhagic stroke follow a different diagnostic and therapeutic pathway.  CT scans also may rule out other life-threatening processes such as hematoma, neoplasm’s and abscesses.

For patients with TBI’s, with or without a fracture, the most critical factor is determining if a brain injury is present.  CT scan is used most often to evaluate acute head injuries; a major indicator of brain injury is the presence of intracranial bleeding.  CT is useful for identifying injuries to the brain itself and to determine the presence, location and severity of bleeding. Data collected from the research company IMV indicates that in 2006, about 62 million CT procedures was conducted in the United States, and estimated that between 38 and 50 percent of those studies were conducted to image the brain.

Clinical Value of Signature Mapping

We have developed multiple solutions for the analysis and “tissue characterization” of the brain, including the detection of 5% or less intracranial hemorrhages, the detection and quantification of multiple sclerosis lesions, and the measurement of normal pressure hydrocephalus.  The most extensive work has been focused in the area of Traumatic Brain Injury with a special emphasis on accurately segmenting and detecting intracranial bleeding using axial Computer Tomography (CT) slices.

Under our test conditions, Signature Mapping has been demonstrated in all cases to be an accurate and sensitive tool for the detection of acute intracranial bleeds. It has also demonstrated an ability to differentiate between small intracranial bleeds that are less than 5% subdural hematoma from difficult to discern bone hardening artifacts typical in most CT scans. In an early study results of ER physicians, general radiologists and neuroradiologists; Signature Mapping improved the performance of all three groups, and more importantly, elevated the detection performance level of the emergency room physicians to those equaling the neuroradiologists.

Results of the multiple sclerosis study found that Signature Mapping algorithms are capable of accurately detecting lesions and, importantly, providing accurate automated measurements of the size and overall lesion volumes. Compared to clinical observers, Signature Mapping proved to be a more sensitive tool for detecting lesions that were considered marginal or undetectable and provided extremely accurate measurements while reducing the radiologist analysis time to just seconds.

Normal Pressure Hydrocephalus (NPH) was also analyzed by IPI. The challenge facing the radiologist is determination of whether the pressure changes in the ventricles are caused by the normal course of aging or as a result of an anomaly. Signature Mapping detected and quantified the ventricles and cranial spinal fluid visualized from the MRI images. IPI reviewed the results of utilizing Signature Mapping and determined that the results accurately detected cerebral spinal fluid, provided a methodology for segmenting the ventricles, and determined and quantified ventricular size and volume.

Lung Disease – Tuberculosis

The Disease

The World Health Organization (“WHO”) has declared tuberculosis a global health emergency. WHO has estimated that 2 billion of the world's population is infected with the tuberculosis bacteria. Furthermore, WHO statistics indicate that in 2006 approximately 9.2 million people developed tuberculosis and 1.5 million people died from the disease, mostly in underdeveloped countries. (See “Global Tuberculosis Control- surveillance, planning and financing,” WHO Report 2008.)

Detection

Tuberculosis detection and treatment in developing countries is hampered by a shortage of radiologist and technologists available to interpret and administer chest x-rays.  Typically, a long lag time exists between the time chest x-rays are administered and when an accurate diagnosis can be made and communicated to the patient.  Patients’ sputum samples are also used to detect tuberculosis.  Sputum sample analysis is a highly laboratory intensive and tedious, time-consuming process requiring highly trained laboratory technologists.  Any diagnostic lag time between conducting a patient’s chest x-ray and sputum sample laboratory tests delays interpretation, diagnosis and drug therapy. In some cases the patients are difficult to re-contact and may never receive drug treatment. These delays mean the infected patients are likely to infect others in their immediate surrounding.

Clinical Value of Signature Mapping

We have partnered with the Aurum Institute for Health Research (“Institute”).  The Aurum Institute, headquartered in Johannesburg, South Africa, is an internationally recognized medical research organization, a world leader in research and treatment involving tuberculosis, HIV/AIDS, malaria and other infectious diseases.  Under the collaborative research partnership, Guardian and the Institute’s scientists are expected to collaborate to perfect the use of Signature Mapping imaging technology to automatically detect, identify and quantify the bacteria that causes tuberculosis. Automation of these processes with Guardian's technology is expected to reduce labor costs, provide more timely diagnosis and delivery of therapeutic treatments, eliminate human errors and sharply improve detection rates and accuracy of diagnosis.  The Aurum Institute has also partnered with Guardian to expand its activities within the mining industry to include detection of silicosis. Silicosis is a form of lung disease resulting from occupational exposure to silica dust over a period of years. Silicosis causes slowly progressive fibrosis of the lungs, impairment of lung function and a tendency to tuberculosis of the lungs. In early internal tests, Signature Mapping™ has been shown to be capable of detecting silicosis.

Furthermore, we have established a strategic development agreement with the global healthcare leader Delft Diagnostic Imaging (“Delft”) headquartered in The Netherlands, a leader in x-ray screening devices for the detection of tuberculosis with over 30,000 systems installed worldwide.  The agreement establishes a strategic development program providing Guardian’s Signature Mapping software to be fully integrated into the Delft Odelca-DR digital chest x-ray system.  The integrated product is expected to position Delft with a turnkey solution for mass screening of patients and digital storing, transmission and diagnostic viewing of images.  The system has been designed with special attention to the clinical image requirements for detection of tuberculosis in the developing world.

The use of Signature Mapping™ to detect and monitor tuberculosis (“TB”) changes over a given treatment period using radiographic chest x-rays was also studied. In early internal tests, Signature Mapping™ proved to be successful in detecting lung area, quantifying normal lung volumes, and reporting lung volume changes over time during drug treatment therapies.

Our efforts are focused on the development of a technology platform for diagnostic radiology and developed for specific diagnostic modalities and targeted applications based upon our Signature Mapping™ technology that we expect to be able to market and sell to the medical industry in the U.S. and overseas. We have made technical progress in the development of Signature Mapping™.  However, certain of the products we may develop will require us to obtain FDA approval for such product to enable us to sell such product in the U.S., or satisfy any comparable regulatory approval requirements overseas.  Further, our ability to develop any such product will depend, in part, on our ability to raise additional financing to continue such development or obtain applicable grant funding.  There can be no assurance we will be able to raise such additional financing or funding to continue our development efforts.

Healthcare Technology Solution - FlowPoint

Our FlowPoint products consist of a web-enabled Radiology Information System (RIS) and Picture Archiving & Communication System (PACS) which manages radiology workflow, patient information, treatment history, and billing information. It also manages digital images through image viewers, compression technologies, storage, image archiving, image retrieval and transfer.  

Due to the increased efforts and focus in developing our Signature Mapping imaging technology, we have discontinued active marketing of our FlowPoint products and seek licensing arrangements with other software or hardware providers who may use our RIS and PACS systems to complement their existing product line.  Accordingly, during January 2008, we entered into the first such licensing arrangement with Rogan-Delft for a perpetual, nonexclusive and nontransferable license to use, modify, create derivative works from, market and sublicense our FlowPoint Radiology Information System (“RIS”) product.

MARKET AND COMPETITION

Aviation Security Screening Products

Market

Initially, management has focused its principal development and marketing efforts for its PinPoint product on the market for airport baggage screening technology solutions. However, as discussed further below, and although there can be no assurance, management believes that its PinPoint solution is also capable of being adapted for use in the people portal and cargo screening markets.  The following discussion focuses on the market for baggage screening solutions; however, we have also provided an overview of the potential market for people portal and cargo screening technology solutions, potential future markets for our PinPoint product.

Baggage Screening Market

Security oversight of airports in the United States is overseen by the Transportation Safety Administration (“TSA”) with an annual operating budget in excess of $5 billion.  TSA has the responsibility for over 480 U.S. airports with a combined inventory of baggage scanning equipment (checked baggage area and the carry-on baggage area) in excess of 6,000 scanners.  While exact statistics on the number of scanners deployed in the rest of the world are not readily available, management estimates that the market is four times greater than the U.S.  In addition to baggage scanners, airports worldwide are faced with replacing or supplementing existing metal detectors for passenger processing.

Since the events of September 11, 2001, there has been a major growth surge in the baggage screening industry.  In the decade leading up to 9/11, the U.S. market for baggage screening products and services maintained a steady $400-$600 million per year.  Since 9/11 the industry has reinvented itself almost from the ground up.  The growth in the marketplace for baggage screening products and services arises as a result of the TSA’s need to position itself to accommodate the forecasted growth in demand from 2 billion baggage screening transactions in 2001, to 7.3 billion in 2006 and 17.6 billion in 2010. See Homeland Security Research Corporation (HSRC) report, “2003-2010 Luggage and Large Parcel Screening Market Report.”  

Technology is expected to convert the marketplace from a largely services (labor-driven) environment to “technology intensive.”  The current baggage screening technology is a stopgap measure rather than a delivering solution.  The fused technologies "checkpoint of the future" will dominate the market.  It will provide multi-threat screening (next generation bombs weapons and weapons of mass destruction). Sectors such as aviation, maritime and mass transit, public gathering sites and government and private sector sensitive sites is expected to spend an accumulated $60 billion on hand-held baggage screening equipment, service and infrastructure during the 2003-2010 period (compared to an accumulated $7 billion during the 1994-2001 period). See Homeland Security Research Corporation (HSRC) report, “2003-2010 Luggage and Large Parcel Screening Market Report.”

Currently, there are limited standards within the aviation security marketplace for the testing and validation of software technology solutions.  The marketplace places a premium on the newest innovations in hardware technology, but fails to realize how a threat detection software solution could possibly succeed.  Because of that fallacy, the marketplace has limited standards for the certification of aviation security products other than bulk explosives detection systems and explosives trace detectors, or ETD, which have been developed around chemical analysis and not image analysis.  

Our challenge with our PinPoint product is to establish the testing and certification standards, to validate through independent parties the efficacy of PinPoint as an automated threat detection solution, and to convince the appropriate governmental authorities to commit financial resources to purchase PinPoint.  Our initial action to meet the challenge was the execution of a Teaming Agreement with Lockheed Martin. Through our joint efforts, we have been able to establish the necessary testing standards and methods. While it remains to be seen if our efforts will result in a TSA certification, we have made material strides in the development of PinPoint, the accumulation of a large database of threat and non-threat images, and in the documentation of testing procedures and results.  Further, we have commenced the international marketing and sale of PinPoint through our contractual relationships with EGC Informatics and Fo wler International for sales and marketing activities. These relationships are a significant strategic component of our growth strategy as they provide us the sales and marketing reach that we would not otherwise be able to staff or fund.  

We successfully completed testing in Moscow, Russia, and Madrid, Spain.  Management believes that market acceptance of PinPoint in these markets as a viable threat detection solution will not only enhance our ability to sell worldwide, but it will open additional opportunities for the development of PinPoint as the “intelligent image” analysis solution for areas such as target acquisition, satellite remote sensing, and additional opportunities within aviation security such as people portals and cargo scanning.

The discussion of the market for our PinPoint product focuses on the aviation security industry in the U.S.  Data for markets outside the U.S. are not readily available or may not be reliable. Management believes that the Company will generate revenues from PinPoint internationally prior to earning its first U.S. revenues.  The reason for this expectation is twofold: (i) Guardian has established Distribution/Reseller Agreements in Russia, Spain, and Central and South America, and (ii) Guardian is involved in several opportunities for the sale of PinPoint in Russia.

As the global Homeland Security marketplace continues to supply more effective next generation terror mitigation technologies, a much greater amount of funding will flow to procurement of technologies and less for labor.   Homeland Security Research Corp.’s analysis, the 2006 – 2015 Homeland Security & Homeland Defense Global Market, forecasts that this trend will lead to a tripling of the global Homeland Security market ($60B in 2006 to $180B in 2015), while the global Homeland Security expenditures (the total amount of money allocated) will only double.

Information regarding the amount of the TSA’s annual budget allocated for the purchase of software solutions that are able to detect threat items at U.S. airports and other similar facilities, such as PinPoint, is not readily discernible from publicly available information or independent research reports. However, management estimates, based upon information derived from the FY 2006 and requested FY 2007 United States Department of Homeland Security (DHS) budget, that the DHS budget allocation for FY 2006 for software solutions that are able to detect threat items at U.S. airports and other facilities, such as PinPoint, was approximately .77% of the DHS’ $41.1B budget, and that the budget allocation for the proposed FY 2007 DHS budget will be approximately 2.25%.  In addition, management estimates that the worldwide market for solutions such as PinPoint is estimated to be approximately twice the United States’ Homela nd Security budget.  These estimates have been prepared by Guardian’s management and reflect certain assumptions of such management.  There can be no assurance that these estimates are or will prove to be accurate or that budget allocations or these estimates may not change, based upon changes in government’s budget priorities and other factors.

In addition to the baggage screening market, management expects to target the following additional markets for PinPoint.  Further evaluation and market studies are required in order for a business plan to be developed and the assessment of development efforts necessary before entering the “People Portal” and “Cargo Scanning” markets.

People Portals

Almost every threat that requires people screening is currently monitored by a different system (explosives, weapons, biological, chemical, and nuclear/radiological).  Management believes that today's people screening systems deliver unacceptable performance (high ‘false alarm’ rates, slow processing throughput, continued dependence on human detection, and high transaction costs).  Over a period of 10 years (2001-2010) the total U.S. annual people screening outlay is expected to grow to over 15 times its current size.  Sales of $590 million in 2001 are forecasted to grow to $3.5 billion in 2006 and to $9.9 billion in 2010. The compound annual growth rate is expected to be over 50% for the 2003-2010 periods. Management believes that the market for people portals that utilize imaging as its detection methodology is a sub-set, and is estimated at

50% of the entire forecasted market of which management believes PinPoint can address.  See HSRC report, “2003-2010 People Screening Weapon & Explosives Detection Market Report.”  

It is management’s belief that the current people portal technology fails to meet the post-9/11 requirements. It is management’s belief that the technology will undergo dramatic technological changes when the multiple-threats "checkpoint of the future" is introduced.  The accumulated U.S. investment in people screening during the 2003-2010 period is expected to be over $50 billion.  During the 2006-2010 periods, over 80% of sales of people portal systems in the US are expected to be for technologies that were not in existence in 2003.  

Cargo Scanning

Currently, less than 10% of worldwide shipped cargo is screened, and even with that small of a sampling the screening is only preformed to identify a limited number of threats, not the entire array of threats (explosives, weapons, biological, chemical and radiological/nuclear). Terrorism threats to disrupt western economies, and regulatory changes driven by the U.S., specifying requirements for cargo shipped into the U.S., are expected to bring dramatic changes in this industry.  Management believes that the 10 companies currently active in the field of cargo inspections will have to redesign their systems to meet the post 9/11 threat of weapons of mass destruction.  Through market studies, which we will undertake before expending significant resources, an assessment of market penetration and developmental requirements will be completed which we expect will clearly identify our PinPoint product intro duction into this market.

The aviation sector alone handles more than 60 billion tons of cargo per year, and is growing at a rate of 9% per year.  Total cost of added security for airline cargo alone was forecasted to surpass $2 billion in 2006 in the U.S.  Present airline insurance costs are $6 billion/year, six times higher than their pre 9/11 levels.  See HSRC report, “2003-2010 Cargo Screening Market Report.” A single cargo terror event is expected to drive these costs even higher. The events of 9/11 caught the luggage and large parcel industry by surprise, since this industry was operating on a schedule that required the introduction of proper solutions only by 2025. With existing technologies and budgets, it is impossible to deliver screening for more than a small fraction of luggage and parcels, and even that only at essential and ultra sensitive sites.

Competition

The competition between the manufacturers of baggage (hand-held and small parcel) screening, luggage and large parcel screening, people screening for weapons and explosives detection, container and vehicle screening, and cargo screening is intense.  These same equipment manufacturers represent Guardian’s major competition, and include: AS&E, Smiths-Detection, OSI Rapiscan, GE-InVision, and L3, each of which is better capitalized and has greater marketing and other resources than Guardian.  The competition between manufacturers is intense in view of amounts appropriated by the U.S. Government for threat detection technologies. What is not so obvious is that the manufacturers that once held the largest share of installed base are at risk due to aging and inadequate technology.  Due to the agnostic nature of PinPoint, we believe we can integrate PinPoint with any manufacturer’s scanning equipment.  We beli eve our technology improves the efficiency of the underperforming hardware and extends the obsolescence of the existing scanning equipment.  Funds previously appropriated for the upgrade or replacement of the in-place scanners could then be redeployed for the acquisition of required technologies such as body scanners or cargo scanners.

The equipment manufacturers in conjunction with software companies and academic institutions are attempting to develop sophisticated solutions to aid in the detection of contraband substances.  To date there has been no known solution developed.  We believe that Guardian’s approach is unique in that it is a non-intrusive adjunct to the current manufacturers’ products.  The enhancement identifies contraband at an accuracy level that is higher than the methodology used today by TSA.

The market for contraband detection systems software is anticipated to become intensely competitive and is characterized by continuously developing technology and frequent introductions of new products and features. We expect competition to increase as other companies introduce additional and more competitive products in the aviation security market and as we develop additional capabilities and enhancements for PinPoint and new applications for our technology. Historically, the principal competitors in the market for explosive detection systems have been GE-InVision, Vivid Technologies, Inc., EG&G Astrophysics, Smiths-Detection, Thermedics Detection Inc., and Barringer Technologies Inc. Each of these competitors provides aviation security solutions and products for use in the inspection of checked and carry-on luggage.  We expect certain major corporations competing in other markets to enter the aviation security market.

Guardian believes that its ability to compete in the aviation security market is based upon such factors as: product performance, functionality, quality and features; quality of customer support services, documentation and training; and the capability of the technology to appeal to broader applications beyond the inspection of checked and carry-on baggage. Although we believe that PinPoint is superior to our competitors’ products in its detection capability and accuracy, PinPoint must also compete on the basis of price, throughput, and the ease of integration into existing baggage handling systems. Certain of our competitors may have an advantage over our existing technology with respect to these factors.

Healthcare Products

Market

CAD vendors today have developed and sold clinical products in three major applications segments; mammography as a second look for the screening and early detection of breast cancer; chest CT for the early detection of nodules and CT of the colon for the non-endoscope screening of polyps.

In 2006 an analyst at Frost & Sullivan stated "Early introduction of integrated CAD solutions is critical for gaining market share and may lead to higher profits…These new systems will enable workflow improvements while providing a smooth migration to the digital solution. This will increase the viability and broaden the appeal of these systems, and is likely to result in increased sales and revenues."  These are new markets with new applications. The market is shifting towards CAD as physicians’ confidence levels continue to grow. For example, the radiologist who uses CAD for Mammography (one of the most prevalent today) would most likely be very willing to trying new clinical applications.  This is true for general radiologists and specialty radiologists.  Frost and Sullivan studies published in 2006 estimated world wide radiology imaging procedures for all modalities at slightly a billion proced ures per year and estimated that approximately 300 million to 350 million procedures were attributed to the USA.

In 2006, Frost & Sullivan projected CAD sales to reach $600 million by 2009 with a Compound Annual Growth Rate (“CAGR”) of +18% by 2010. With replacement expected in full force in the two segments with the most demand by that point, namely, the breast MRI CAD segment and the mammography CAD segment, overall replacement in the total CAD market is expected to reach almost 50 percent of demand by 2012. With each new CAD technology introduced to the market, the potential size of this new market grows exponentially “Given the myriad of body parts and systems that CAD technology could be applied to in the future, as well as the different imaging modalities associated with each, growth in this market could be virtually unstoppable.”  Such as, a new technology introduced for CT would be applicable to the brain, chest, neck, abdominal and other areas of the body; or Ultrasound would be applicable for the breast, live r, prostrate and abdominal, for just a few examples.

Shalom S. Buchbinder, M.D., FACR, Chairman, Department of Radiology, Staten Island University Hospital, and Clinical Associate Professor of Radiology, Obstetrics, Gynecology and Women’s Health, Albert-Einstein College of Medicine of Yeshiva University, New York, U.S.A. (Changing the Way Healthcare is Delivered, RSNA 2004, p89) states “This relatively new technology improves the decision making compatibilities of clinicians…In my opinion mammography CAD has proven its clinical value and the future is about more robust and sophisticated tools that can, in addition to detection, help in the analysis of lesions. Innovative technologies can provide valuable information to support lesion classification.”

Competition

We expect to compete with existing CAD manufactures such as iCAD, Hologic, Medipatten, Confirma, Siemens, or Carestream Health, each of which is better capitalized and has greater marketing, personnel and other resources than Guardian and are well established in the healthcare market..  We may also partner with one or more of these existing CAD manufacturers, or an emerging company with new technology for the CAD arena.  Once our products are commercially viable, we anticipate marketing and selling our products through original equipment manufacturers (“OEM”), or system integrators.

SALES, MARKETING AND DISTRIBUTION

PinPoint Market

We market and sell our PinPoint product through our internal sales force, agents, distributors and consultants.  At the same time, we intend to escalate our efforts with the TSA.  Initially, we worked with Lockheed Martin Distribution Technologies to advance the certification process with TSA and, following the termination of our agreement with Lockheed, we are continuing to work with TSA independently. Additionally, we will seek the support of politicians through our lobbying efforts and the support of certain scanning equipment manufacturers.  While TSA certification is not absolutely essential to the acceptance of our PinPoint product, management believes that TSA certification and a business relationship with the TSA is important to our strategic growth plans as the relationship offers the opportunity to obtain potential sub-contracts for baggage scanning applications and for additional aviat ion and transportation security contracts. Management remains focused on the ongoing development of PinPoint, particularly with respect to test results.  This focus must be even sharper as we enter the pilot test arena where the duration of the pilot test, the conditions under which the pilot test is conducted, and the definition of success and failure will vary country-by-country.  Market acceptance is a key to our future success and there can be no assurance that our PinPoint products will achieve that acceptance.

Initially, we entered into a teaming agreement with Lockheed Martin Systems Integration (LMSI) that we believe has enabled us to establish certain testing standards and methods with the TSA.  While it remains to be seen if our efforts will result in a TSA certification, we have made progress in the development of PinPoint, the accumulation of a large database of threat and non-threat images, and in the documentation of testing procedures and results.

Further, as described below, we have entered into agreements with certain distributors and consulting firms to market and sell PinPoint in certain foreign markets, including South America, Spain, Portugal, Southern France, India, and Russia.  These distributors have in-country sales and technical support to market, sell and support PinPoint installations.

Healthcare Market

Signature Mapping Products

We may partner with one or more of the existing CAD manufactures such as iCAD, Hologic, Medipatten, Confirma, Siemens, or Carestream Health, or an emerging company with new technology for the CAD arena.  Once our products are commercially viable, we anticipate marketing and selling our products through original equipment manufacturers (“OEM”), or system integrators.

FlowPoint Products

Due to the increased efforts and focus in developing our Signature Mapping imaging technology, we have discontinued active marketing of our FlowPoint products and seek licensing arrangement with other software or hardware providers, who may use our RIS and PACS systems to complement their existing product line.  Accordingly, during January 2008, we entered into the first such licensing arrangement with Rogan-Delft for a perpetual, nonexclusive and nontransferable license to use, modify, create derivative works from, market and sublicense our FlowPoint Radiology Information System (“RIS”) product.

Product Distribution and Marketing

We have entered into the following distributor, strategic partnership, development, and consulting agreements with regard to our products:

Strategic Alliance and Joint Development Agreement with Control Screening (d.b.a. AutoClear)

On October 16, 2007, we entered into a Strategic Alliance and Joint Development Agreement with Control Screening, LLC, d/b/a AutoClear, to facilitate and promote the delivery of fully integrated, automated threat detection hardware and software solutions for the homeland security marketplace.  The agreement provides that we will work with AutoClear to integrate our Pinpoint technology with AutoClear’s advanced x-ray scanners, including AutoClear’s 6040 baggage scanner and multi-view AT prototype scanner.  Both parties will jointly evaluate the interface of PinPoint into AutoClear operating system, collect images of live explosives, and validate the performance of the combined solution.  During the term of the agreement, the parties may explore and assess other possible joint development or integration opportunities consistent with the intent and purpose of this agreement.  Each party agrees to that it shall be responsible for its own expenses incurred on conjunction with the agreement.  The agreement is for a term of three years unless otherwise

terminated for cause or, except as provided in any subsequent agreement with regard to a project, upon thirty days’ prior written notice.  The agreement contains certain confidentiality, nondisclosure and indemnification provisions.

Marketing License Agreement with EGC Informatics, Inc. (d.b.a. International Threat Detection Systems)

On November 1, 2007, we entered into a non-exclusive Marketing License Agreement with EGC Informatics, Inc., d/b/a International Threat Detection Systems (“ITDS”) to pursue opportunities for our PinPoint 3i engine products.  Although there are no geographical limitations or requirements under the agreement, we expect ITDS will focus their marketing efforts in Spain, Portugal, Southern France and Latin America. The agreement is for a term of two years and is automatically renewed for successive two year periods unless a default by ITDS exists.  The agreement may be terminated upon breach of any material obligation under the agreement subject to a 30 day cure period.  The agreement provides that ITDS will be responsible for identifying, contacting and performing demonstrations, negotiating and obtaining customer license agreements subject to Guardian’s acceptance and execution.  ITDS will assist with col lection efforts of outstanding receivables.  ITDS is required to submit to Guardian monthly written reports to include promotional and marketing activities, a summary of the nature of contacts with end-users, and the date of each license agreement executed by each end-user.  ITDS may provide the end-user ancillary services including installation, training, and consulting.  Guardian will pay to ITDS a commission equal to 18% of the net license fee (actual license fee revenue received by Guardian less royalties, commissions, hardware fees or similar payments to third parties in connection with the licensing of products, charge-backs or credits in favor of Guardian or refunds to the end-users).   ITDS shall be responsible for its own expenses and costs under the agreement.  The agreement contains certain indemnification provisions and for arbitration in the event of a dispute.

Distributor Agreement with Borlas Security Systems, Ltd.

On March 14, 2008, we entered into a non-exclusive Distributor Agreement with Borlas Security Systems, Ltd (“Borlas”).  The agreement is for a period of one year, and is automatically renewed for successive one year periods unless either party gives to the other party written notice of termination at least one hundred eighty (180) days prior to the end of the initial or any renewal term.  Borlas has agreed to use its best efforts to vigorously and actively promote the sale of our security products in the Russian Federation and Commonwealth of Independent Sates (“CIS countries”).  Borlas has agreed to train dealers and contractors regarding the proper usage and application of our security products; maintain inventory levels in connection with maintenance repair services that are adequate to serve the needs of the customer, and to be responsible for all advertising, marketing and other related costs incu rred by the distributor.  We will assist the distributor for the procurement of business under tenders issued by governmental agencies and have agreed not to enter into any business that would result in competition for the tender.  We may implement price changes at any time during the term of the agreement upon thirty (30) days prior written notice to the distributor.  In addition to the purchase price of the products, Borlas has agreed to pay us the amount of all taxes, excises or other governmental charges that we may be required to pay on the sale or delivery of any products sold and delivered, except where the law otherwise provides.

Software License Agreement with NAST.

On June 26, 2007, we entered into a perpetual, non-exclusive nontransferable licensing agreement to use our PinPoint™ product at their location in Moscow, Russia. NAST agrees that in the process of certifying our product and documentation, that they will not reverse engineer, decompile, disassemble or extract, as applicable, any idea, algorithms or procedures for the software or documentation for any reason, and shall not copy the software.

Consulting Agreement with Fowler International

We initially entered into an agreement with Fowler International, LLC (“Fowler”), on June 30, 2004, and with subsequent renewals, extended Fowler’s contract through December 31, 2006. Fowler was engaged to provide advice and assistance in the course of commercial negotiations with Russian distributors with regard to the licensing of PinPoint in the Russian Federation, including recommending a marketing strategy, due diligence with regard to potential distributors, and participation in negotiations with potential distributors.  On November 26, 2006, we formalized into a written agreement and extended the arrangement through June 30, 2007. We agreed verbally that the agreement will be extended through December 31, 2008 under similar terms and conditions as the November 26, 2006 agreement. During the term of the agreement, Fowler will receive a monthly retainer fee. In addition, for transactions closed with a distributo r, Fowler will receive a success fee of 5% of the value of the transaction for a period of one year after the first deal is signed between

Guardian and the distributor. Such success fee will be calculated on the amount of the total revenue of the deal for the one year period.  The success fee will be payable on the date on which Guardian receives revenue for the transaction. The agreement requires that we provide certain support services in connection with sales of our products. We have the right to terminate the agreement at any time upon thirty days’ prior written notice.  The agreement contains certain confidentiality and non-disclosure provisions.  The monthly retainer fee is expensed as incurred and, as there have been no sales of PinPoint products, a success fee has not been recognized.

 Sales, Installation and Servicing Agreement with Hi-Tec Aviation Safety & Security Systems Pvt. Ltd

On January 14, 2008, we entered into a term sheet with Hi-Tec Aviation Safety & Security Systems Pvt. Ltd. for the sales, installation and servicing of our products in India and the adjacent countries with common boundaries except China.  Our agreement is for a period of five years and is renewable for an additional five years upon agreement by both parties.  Either party may terminate the agreement upon 120 days written notice to the other party.  Our agreement provides that Hi-Tec will be a reseller and not an agent for Guardian. Hi-Tec will be the exclusive reseller for India, and a non-exclusive reseller for the adjacent countries within the territory.  We will provide to Hi-Tec information and training with respect to our products as appropriate to help Hi-Tec to market, sell and service our products.  Hi-Tec agrees that it will not sell or represent within the territory any other similar product that c ompetes with our products.

EMPLOYEES

As of December 31, 2007, we employed 23 full-time employees in the United States and one employee in the United Kingdom.  None of our employees is a party to a collective bargaining agreement and we believe our relationship with our employees is good.  We also employ certain consultants and independent contractors on a regular basis to assist in the completion of projects.  It is our practice to require all our employees, consultants and independent contractors to enter into proprietary information and inventions agreements containing non-disclosure, non-compete and non-solicitation restrictions or covenants.

PATENTS AND PROPRIETARY RIGHTS

We rely on a combination of common law trademark, service mark, copyright and trade secret law and contractual restrictions to establish and protect our proprietary rights and promote our reputation and the growth of our business.  We do not own any patents that would prevent or inhibit our competitors from using our technology or entering our market, although we intend to seek such protection as appropriate.  It is our practice to require all of our employees, consultants and independent contractors to enter into agreements containing non-disclosure, non-competition and non-solicitation restrictions and covenants, and while our agreements with some of our customers and suppliers include provisions prohibiting or restricting the disclosure of proprietary information, we can not assure you that these contractual arrangements or the other steps taken by us to protect our proprietary rights will prove sufficient protection to pre vent misappropriation of our proprietary rights or to deter independent, third-party development of similar proprietary assets.

We have 16 pending patent applications (U.S. and foreign) covering the implementation of our core 3i technology.  The United States Patent & Trademark Office (USPTO) has indicated that the claims in two of our U.S. patent applications contain allowable subject matter.  We expect these two patent applications to issue as patents within the next three months, assuming the USPTO does not reverse the decision of allowability.  We are awaiting official responses for the remaining patent applications.  The indication of allowable subject matter in two of our pending U.S. patent applications increases the probability of a positive outcome for the remaining patent applications.  However, we cannot provide assurances that any or all of the patent applications will issue to patents or that they will not be challenged, or that rights granted to us would actually provide us with an advantage over our competitors. Prior art searches h ave been conducted and, based on the results of these searches; we believe that we do not infringe any third party patents identified in the searches.

Due to the rapid pace of technological change in the software industry, we believe patent, trade secret and copyright protection are less significant to our competitive edge than factors such as the knowledge, ability and experience of our personnel, new product development, frequent product enhancements, name recognition and the ongoing reliability of our products.

RESEARCH AND DEVELOPMENT

Under United States generally accepted accounting principles, until the technology is determined to be feasible, all related research and development expenditures must be expensed rather than capitalized. When a determination is made that the software is feasible (commercially viable), then expenditures may be capitalized, as long as there are no high-risk development issues.  We determined that a high-risk development issue exists for integrating PinPoint into already existing scanning equipment.  Therefore, we concluded that capitalizing such expenditures for PinPoint was currently inappropriate and have expensed all research and development costs to date. Research and development costs for fiscal periods 2007, 2006, and 2005 were $901,524, $994,569, and $858,218, respectively.  Our research and development costs are comprised of staff and consultancy expenses on our core technology in intellig ent imaging informatics (“3i”) engine that is capable of extracting embedded knowledge from digital images, as well as the capacity to analyze and detect image anomalies for our development of our PinPoint and Medical Computer Aided Diagnosis (CAD) projects.

GOVERNMENTAL REGULATION

Many of our prospective customers and the other entities with which we may develop a business relationship operate in the healthcare industry and, as a result, are subject to governmental regulation. Because our healthcare products and services are designed to function within the structure of the healthcare financing and reimbursement systems currently in place in the United States, and because we are pursuing a strategy of developing and marketing products and services that support our customers' regulatory and compliance efforts, we may become subject to the reach of, and liability under, these regulations.

The federal Anti-Kickback Law, among other things, prohibits the direct or indirect payment or receipt of any remuneration for Medicare, Medicaid and certain other federal or state healthcare program patient referrals, or arranging for or recommending referrals or other business paid for in whole or in part by the federal health care programs. Violations of the federal Anti-Kickback Law may result in civil and criminal sanction and liability, including the temporary or permanent exclusion of the violator from government health programs, treble damages and imprisonment for up to five years for each violation. If the activities of a customer or other entity with which we have a business relationship were found to constitute a violation of the federal Anti-Kickback Law and we, as a result of the provision of products or services to such customer or entity, were found to have knowingly participated in such activities, we could be subject to sanction or liability under such laws, including exclusion from government health programs. As a result of exclusion from government health programs, our customers would not be permitted to make any payments to us.

The federal Civil False Claims Act and the Medicare/Medicaid Civil Money Penalties regulations prohibit, among other things, the filing of claims for services that were not provided as claimed, which were for services that were not medically necessary, or which were otherwise false or fraudulent. Violations of these laws may result in civil damages, including treble and civil penalties. In addition the Medicare/Medicaid and other federal statutes provide for criminal penalties for such false claims. If, as a result of the provision by us of products or services to our customers or other entities with which we have a business relationship, we provide assistance with the provision of inaccurate financial reports to the government under these regulations, or we are found to have knowingly recorded or reported data relating to inappropriate payments made to a healthcare provider, we could be subject to liability under these laws.

The United States Food and Drug Administration promulgated a draft policy for the regulation of computer software products as medical devices under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act. To the extent that computer software is a medical device under the policy, we, as a manufacturer of such products, could be required, depending on the product, to:

·

register and list its products with the FDA;

·

notify the FDA and demonstrate substantial equivalence to other products on the market before marketing such products; or

·

obtain FDA approval by demonstrating safety and effectiveness before marketing a product.

Depending on the intended use of a device, the FDA could require us to obtain extensive data from clinical studies to demonstrate safety or effectiveness, or substantial equivalence. If the FDA requires this data, we would be required to obtain approval of an investigational device exemption before undertaking clinical trials. Clinical trials can take extended periods of time to complete. We cannot provide assurances that the FDA will approve or clear a device after the completion of such trials. In addition, these products would be subject to the Federal Food, Drug and Cosmetic Act's general controls, including

those relating to good manufacturing practices and adverse experience reporting. Although it is not possible to anticipate the final form of the FDA's policy with regard to computer software, we expect that the FDA is likely to become increasingly active in regulating computer software intended for use in healthcare settings regardless of whether the draft is finalized or changed. The FDA can impose extensive requirements governing pre- and post-market conditions like service investigation, approval, labeling and manufacturing. In addition, the FDA can impose extensive requirements governing development controls and quality assurance processes.

PRINCIPAL OFFICES

We maintain our principal offices at 516 Herndon Parkway, Suite A, Herndon, Virginia  20170.  Our telephone number in the U.S. is (703) 464-5495.  Our Internet address is www.guardiantechintl.com.  Information on our website is not deemed to be part of this Annual Report on Form 10-K.

ITEM 1A.  RISK FACTORS

An investment in our common stock involves a high degree of risk.  You should carefully consider the risks described below and other information contained in this filing deciding to invest in our common stock.  The risks described below are not the only ones facing our company. Additional risks not presently known to us or which we currently consider immaterial may also adversely affect our company.  If any of the following risks actually occur, our business, financial condition and operating results could be materially adversely affected.  In such case, the trading price of our common stock could decline, and you could lose a part of your investment.

Risks Related to Our Company and Our Operations

Our business plan and technologies are unproven. We have generated minimal revenues from our operation, and incurred substantial operating losses since our inception.  We have very limited cash resources.

Since June 2003, we have experienced operating losses and negative cash flows.  We incurred an operating loss of approximately $10,509,746 for the year ended December 31, 2007; an operating loss of approximately $10,093,879 for the year ended December 31, 2006, and an operating loss of approximately $13,147,446 for the year ended December 31, 2005. Our accumulated deficit as of December 31, 2007, is approximately $69,654,122.  Moreover, our business plan is unproven and we cannot assure you that we will ever achieve profitability or, if we achieve profitability, that it will be sustainable.  The income potential of our businesses is unproven, and our limited operating history makes it difficult to evaluate our prospects.  We anticipate increased expenses as we continue to expand and improve our infrastructure, invest in or develop additional products, make acquisitions, develop our technology, expand our sales and ma rketing efforts and pursue additional industry relationships. Moreover, the acceptance of the products that we offer is uncertain, including acceptance by the healthcare and transportation security scanning markets.

During the period of January 1, 2007 through December 31, 2007, the Company raised $169,300 from the exercise of employee stock options, received $100,000 from a promissory note, received $815,641 net proceeds from the exercise of common stock purchase warrants, received gross proceeds of $2,550,000 (net proceeds of $2,540,000 after payment of sales commissions to a broker) from the issuance of common stock and warrants in a private placement offering, and completed the second closing of its Series A Debenture and Series D Warrant financing (the debenture financing).  Gross proceeds from the second closing were $2,575,000, with net proceeds of $2,217,747 (after payment of sales commissions to a broker and related transaction costs).  In addition, the Company repaid: (i) $100,000 in principal repayment to Mr. Trudnak, the Company’s Chief Executive Officer, towards his outstanding non-interest bearing loans, with the remain ing amount outstanding being $202,000, and (ii) $800,000 in principal repayment to a bridge note holder.

Management believes that the cash balance of $101,136 at December 31, 2007, and subsequently $29,079 of collections on outstanding trade receivables, $15,000 received from the exercise of stock options, $4,850,000 received from the sale of securities, and outstanding subscriptions receivable of $1,650,000 due on or about May 30, 2008, to be sufficient to fund the Company’s operations, absent any cash flow from operations, until approximately the end of February 2009.  The Company is currently spending approximately $480,000 per month on operations and the continued research and

development of our 3i technologies and products.  Although there can be no assurance, management believes that with the cash balance and other sources of funds received to-date, the Company may not require additional financing to fund the Company’s existing operations through December 31, 2008. This assumes that the Company will be unable to generate sufficient operating cash flow to fund its operations during this period.  Also, this assumes that holders of our outstanding debentures convert such debentures into shares of our common stock prior to November 7, 2008, the date we are required to pay the principal amount of such debentures.  We may be required to raise additional capital through an equity or debt financing or though bank borrowing, in the event the debenture holders do not convert such debentures, partially convert such debentures, or effect the buy-in provision of the warrants related to the de bentures.  We are also seeking research grant funding from sources in connection with the development of our Medical CAD product. There can be no assurances that the Company will be successful in its efforts to secure such additional financing, any bank borrowing or any grant funding.

During fiscal 2007, the Company’s total stockholders’ deficit increased by $4,344,347 to $7,343,647.  Notwithstanding the foregoing discussion of management’s expectations regarding future cash flows, the Company’s deepening insolvency continues to increase the uncertainties related to its continued existence.  Both management and the Board of Directors are carefully monitoring the Company’s cash flows and financial position in consideration of these increasing uncertainties and the needs of both creditors and stockholders.

We have a severe working capital deficit and, in addition to proceeds from financings, we continue to have outstanding loans from our chief executive officer and deferrals of salaries by our executive officers and a consultant to indirectly continue to fund operations.

As of December 31, 2007, we had a working capital deficit of approximately $6,352,406.  During 2007, our revenue generating activities had not produced sufficient funds for profitable operations and we have incurred operating losses since inception.  During 2007, although we have obtained cash from certain financings, we continue to have outstanding loans from our chief executive officer of approximately $202,000, and deferrals of salaries of our executive officers and a consultant in the amount of $570,452.

Dilutive effect of conversion of Series A 10% Senior Convertible Debentures and exercise of Series D Warrants and Midtown placement agent’s warrants.

Under a Securities Purchase Agreement, dated November 3, 2006, between the Company and certain institutional accredited investors, the Company sold an aggregate of $5,150,000 in principal amount of our Series A Debentures and Series D Common Stock Purchase Warrants to purchase an aggregate of 4,453,709 shares of our common stock.  The Company issued an aggregate of $2,575,000 in principal amount of Series A Debentures and 4,453,709 Series D Warrants at a first closing held on November 8, 2006, and, due to the conversion feature embedded in the debentures and the warrants, the transaction was recognized as a liability under generally accepted accounting principles.  Due to milestone-related adjustments, the exercise price and the maximum number of shares to be issued under the debentures are indeterminable as of December 31, 2007 and, as the debentures are currently in default and otherwise due November 7, 2008, and given the C ompany’s uncertain ability to share-settle these warrant contracts due to the buy-in provisions, all liabilities for warrants related to the debentures are classified as current. The Company issued an additional $2,575,000 in principal amount of the Series A Debentures at a second closing held April 12, 2007, following the effectiveness of a registration statement registering the shares of our common stock underlying the Series A Debenture and Series D Warrants.  The proceeds from the second closing were allocable to the embedded conversion features of the Series A Debentures and Series D Warrants, and are recognizable as a liability under generally accepted accounting principles.  One-half of the Series D Warrants became exercisable on November 8, 2006 (2,226,854 warrants), and the remaining one-half became exercisable on April 12, 2007 (2,226,855 warrants).  The Series D Warrants and the Placement Agent’s Warrants issued as compensation in the offering to Midtown Partners & Co. , LLC, may be exercised via a cashless exercise if certain conditions are met.  The Company considered Emerging Issues Task Force Issue 00-19 (EITF 00-19), “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” and concluded that there were insufficient shares to share settle the contracts.  The Series D Warrants that became exercisable at the first closing will expire on November 8, 2011, and those related to the second closing will expire in April 12, 2012.

The initial conversion price of our Series A 10% Senior Convertible Debentures was $1.15634 subject to certain adjustments.  On May 18, 2007, the conversion price of the Series A Debentures and the exercise price of the Series D Warrants held by investors and Placement Agent’s Warrants issued as compensation to Midtown Partners & Co., LLC, were

reset to a price of $0.6948 per share effective October 1, 2007.  We may be required to further re-set the conversion or exercise price of such debentures and warrants and to issue additional shares in the event the price re-set provisions of the Series A Debentures and Series D Warrants are triggered.  As of December 31, 2007, holders of our Series A Debentures have converted an aggregate of $1,921,795 in principal amount of the Series A Debentures and $3,228,205 in principal amount remains unconverted. A holder of our Series D Warrants exercised an aggregate of 864,798 of such warrants and we issued an aggregate of 864,798 Class E Warrants as an inducement for such exercise. The Class E Warrants are exercisable for a period of five years at an exercise price of $1.17 per share.  Furthermore, as of the filing of this report, approximately 792,742 warrants (including the currently exercisable placement agent warra nts issued to Midtown Partners and Co. LLC, in connection with our debenture and warrant financing and the Class F Warrants) may be exercised pursuant to the cashless exercise provisions of such warrants which may be subsequently resold as “restricted securities” within the meaning of Rule 144 under the Securities Act.    Increased sales volume of our common stock could cause the market price of our common stock to drop.

We have incurred substantial debt which could affect our ability to obtain additional financing and may increase our vulnerability to business downturns. Additionally, as disclosed below, we may be in default under the debenture agreements.

On November 3, 2006, we entered into a securities purchase agreement with certain institutional and accredited investors under which we agreed to issue debentures in the aggregate principal amount of $5,150,000, of which we received an aggregate of $2,575,000 at a first closing on November 8, 2006, and the remaining $2,575,000 at a second closing on April 12, 2007.  The principal amount of the debentures will be due November 7, 2008.  On the date of issuance, the debentures were convertible into shares of our common stock at a price of $1.15634, subject to anti-dilution and price re-set provisions.  On May 18, 2007, the conversion price of the Series A Debentures and the exercise price of the Series D Warrants and Placement Agent’s Warrants were reset to a price of $0.6948 per share effective November 12, 2007, and may be further reset in the event we do not meet certain milestones set forth in the debentures and war rants.  As of December 31, 2007, holders of our Series A Debentures have converted an aggregate of $1,921,795 in principal amount of the Series A Debentures and $3,228,205 in principal amount remains unconverted and is due as of November 7, 2008. Due to milestone-related adjustments, the exercise price and the maximum number of shares to be issued under the debentures are indeterminable as of December 31, 2007 and, as the debentures are due November 7, 2008 and may be currently in default, all liabilities for warrants are classified as current given the Company’s uncertain ability to share-settle the contracts.

During August through September 2006, we issued bridge notes in the principal amount of $1,100,000 that were initially due six months after the date of issuance.  The bridge notes were extended as they became due in February and March 2007.  During 2007, $800,000 in principal was paid and $300,000 was converted to equity.  Also, in December 2007, we issued a promissory note in the principal amount of $100,000 that is due upon closing of a financing.  

As a result, we are subject to the risks associated with substantial indebtedness, including that we are required to dedicate a portion of our cash flows from operations to pay debt service costs; it may be more expensive and difficult to obtain additional financing; we are more vulnerable to economic downturns; and if we default under our indebtedness, we may not have sufficient funds to repay any accrued interest or outstanding principal.

We did not make certain interest payments due under our Series A Debentures and may be deemed to be in default.  Also, we may be deemed to be in non-compliance with a negative covenant under the debentures.

We did not make timely payment of the interest due under our Series A 10% Senior Convertible Debentures on January 1, 2008.  However, the Company has paid all of the interest and late fees due to debenture holders as of April 8, 2008.  The debentures provide that any default in the payment of interest, which default is not cured within five trading days of the receipt of notice of such default or ten trading days after the Company becomes aware of such default, will be deemed an event of default.  If an event of default occurs under the debentures, the debenture holders may elect to require the Company to make immediate repayment of the mandatory default amount, which equals the sum of (i) the greater of either (a) 120% of the outstanding principal amount of the debentures, plus accrued but unpaid interest, or (b) the outstanding principal amount plus accrued but unpaid interest divided by the conversion price on the date the mandatory default amount is either (1) demanded or otherwise due or (2) paid in full, whichever has the lower conversion price, multiplied by the variable weighted average price of the common stock on the date the mandatory default amount is either demanded or otherwise due, whichever has the higher variable weighted average price, and (ii) all other amounts, costs, expenses, and

liquidated damages due under the debentures. Also, interest under the debentures accrues at a rate of 18% per annum or the maximum amount allowed under the law and the Company may be subject to a late fee equal to the lesser of 18% per annum or the maximum rate permitted by law.  As of the date of this report, the debenture holders have not made an election requiring immediate repayment of the mandatory amount, although there can be no assurance they will not do so. In anticipation of such an election and measured as of December 31, 2007, the additional amount due is approximately $645,641, and is recorded as an increase to the carrying value of the debentures.

Our debentures include a negative covenant prohibiting us from incurring any indebtedness except as permitted under the debenture to include debt that is expressly subordinate to the debentures pursuant to a written subordination agreement acceptable to the holders of the debentures. In December 2007, we issued a promissory note to an investor that did not include an agreement subordinating the note to the debentures.  The debentures provide that, if we fail to materially observe or perform any covenant or agreement in the debentures, the holders of our debentures may send us a notice of default.  If we do not cure a default within the earlier of five trading days of the receipt of such notice or within 10 trading days of the date we become aware of such failure, we could be deemed to be in default under our debentures.  We have not received any notice from a debenture holder.  Moreover, the holder of the note subseq uently converted the note into our common stock and warrants. Although there can be no assurance, we believe we have materially observed the covenants under the debentures and that no event of default has occurred as a result of the issuance of the promissory note.

Our certifying officers evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2005, as of March 31, 2006, June 30, 2006, September 30, 2006, December 31, 2006, September 30, 2007, and December 31, 2007, and concluded that our disclosure controls were not effective and that we had certain weaknesses in our internal controls over timely reporting.

Our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”) are responsible for establishing and maintaining our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)).  The Certifying Officers designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under their supervision, to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the SEC’s rules and forms, and is made known to management (including the Certifying Officers) by others within the Company, including its subsidiaries.  We regularly evaluate the effectiveness of our disclosure controls and procedures and report our conclusions about the effectiveness of the disclosure controls quarterly in our Forms 10-Q and annually in our Forms 10-K.  In completing such reporting, we disclose, as appropriate, any significant change in our internal control over financial reporting that occurred during our most recent fiscal period that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  As we disclosed in our 2005 and 2006 Form 10-K, this Form 10-K, and our Forms 10-Q for the periods ended March 31, 2006, June 30, 2006, September 30, 2006, and September 30, 2007, our Certifying Officers concluded that our disclosure controls and procedures were not effective as of the end of the periods covered by such reports. We also disclosed that there were certain material weaknesses in our internal controls over financial reporting.  Management (including the Certifying Officers) has undertaken specific measures to cure or mitigate the ineffective controls and procedures identified in our Exchange Act filings.  While management is responsible for establishing and maintaining our disclosure controls and procedures and has taken steps to ensure that the disclosure controls are effective and free of “significant deficiencies” and/or “material weaknesses,” the ability of management to implement the remediation of such weaknesses and deficiencies and the inherent nature of our business and rapidly changing environment may affect management’s ability to be successful with this initiative.

Current shareholdings may be diluted if we make future equity issuances or if outstanding debentures, warrants, and options are exercised for or converted into shares of common stock.

“Dilution” refers to the reduction in the voting effect and proportionate ownership interest of a given number of shares of common stock as the total number of shares increases.  Our issuance of additional stock, convertible preferred stock and convertible debt may result in dilution to the interests of shareholders and may also result in the reduction of your stock price.  The sale of a substantial number of shares into the market, or even the perception that sales could occur, could depress the price of the common stock.  Also, the exercise of warrants and options may result in additional dilution.

The holders of outstanding options, warrants and convertible securities have the opportunity to profit from a rise in the market price of the common stock, if any, without assuming the risk of ownership, with a resulting dilution in the interests

of other shareholders.  We may find it more difficult to raise additional equity capital if it should be needed for our business while the options, warrants and convertible securities are outstanding.  At any time at which the holders of the options, warrants or convertible securities might be expected to exercise or convert them, we would probably be able to obtain additional capital on terms more favorable than those provided by those securities. Also, some holders of the options and warrants have piggy back registration rights requiring us to register their shares underlying such options and warrants in any registration statement we file under the Securities Act.  The cost to us for such required registration may be substantial.

We may face competition from other developers or sellers of imaging and radiology technology and baggage screening technology.

While the market for imaging and radiology technology is highly fragmented, we face competition from other companies which are developing products that are expected to be competitive with our products.   We also face potential competition from other companies developing baggage screening technology.  Business in general is highly competitive, and we compete with both large multinational solution providers and smaller companies. Some of our competitors have more capital, longer operating and market histories, and greater resources than we have, and may offer a broader range of products and at lower prices than we offer.

We may undertake acquisitions which pose risks to our business.

As part of our growth strategy, we have and may in the future acquire or enter into joint venture arrangements with, or form strategic alliances with complimentary businesses. Any such acquisition, investment, strategic alliance or related effort will be accompanied by the risks commonly encountered in such transactions.  These risks may include:

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Difficulty of identifying appropriate acquisition candidates;

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Paying more than the acquired company is worth;

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Difficulty in assimilating the operations of the new business;

·

Costs associated with the development and integration of the operations of the new entity;

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Existing business may be disrupted;

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Entering markets in which we have little or no experience;

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Accounting for acquisitions could require us to amortize substantial intangible assets (goodwill), adversely affecting our results of operations;

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Inability to retain the management and key personnel of the acquired business;

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Inability to maintain uniform standards, controls, policies and procedures; or

·

Customer attrition with respect to customers acquired through the acquisition.

We cannot assure you that we would successfully overcome these risks or any other problems associated with any acquisition, investment, strategic alliances, or related efforts.  Also, if we use our common stock in connection with an acquisition, your percentage ownership in us will be reduced and you may experience additional dilution.

Our independent registered public accounting firm has expressed uncertainty regarding our ability to continue as a going concern.

Our independent registered public accounting firm has expressed uncertainty regarding our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on recoverability and classification of assets or the amounts and classification of liabilities that might occur if we are unable to continue in business as a going concern.

Investor confidence in the price of our stock may be adversely affected if we are unable to comply with Section 404 of the Sarbanes-Oxley Act of 2002.

As an SEC registrant, we are subject to the rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, which require us to include in our annual report on Form 10-K our management’s report on, and assessment of the effectiveness of, our internal control over financial reporting (“management’s report”). In addition, our

independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of our internal control over financial reporting (“independent registered public accountant’s report”).  The requirement pertaining to management’s report is effective on our annual report for the fiscal year ending December 31, 2007, and the requirement pertaining to the independent registered public accountant’s report is expected to first apply to the annual report for the fiscal year ending December 31, 2008, although the SEC has proposed to extend the date such requirement would first apply to non-accelerated filers to December 31, 2009.  Our management identified material weaknesses in our internal controls over financial reporting as of December 31, 2007, although management is undertaking specific measures to cure or mitigate the ineffective controls and procedure s identified in our Exchange Act filings.  If we fail to achieve and maintain the adequacy of our internal control over financial reporting, there is a risk that we will not comply with all of the requirements imposed by Section 404.  Moreover, effective internal control over financial reporting, particularly that relating to revenue recognition, is necessary for us to produce reliable financial reports and is important in helping to prevent financial fraud.  Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss in investor confidence in the reliability of our financial statements, which ultimately could harm our business and could negatively impact the market price of our common stock.  Investor confidence and the price of our common stock may be adversely affected if we are unable to comply with Section 404 of the Sarbanes-Oxley Act of 2002.

In order to comply with public reporting requirements, we must continue to strengthen our financial systems and controls, and failure to do so could adversely affect our ability to provide timely and accurate financial statements.

Due to the restatements of our consolidated unaudited quarterly financial statements, included in Form 10-Q for the quarters ended September 30^th, June 30^th and March 31^st of 2005, and September 30, 2006, our independent registered public accounting firm, Goodman & Company, L.L.P., has informed us that a material weakness in internal controls over financial reporting exists. In addition, Goodman & Company, L.L.P., informed us that we had certain material weakness in our internal control over financial reporting as of December 31, 2007.  They also provided us with comments and recommendations concerning improvements in our internal controls in the following areas: Information Technology for the fiscal years ended 2005 and 2006; and accounting systems for Wise Systems, Limited (UK affiliate) in fiscal 2005. Also, management is undertaking specific measures to cur e or mitigate the ineffective controls and procedures identified in our Exchange Act filings.  We believe we have made significant improvements in these areas, but we will need to make continued progress.

Continued improvement of our internal controls and procedures will be required in order for us to manage future growth successfully and operate effectively as a public company. Continued improvement of our internal controls, as well as compliance with the Sarbanes-Oxley Act of 2002 and related requirements, will be costly and will place a significant burden on management.  We cannot assure you that measures already taken, or any future measures, will enable us to provide accurate and timely financial reports, particularly if we are unable to hire additional personnel in our accounting and financial department, or if we lose personnel in this area. Any failure to improve our internal controls or other problems with our financial systems or internal controls could result in delays or inaccuracies in reporting financial information, or non-compliance with SEC reporting and other regulatory requirements, any of which could adversely affect our business and stock price.

In preparing our consolidated financial statements, we identified material weaknesses in our internal control over financial reporting, and our failure to remedy effectively the material weaknesses identified as of December 31, 2007 could result in material misstatements in our financial statements and  investors could lose confidence in our financial reports, and our stock price may be adversely affected.

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Our management identified certain material weaknesses in our internal control over financial reporting as of December 31, 2007. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses as of December 31, 2007, consist of the following:

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Several matters involving the application of Generally Accepted Accounting Principles to the Company’s complex financial instruments resulted in material audit adjustments to the Company’s consolidated financial

statements. The adjustments were related to certain complex provisions of derivative liabilities, including our convertible debentures and warrants, and the interpretation of Emerging Issues Task Force Issue 00-19 (EITF 00-19), “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” and Statement of Financial Accounting Standards No. 5 “Accounting for Contingencies.” These deficiencies did not result in errors to the Company’s consolidated financial statements.

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As of December 31, 2007, the Company did not have personnel with the appropriate technical accounting expertise to sufficiently address the accounting and financial reporting issues that arise from time to time with respect to these complex financial instruments.

As a result of these material weaknesses, our management concluded as of December 31, 2007, that our internal control over financial reporting were not effective based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.

We are implementing remedial measures designed to address these material weaknesses. If these remedial measures are insufficient to address these material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, we may fail to meet our future reporting obligations on a timely basis, our consolidated financial statements may contain material misstatements, we could be required to restate our prior period financial results, our operating results may be harmed, we may be subject to class action litigation, and our common stock could be delisted from the OTC Bulletin Board or any exchange on which our common stock is then listed or quoted. For example, material weaknesses that remain unremediated could result in material post-closing adjustments in future financial statements. Any failure to address the identified material weaknesses or any a dditional material weaknesses in our internal control could also adversely affect the results of the periodic management evaluations regarding the effectiveness of our internal control over financial reporting that are required to be included in our annual reports on Form 10-K. Internal control deficiencies could also cause investors to lose confidence in our reported financial information. We can give no assurance that the measures we have taken to date or any future measures will remediate the material weaknesses identified or that any additional material weaknesses or additional restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our consoli dated financial statements.  A determination that there is a significant deficiency or material weakness in the effectiveness of our internal controls over financial reporting could also reduce our ability to obtain financing or could increase the cost of any financing we obtain and require additional expenditures to comply with applicable requirements.

Our stock price is volatile.

The stock market from time to time experiences significant price and volume fluctuations that are unrelated to the operating performance of particular companies.  These broad market fluctuations may cause the market price of our common stock to drop.  In addition, the market price of our common stock is highly volatile.  Factors that may cause the market price of our common stock to drop include:

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Fluctuations in our results of operations;

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Timing and announcements of new customer orders, new products, or those of our competitors;

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Any acquisitions that we make or joint venture arrangements we enter into with third parties;

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Changes in stock market analyst recommendations regarding our common stock;

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Failure of our results of operations to meet the expectations of stock market analysts and investors;

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Increases in the number of outstanding shares of our common stock resulting from sales of new shares, or the exercise of warrants, stock options or convertible securities;

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Reluctance of any market maker to make a market in our common stock;

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Changes in investors’ perception of the transportation security scanning and healthcare information technology industries generally; and

·

General stock market conditions.

There is a limited market for our common stock.

Our common stock is quoted on OTC Bulletin Board under the symbol “GDTI.”  As a result, relatively small trades in our stock could have disproportionate effect on our stock prices.  No assurance can be made that an active market will develop for our common stock or, if it develops, that it will continue.

The OTC Bulletin Board is a regulated quotation service that displays real-time quotes, last-sale prices and volume information for shares of stock that are not designated for quotation on a national securities exchange.  Trades in OTC Bulletin Board quoted stocks will be displayed only if the trade is processed by an institution acting as a market maker for those shares.  Although there are approximately 28 market makers for our stock, these institutions are not obligated to continue making a market for any specific period of time.  Thus, there can be no assurance that any institution will be acting as a market maker for our common stock at any time.  If there is no market maker for our stock and no trades in those shares are reported, it may be difficult for you to dispose of your shares or even to obtain accurate quotations as to the market price for your shares.  Moreover, because the order handling rules ad opted by the SEC that apply to other listed stocks do not apply to OTC Bulletin Board quoted stock, no market maker is required to maintain an orderly market in our common stock.  Accordingly, an order to sell our stock placed with a market maker may not be processed until a buyer for the shares is readily available, if at all, which may further limit your ability to sell your shares at prevailing market prices.

Because we became public because of a reverse acquisition, we may not be able to attract the attention of major brokerage firms or institutional investors.

We became a public company through a reverse acquisition of Guardian in June 2003.  Accordingly, securities analysts and major brokerage firms and securities institutions may not cover our common stock since there is no incentive to recommend the purchase of our common stock.  No assurance can be given that established brokerage firms will want to conduct any financing for us in the future.

Our common stock is subject to the SEC’s Penny Stock Regulations.

Our common stock is subject to the SEC’s “penny stock” rules.  These regulations define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share, subject to certain exceptions.  For any transaction involving a penny stock, unless exempt, these rules require the delivery, prior to the transaction, of a disclosure schedule prepared by the SEC relating to the penny stock market.  The broker-dealer also must disclose the commissions payable to the broker-dealer and the registered underwriter, current quotations for the securities, information on the limited market in penny stocks and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealers’ presumed control over the market.  In addition, the broker-dealer must obtain a written statement from the customer that such disclosure information was provided and must retain such acknowledgment for at least three years.  Further, monthly statements must be sent disclosing current price information for the penny stock held in the account.  The penny stock rules also require that broker-dealers engaging in a transaction in a penny stock make a special suitability determination for the purchaser and receive the purchaser's written consent to the transaction prior to the purchase.  The foregoing rules may materially and adversely affect the liquidity for the market of our common stock.  Such rules may also affect the ability of broker-dealers to sell our common stock, the ability of holders of such securities to obtain accurate price quotations and may therefore impede the ability of holders of our common stock to sell such securities in the secondary market.

Certain provisions of our charter and bylaws may discourage mergers and other transactions.

Certain provisions of our certificate of incorporation and bylaws may make it more difficult for someone to acquire control of us.  These provisions may make it more difficult for stockholders to take certain corporate actions and could delay or prevent someone from acquiring our business.  These provisions could limit the price that certain investors might be willing to pay for shares of our common stock.  The use of a staggered board of directors and the ability to issue “blank check” preferred stock are traditional anti-takeover measures.  These provisions may be beneficial to our management and the board of directors in a hostile tender offer, and may have an adverse impact on stockholders who may want to participate in such tender offer, or who may want to replace some or all of the members of the board of directors.

Our board of directors may issue additional shares of preferred stock without stockholder approval.

Our certificate of incorporation authorizes the issuance of up to 1,000,000 shares of preferred stock of which 6,000 have been designated as Series A Convertible Preferred Stock, 6,000 shares as Series B Convertible Preferred Stock, and 1,000 shares as Class C Convertible Preferred Stock, none of which shares are outstanding on the date of the filing of this report.  Accordingly, our board of directors may, without shareholder approval, issue one or more new series of preferred stock with rights which could adversely affect the voting power or other rights of the holders of outstanding shares of common stock.  In addition, the issuance of additional shares of preferred stock may have the effect of rendering more difficult or discouraging, an acquisition or change of control of Guardian.  Although we do not have any current plans to issue any shares of preferred stock, we may do so in the future.

We depend on key personnel.

Our success depends of the contributions of our key management personnel, including Mr. Michael W. Trudnak, Chairman, Chief Executive Officer, Secretary and Treasurer, Mr. William J. Donovan, President and Chief Operating Officer, and Mr. Gregory E. Hare, our Chief Financial Officer.  If we lose the services of any of such personnel we could be delayed in or precluded from achieving our business objectives.  We do not have key man life insurance on any of our officers.

In addition, the loss of key members of our sales and marketing teams or key technical service personnel could jeopardize our positive relations with our customers.  Any loss of key technical personnel would jeopardize the stability of our infrastructure and our ability to provide the service levels our customers expect.  The loss of any of our key officers or personnel could impair our ability to successfully execute our business strategy, because we substantially rely on their experience and management skills.

Our directors and named executive officers own a substantial percentage of our common stock.

As of April 11, 2008, our directors and executive officers beneficially own approximately 16.2% of our shares of common stock.  Accordingly, our directors, executive officers and two most highly compensated employees are entitled to cast an aggregate of 4,939,650 votes on matters submitted to our stockholders for a vote or approximately 10.0% of the total number of votes entitled to be cast at a meeting of our stockholders.  These stockholders, if they acted together, could exert substantial control over matters requiring approval by our stockholders.  These matters would include the election of directors and the approval of mergers or other business combination transactions.  This concentration of ownership may discourage or prevent someone from acquiring our business.

Our ability to attract and retain additional skilled personnel may impact our ability to develop our technology and attract customers in growing our business.

We believe that our ability to attract, train, motivate and retain additional highly skilled technical, managerial and sales personnel, particularly in the areas of technology-based application development, business intelligence, knowledge extraction, management, product development, healthcare economics, radiology, integration and technical support, is essential to our future success.  Our business requires individuals with significant levels of expertise in knowledge extraction, business operations, mathematics, quantitative analysis, and machine learning.  Competition for such personnel is intense, and qualified technical personnel are likely to remain a limited resource for the foreseeable future.  Locating candidates with the appropriate qualifications, particularly in the desired geographic location, can be costly and difficult.  We may not be able to hire the necessary personnel to implement our business strat egy, or we may need to provide higher compensation to such personnel than we currently anticipate.  If we fail to attract and retain sufficient numbers of highly skilled employees, our ability to provide the necessary products, technologies, and services may be limited, and as a result, we may be unable to attract customers and grow our business.

We have never paid a cash dividend

We have not declared a cash dividend and we do not anticipate paying such dividends in the foreseeable future.

Risks Related to Our Industries

Changes may take place in funding for healthcare.

We expect to derive a substantial portion of our revenues from sales of clinical healthcare information systems, and other related services within the healthcare industry. As a result, our success is dependent in part on political and economic conditions as they relate to the healthcare industry.

Virtually all of our prospective customers in the healthcare industry are subject to governmental regulation, including Medicare and Medicaid regulation.

Accordingly, our prospective customers and other entities with which we may develop a business relationship are affected by changes in such regulations and limitations in governmental spending for Medicare and Medicaid programs. Recent actions by Congress have limited governmental spending for the Medicare and Medicaid programs, limited payments to hospitals and other providers under such programs, and increased emphasis on competition and other programs that potentially could have an adverse effect on our customers and the other entities with which we have a business relationship. In addition, federal and state legislatures have considered proposals to reform the U.S. healthcare system at both the federal and state level. If enacted, these proposals could increase government involvement in healthcare, lower reimbursement rates and otherwise change the business environment of our prospective customers and other entities with which we ma y develop a business relationship. Our prospective customers and other entities with which we may develop a business relationship could react to these proposals and the uncertainty surrounding these proposals by curtailing or deferring investments, including those for our products and services.

In addition, many healthcare providers are consolidating to create integrated healthcare delivery systems with greater market power. These providers may try to use their market power to negotiate price reductions for our anticipated products and services, which would negatively impact our expected operating margins. As the healthcare industry consolidates, competition for customers will become more intense and the importance of acquiring each customer will become greater.

Product liability claims may occur.

Any failure by our products that provide applications relating to patient diagnostic procedures, and treatment plans could expose us to product liability claims for personal injury and wrongful death. Unsuccessful claims could be costly to defend and divert management time and resources. In addition, we cannot make assurances that we will have appropriate insurance available to us in the future at commercially reasonable rates.  Currently, we maintain Property, General/Umbrella Liability, Error and Omissions, and Directors and Officers insurance.  We expect to seek product liability coverage upon the commercialization of our intelligent imaging informatics (“3i”) technology.

Specific government regulations relating to Medicare and Medicaid may impinge on us.

Many of our prospective customers and the other entities with which we may develop a business relationship operate in the healthcare industry and, as a result, are subject to governmental regulation. Because our healthcare products and services are designed to function within the structure of the healthcare financing and reimbursement systems currently in place in the United States, and because we are pursuing a strategy of developing and marketing products and services that support our customers' regulatory and compliance efforts, we may become subject to the reach of, and liability under, these regulations.

The federal Anti-Kickback Law, among other things, prohibits the direct or indirect payment or receipt of any remuneration for Medicare, Medicaid and certain other federal or state healthcare program patient referrals, or arranging for or recommending referrals or other business paid for in whole or in part by the federal health care programs. Violations of the federal Anti-Kickback Law may result in civil and criminal sanction and liability, including the temporary or permanent exclusion of the violator from government health programs, treble damages and imprisonment for up to five years for each violation. If the activities of a customer or other entity with which we have a business relationship were found to constitute a violation of the federal Anti-Kickback Law and we, as a result of the provision of products or services to such customer or entity, were found to have knowingly participated in such activities, we could be subject to sanction or liability under such laws, including exclusion from government health programs. As a result of exclusion from government health programs, our customers would not be permitted to make any payments to us.

The federal Civil False Claims Act and the Medicare/Medicaid Civil Money Penalties regulations prohibit, among other things, the filing of claims for services that were not provided as claimed, which were for services that were not medically necessary, or which were otherwise false or fraudulent. Violations of these laws may result in civil damages, including treble and civil penalties. In addition the Medicare/Medicaid and other federal statutes provide for criminal penalties for such false claims. If, as a result of the provision by us of products or services to our customers or other entities with which we have a business relationship, we provide assistance with the provision of inaccurate financial reports to the government under these regulations, or we are found to have knowingly recorded or reported data relating to inappropriate payments made to a healthcare provider, we could be subject to liability under these laws.

Medical device regulation may require us to obtain approval for our products.

The United States Food and Drug Administration (“FDA”) have promulgated a draft policy for the regulation of computer software products as medical devices under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act. To the extent that computer software is a medical device under the policy, we, as a manufacturer of such products, could be required, depending on the product, to:

·

register and list its products with the FDA;

·

notify the FDA and demonstrate substantial equivalence to other products on the market before marketing such products; or

·

obtain FDA approval by demonstrating safety and effectiveness before marketing a product.

Depending on the intended use of a device, the FDA could require us to obtain extensive data from clinical studies to demonstrate safety or effectiveness, or substantial equivalence. If the FDA requires this data, we would be required to obtain approval of an investigational device exemption before undertaking clinical trials. Clinical trials can take extended periods of time to complete. We cannot provide assurances that the FDA will approve or clear a device after the completion of such trials. In addition, these products would be subject to the Federal Food, Drug and Cosmetic Act's general controls, including those relating to good manufacturing practices and adverse experience reporting. Although it is not possible to anticipate the final form of the FDA's policy with regard to computer software, we expect that the FDA is likely to become increasingly active in regulating computer software intended for use in healthcare settings reg ardless of whether the draft is finalized or changed. The FDA can impose extensive requirements governing pre- and post-market conditions like service investigation, approval, labeling and manufacturing. In addition, the FDA can impose extensive requirements governing development controls and quality assurance processes.

System errors and warranties may subject us to liability.

Our technology is very complex. As is the case with all complex and new systems, our product may contain errors especially when first introduced. Our technology is intended to provide information to security agencies for threat detection, and to healthcare providers for use in medical diagnosis. Therefore, users of our products may have a greater sensitivity to system errors than the market for software products generally. Failure of a system to perform in accordance with its documentation could constitute a breach of warranty and require us to incur additional expenses in order to make the system comply with the documentation. If such failure is not timely remedied, it could constitute a material breach under a contract allowing the client to cancel the contract and subject us to liability.

We retain and transmit confidential information; including patient health information. A security breach could damage our reputation or result in liability. It is critical that these facilities and infrastructure remain secure and be perceived by the marketplace as secure. We may be required to expend significant capital and other resources to protect against security breaches and hackers or to alleviate problems caused by breaches. Despite the implementation of security measures, this infrastructure or other systems that we interface with, including the Internet and related systems, may be vulnerable to physical break-ins, hackers, improper employee or contractor access, computer viruses, programming errors, attacks by third parties or similar disruptive problems. Any compromise of our security, whether as a result of our own systems or systems that they interface with, could reduce demand for our services and products.

Customer satisfaction and our business could be harmed if our business experiences delays, failures or loss of data in its systems. The occurrence of a major catastrophic event or other system failure at any of our facilities, or at any third

party facility, including telecommunications provider facilities, could interrupt data processing or result in the loss of stored data, which could harm our business.

We may infringe the proprietary rights of others.

If any of our products violate third party proprietary rights, we may be required to reengineer our products or seek to obtain licenses from third parties to continue offering our products without substantial reengineering. Any efforts to reengineer our products or obtain licenses from third parties may not be successful, in which case we may be forced to stop selling the infringing product or remove the infringing functionality or feature. We may also become subject to damage awards as a result of infringing the proprietary rights of others, which could cause us to incur additional losses and have an adverse impact on our financial position. We do not conduct comprehensive patent searches to determine whether the technologies used in our products infringe patents held by others. In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patent applications pen ding; many of which are confidential when filed, with regard to similar technologies.

Unforeseeable disruption in the economy may take place consequent to terrorism or other international events.

The terrorist events of September 11, 2001, as well as new terrorists threats, the war in Iraq and the possibility of war in other areas of the Middle East, have sensitized us and many other businesses to the potential disruption that such activities can have on the economy, the business cycle and, ultimately on the financial performance of these organizations. It is impossible to know whether such terrorist or military activities will continue, and whether, and to what extent, they may cause a disruption that may have a material adverse effect on our business and financial condition.

A number of factors that affect our revenues make our future results difficult to predict, and therefore we may not meet expectations for a particular period.

We believe that our revenues have the potential to vary significantly from time to time. We believe that these variations may result from many factors, including:

·

the timing, size and mix of orders from our major customers including, in particular, the TSA and agencies of other governments;

·

legislative or other government actions driven, in part, by the public’s perception of the threats facing commercial aviation, leading to fluctuations in demand for transportation security scanning  products and services;

·

delays in product shipments caused by the inability of airports to install or integrate our products in a timely fashion;

·

the availability and cost of key components;

·

the timing of completion of acceptance testing for some of our products;

·

the introduction and acceptance of new products or enhancements to existing products offered by us or our competitors;

·

changes in pricing policies by us, our competitors or our suppliers, including possible decreases in average selling prices of our products caused by customer volume orders or in response to competitive pressures; and

·

our sales mix to domestic and international customers.

We expect to depend on a small number of customers for a substantial portion of our future revenues.

A significant portion of our quarterly and annual operating expenses is expected to be relatively fixed in nature. This means that future revenue fluctuations will cause our quarterly and annual operating results to vary substantially. We also may choose to increase spending to pursue new market opportunities, which may negatively affect our financial results. We cannot assure investors that our PinPoint product will be selected by the U.S. DHS or other countries’ security departments or address their solutions needs for threat detection, or that our Signature Mapping product will be accepted in the healthcare arena.

Governmental agencies, the primary customers for our PinPoint products, are subject to budget processes which could limit the demand for these products.

Substantially all of the potential customers for our PinPoint products under development to date have been public agencies or quasi-public agencies, such as the FAA, the TSA, airport authorities and manufactures of threat detection devices. Public agencies are subject to budgetary processes and expenditure constraints.

The funding of government programs is subject to legislative appropriation. Budgetary allocations for PinPoint depend, in part, upon governmental policies, which fluctuate from time to time in response to political and other factors, including the public’s perception of the threat of commercial airline bombings. For example, the terrorist attacks of September 11, 2001 resulted in the passage of the Aviation and Transportation Security Act of 2001, or Transportation Security Act, mandating a small surcharge on each airline ticket purchase to fund airline security. This surcharge was suspended from June 1, 2003 to September 30, 2003. We cannot assure investors that the surcharge will not again be suspended or that the funds generated by these surcharges will be used to purchase our PinPoint products. We cannot assure investors that funds will continue to be appropriated by Congress or allocated by the TSA or other agen cies for the purchase of PinPoint product or any other such product we develop and market. Moreover, we expect that similar funding and appropriations issues will affect our ability to market and sell our PinPoint product outside the United States.

Legislative actions could lead to fluctuations in demand for transportation security scanning products and services.

In addition to the Congressional budgetary process, other legislation could be introduced that would impact demand for transportation security scanning products and services. In response to fluctuation in concern on the part of voters about transportation security scanning and competing homeland security demands, or for other reasons, the plans for deployment of our PinPoint product to screen baggage could be changed. Budgetary debates and delays could result in fewer PinPoint products being sold to the TSA.

Governmental agencies have special contracting requirements, which create additional risks.

In contracting with public agencies, we are subject to public agency contract requirements that vary from jurisdiction to jurisdiction. Future sales to public agencies will depend, in part, on our ability to meet public agency contract requirements, certain of which may be onerous or even impossible for us to satisfy.

Government contracts typically contain termination provisions unfavorable to us and are subject to audit and modification by the government at its sole discretion, which subject us to additional risks. These risks include the ability of the U.S. government to unilaterally:

·

suspend or prevent us for a set period of time from receiving new contracts or extending existing contracts based on violations or suspected violations of laws or regulations;

·

terminate our future contracts;

·

reduce the scope and value of our future contracts;

·

audit and object to our contract-related costs and fees, including allocated indirect costs;

·

control and potentially prohibit the export of our products; and

·

change certain terms and conditions in our contracts.

The U.S. government can terminate any of its contracts with us either for its convenience or if we default by failing to perform in accordance with the contract schedule and terms. Termination for convenience provisions generally enable us to recover only our costs incurred or committed, and settlement expenses and profit on the work completed prior to termination. Termination for default provisions do not permit these recoveries and make us liable for excess costs incurred by the U.S. government in procuring undelivered items from another source. Our contracts with foreign governments may contain similar provisions.   In the event we enter into one or more government contracts for PinPoint, the government’s termination of any such contracts for our PinPoint product under development would harm our business.

In addition, U.S. government contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds annually for a given program on a September 30 fiscal year-end basis, even though contract performance may take years. Consequently, our future contracts with the TSA may only be partially funded at the outset, and additional monies are normally committed to the contract by the TSA only as appropriations are made by Congress for future periods. The government’s failure to fully fund one or more of the contracts for our PinPoint product under development would harm our business.

Because we expect to contract with the U.S. government, we will be subject to periodic audits and reviews. Based on the results of its audits, the U.S. government may adjust our contract-related costs and fees, including allocated indirect costs. In the future, government audits and reviews could result in adjustments to our revenues and cause other adverse effects, particularly to our relationship with the TSA. In addition, under U.S. government purchasing regulations, some of our costs, including most financing costs, amortization of intangible assets, portions of our research and development costs, and some marketing expenses may not be reimbursable or allowed in our negotiation of fixed-price contracts. Further, because we expect to contract with the U.S. government, we will be subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities to which pu rely private sector companies are not.

In addition, public agency contracts are frequently awarded only after formal competitive bidding processes, which are often protracted and typically contain provisions that permit cancellation in the event that funds are unavailable to the public agency. We may not be awarded any of the contracts for which we submit a bid. Even if we are awarded contracts, substantial delays or cancellations of purchases could result from protests initiated by losing bidders.

Our growth depends on our introduction of new products and services, which may be costly to develop and may not achieve market acceptance.

As part of our strategy for growth, we intend to develop products to address additional transportation security scanning opportunities, such as passenger, carry-on baggage and air cargo screening. We also intend to address homeland security requirements beyond aviation, such as screening at border checkpoints, government offices and transportation terminals and ports. We will be required to spend funds to develop or acquire technologies and products for these initiatives, and these initiatives may divert our development and management resources away from our core PinPoint product. In addition, we have acquired, rather than developed internally, some of our technologies in connection with our acquisitions of companies and businesses, and these technologies may not perform as we expect. The development of new products may require greater time and financial resources than we currently anticipate and, despite significant investments in rese arch and development, may not yield commercially successful products.

The development of our products for explosives and weapons detection is highly complex. Successful product development and market acceptance of any new products and services that we develop depends on a number of factors, including:

·

our timely completion and introduction of new products;

·

our accurate prediction of the demand for homeland security products and the changing requirements of the homeland security industry, including certification or other required performance standards;

·

the availability of key components of our products;

·

the quality, price and operating performance of our products and those of our competitors;

·

our customer service capabilities and responsiveness; and

·

the success of our relationships with potential customers.

Our PinPoint product may fail to obtain certification by the TSA.

New products for transportation security scanning applications may require certification or approval by the TSA, and we believe that the TSA does not currently have standards for the certification of transportation security scanning products other than bulk explosives detection systems and explosives trace detectors, or ETD. Other products, such as metal detectors, are subject to TSA testing prior to approval. Market acceptance of new products may be limited if the TSA has not

developed standards for certification or approval of such products, and even if it does develop such standards, we may be unable to obtain any such certification or approval, which could materially limit market acceptance of such products. If we fail to timely introduce new products or if these products fail to gain market acceptance, our results of operations would be harmed.

In addition, even if successful in the United States, new products that we develop may not achieve market acceptance outside of the United States. Foreign governments may be unwilling to commit financial resources to purchase our new products, which would reduce our potential revenues and harm our business.

Our existing PinPoint product may fail to obtain re-certification by the TSA for changes in the PinPoint system.

Our existing PinPoint product can be required to be re-certified by the TSA. This can happen when a critical component is changed, or we wish to make other changes to the PinPoint systems. When this happens, the affected PinPoint model requires re-certification by the TSA. The failure or delay in gaining re-certification for an existing PinPoint product could harm our ability to continue to sell the product and recognize associated revenues.

Our major potential customer, the TSA, is a part of the Department of Homeland Security, a newly created agency that has experienced, and may continue to experience, delays in its operations, which may cause delays in our receiving orders for our products from the TSA.

The TSA is a relatively new agency that was created in November 2001 by the Transportation Security Act. As a result, it has experienced, and may continue to experience, delays in fulfilling its mandate as a result of delays in establishing the necessary infrastructure to operate in an efficient manner. This may result in delays in our receiving orders for our PinPoint product. Further, the TSA is now a part of the Department of Homeland Security, which was created subsequent to the creation of the TSA and is therefore in an earlier stage of formation, which may further create delays in our receiving orders as this agency is organized.

Future sales of our PinPoint products will depend on the ability of airports to secure funding to build baggage handling systems and to integrate our PinPoint product into such systems, which they may not be able to do.

Future sales will depend on integrating PinPoint into existing baggage and luggage handling systems within airports. If an airport is not configured for these systems, deployment of our PinPoint products may require changes in the airport infrastructure. If our PinPoint product cannot easily be integrated into existing baggage handling systems, we may experience reduced sales of our PinPoint products or these sales may be delayed. There can be no assurance that the government will continue to fund installations, integrations and reimbursements at the current level or at all. If there is a reduction in funding, we may experience reduced sales of our PinPoint products or these sales may be delayed.

We believe that a substantial opportunity exists for our PinPoint system to be integrated into baggage handling systems. If airports determine, in conjunction with governmental authorities, that they will be unable or unwilling to modify or finance baggage handling systems, this opportunity may be limited.

If our PinPoint product fails to detect explosives, we could be exposed to product liability and related claims for which we may not have adequate insurance coverage, and we may lose current and potential customers.

Our transportation security scanning business exposes us to potential product liability risks, which are inherent in the development, sale and maintenance of transportation security scanning products. Our software is not designed to detect, and FAA/TSA certification does not require, 100% detection of any and all explosives contained in scanned baggage. For this reason, or if our products malfunction, it is possible that explosive material could pass undetected utilizing our product, which could lead to product liability claims. There are also many other factors beyond our control that could lead to liability claims, such as the reliability and competence of the customer’s operators and the training of the operators.  Such liability claims are likely to exceed any product liability insurance that we may have obtained.

In addition, the failure of any PinPoint product to detect explosives, even if due to operator error and not to the mechanical failure of a PinPoint product, could result in public and customer perception that our products do not work effectively, which may cause potential customers to not place orders and current customers to cancel orders already placed or to not place additional orders, any of which would harm our business and financial results.

We expect to substantially depend on large orders from a limited number of customers. As a result, order cancellations from any of our customers or the failure of these customers to continue to purchase PinPoint products could have a material negative impact on our business and financial results.

In any given fiscal quarter or year, our revenues will be derived from orders of multiple units of our PinPoint product from a limited number of customers. The failure of these customers, particularly the U.S. government, to purchase our PinPoint products or the cancellation of future orders would harm our business.

The sales cycle for our PinPoint products is lengthy and we may expend a significant amount of effort in obtaining sales orders and not receive them.

The sales cycle of our PinPoint product is expected to be lengthy due to the protracted approval process that typically accompanies large capital expenditures and the time required to install our PinPoint product. In addition, in the United States, the creation of the TSA and formation of a Department of Homeland Security, as well as budgetary debates in Congress, may result in additional delays in the purchase of our PinPoint products. During the sales cycle we may expend substantial funds and management resources but recognize no associated revenue.

Our future international sales subject us to risks that could materially harm our business.

It is part of our growth strategy to establish international sales. A number of factors related to our international sales and operations could adversely affect our business, including:

·

changes in domestic and foreign regulatory requirements;

·

political instability in the countries where we sell products;

·

possible foreign currency controls;

·

fluctuations in currency exchange rates;

·

our ability to protect and utilize our intellectual property in foreign jurisdictions;

·

tariffs, embargoes or other barriers;

·

difficulties in staffing and managing foreign operations;

·

difficulties in obtaining and managing distributors; and

·

potentially negative tax consequences.

Our failure to obtain the requisite licenses, meet registration standards or comply with other government export regulations, may affect our ability to generate revenues from the sale of our products outside the United States, which could harm our business. In particular, our PinPoint product may be deemed regulated and subject to export restrictions under the U.S. Department of State regulations. Consequently, these regulations may make the product more difficult to sell to a number of countries. Compliance with government regulations may also subject us to additional fees and costs. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position.

Exchange rate fluctuations could cause a decline in our financial condition and results of operations.

In 2007, the cost of certain international currencies has increased due to fluctuations in the exchange rate of the U.S. dollar against the Euro or other currencies.  Future fluctuations in this exchange rate or other currencies could adversely affect our results in the event we make foreign sales of our products.  From time to time, as and when we determine it is

appropriate and advisable to do so, we will seek to mitigate the effect of exchange rate fluctuations through the use of derivative financial instruments. We cannot assure you, however, that we will continue this practice or be successful in these efforts.

Our inability to adapt to rapid technological change could impair our ability to remain competitive.

The transportation security scanning industry may undergo significant technological development in response to increased demand for transportation security scanning products. A fundamental shift in technology in our product markets could harm our ability to generate revenues from sales of PinPoint product and services.

We anticipate that we will incur expenses in the design and initial development and marketing of new products and services. Our competitors may implement new technologies before we are able to, allowing them to provide more effective products at more competitive prices. Future technological developments could:

·

adversely impact our competitive position;

·

require write-downs of obsolete technology;

·

require us to discontinue production of obsolete products before we can recover any or all of our related research, development and commercialization expenses; or

·

require significant capital expenditures beyond those currently contemplated.

We cannot assure investors that we will be able to achieve the technological advances to remain competitive and profitable, that new products and services will be developed and developed on schedule or on a cost-effective basis that anticipated markets will exist or develop for new products or services, or that our existing product and services will not become technologically obsolete.

The transportation security scanning industry is highly competitive. Given the anticipated continuing demand for airport security products, competition may increase.

The transportation security scanning industry is intensely competitive and we may not compete successfully. As a result of increased demand for security systems, additional companies may enter the industry. Some of our competitors, and many of the potential new entrants into the transportation security scanning  industry, have financial, technical, production and other resources substantially greater than ours. We believe that some of our competitors have products undergoing TSA certification. Our failure to compete successfully could result in lost sales and could hamper our financial results.

We are reliant upon third party distributors for the distribution and licensing of our PinPoint or Signature Mapping products in several domestic or foreign jurisdictions and have reduced our reliance upon our own internal sales force.

During the latter half of 2006, we decided to reduce our own internal sales force and to establish a network of distributors, sales representatives and consultants to assist us in the distribution and licensing of our products domestically and in certain foreign countries, including those business relationship established during 2007.  Such distributors, sales representatives and consultants have not affected any sales of our PinPoint, Signature Mapping, or Flow Point products to date and we have no assurance they will be able to affect any such sales in the future.  We continue to review sales performance under certain of such arrangements and, as our agreements with such third parties expire, we may determine not to renew or we may terminate such agreements.

Litigation may be necessary to enforce or defend against claims of intellectual property infringement, which could be expensive and, if we lose, could prevent us from selling our products.  

Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Any litigation, regardless of the outcome, could be costly and require significant time and attention of key members of our management and technical personnel.

Our domestic and international competitors, many of whom have substantially greater resources and have made substantial investments in competing technologies, may have patents that will prevent, limit or interfere with our ability to manufacture and sell our products. We have not conducted an independent review of patents issued to third parties. Because of the perceived market opportunity we face, companies possessing technology rights that they believe we might be infringing will now be much more motivated to assert infringement of their rights. These third parties may assert infringement or invalidity claims against us and litigation may be necessary to defend against these claims. An adverse outcome in the defense of a patent suit could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease selling our products. Even successful defenses of patent suits can be costly and time-consuming.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

Not applicable to Registrant as Registrant is not an “accelerated filer” or “large accelerated filer” as such terms are defined in Rule 12b-2 under the Exchange Act.

ITEM 2.     PROPERTIES

We lease approximately 15,253 square feet of space for our offices and other facilities in Herndon, Virginia, pursuant to a commercial lease dated January 11, 2005.  The term of the lease is 63 months commencing February 1, 2005, subject to the right to extend for an additional five years.  The rent for our facility in 2008 is expected to be approximately $267,291 and will be subject to annual rental escalation of 2.5%.  We believe that our facilities will be adequate for our needs for the next 12 months.

ITEM 3.     LEGAL PROCEEDINGS

None.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is quoted on the OTC Bulletin Board under the symbol “GDTI.” The following table sets forth the high and low bid prices for each quarter during 2007 and 2006.

Fiscal Year Ended December 31, 2007:	High	Low
First Quarter	$1.40	$0.72
Second Quarter	$1.15	$0.74
Third Quarter	$1.60	$0.70
Fourth Quarter	$0.88	$0.47
Fiscal Year Ended December 31, 2006:
First Quarter	$2.76	$2.20
Second Quarter	$2.10	$1.69
Third Quarter	$2.72	$1.40
Fourth Quarter	$1.79	$0.66

These quotations reflect interdealer prices, without retail markup, markdown, or commission and may not represent actual transactions.  As of April 2, 2008, there were approximately 387 of holders of record of our common stock.  This amount does not include beneficial owners of our common stock held in “street name.”  Signature Stock Transfer, Inc., Dallas, Texas, is our stock transfer and warrant agent.

Dividends

We have never declared or paid cash dividends on our common stock.  Currently, we intend to retain earnings, if any, to support our growth strategies and do not anticipate paying cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table sets forth, as of December 31, 2007, information with regard to equity compensation plans (including individual compensation arrangements) under which our securities are authorized for issuance.

Plan Category	Number of Securities to be issued upon exercise of outstanding options (a)	Weighted-average exercise price of outstanding options	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by stockholders	7,240,654	$1.31	21,121,346
Equity compensation plans not approved by stockholders	0	0	0
Total	7,240,654	$1.31	21,121,346

RECENT SALES OF UNREGISTERED SECURITIES

During October through December 2007, in accordance with the terms of the Company’s outstanding Series A Debentures, certain debenture holders converted approximately $475,000 in principal amount of such debentures into an aggregate of 683,649 shares of common stock.

All other such transactions have been previously reported in the Company’s periodic reports on Form 8-K through the date of the filing of this report.

ITEM 6.     SELECTED FINANCIAL DATA

The selected financial data set forth below for Guardian as of December 31, 2007 and 2006, and for each of the three years in the period ended December 31, 2007, are derived from the audited financial statements and related notes included in this report.  Balance Sheet data as of December 31, 2005 is derived from audited financial statements not included in this report.  Historical results are not necessarily indicative of the results of operations for future periods.  The data set forth below is qualified in its entirety by and should be read in conjunction with Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements set forth in full elsewhere in this report.

	Year Ended December 31
	2007	2006	2005
Statement of Earnings Data:
Revenue	$ 289,591	$ 488,111	$ 432,186
Operating Loss	(8,845,917)	(8,775,282)	(13,179,155)
Net Loss	(10,509,746)	(10,093,879)	(13,147,446)
Other Items (included in the above):
Depreciation and Amortization	394,609	601,911	549,777
Stock-based Compensation Expense (1)	2,087,779	862,044	5,323,992
Asset Impairment Expense (2)	1,125,122	-	-
Non-Cash Interest Expense (3)	3,091,361	1,233,473	-
Fair value of warrants issued - derivative instruments (4)	3,040,562	-	-
Revaluation of derivative instruments (income) (5)	(4,850,072)	-	-
Per Share Data:
Basis and Diluted Loss Per Share	$ (0.28)	$ (0.30)	$ (0.43)
Cash Flow Data:
Net cash provided (used) in operating activities	$ (5,522,463)	$ (6,527,312)	$ (7,392,248)
Net cash provided (used) in investing activities	(51,566)	(275,643)	(702,697)
Net cash provided by financing activities	4,942,688	5,098,208	9,622,501
Effect of exchange rates on cash and cash equivalents	(4,946)	777	(12,162)
Balance Sheet Data:
Cash and Cash Equivalents	$ 101,136	$ 737,423	$ 2,441,393
Total Assets	1,393,608	3,710,213	5,460,961
Total Liabilities	8,558,944	6,364,180	841,610
Common Shares Subject to Repurchase	178,311	345,333	1,306,390
Stockholders' Equity (Deficit)	(7,343,647)	(2,999,300)	3,312,931
(1) Stock-based compensation expense represents the estimated fair value of stock-based compensation to employees and consultants in lieu of cash compensation.
(2) Asset impairment expense for the year ended December 31, 2007, represents the write-off of Wise Systems Limited unamortized portion of certain intellectual property (IP) of $998,247 and Goodwill of $126,875.
(3) Represents non-cash interest expense and note discounts associated with convertible bridge notes issued in December 2003, August/September 2006, November 2006 and April 2007, and amortization of deferred financing costs from the November 2006 and April 2007 convertible notes.
(4) Represents non-cash expense for issuance of warrants measured at fair value, and consideration of Emerging Issues Task Force Issue 00-19 (EITF 00-19), *Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company*s Own Stock.*
(5) Represents $4,204,431 of non-cash income from the revaluation of convertible debentures and related warrants issued in November 2006 and April 2007, and other warrants issued since November 2006. Reflects the conclusion that convertible note contracts should be analyzed under the provisions of SFAS 133, *Accounting for Derivative Instruments and Hedging Activities,* and the embedded derivative features should be bifurcated and separately measured at fair value.  We also considered Emerging Issues Task Force Issue 00-19 (EITF 00-19), *Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company*s Own Stock.*  Also includes $645,641 representing a contingency due to a default provision of the convertible debentures and in considering FASB No. 5, "Account ing for Contingencies"

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS

General

You should read the following summary together with the more detailed information and consolidated financial statements and notes thereto and schedules appearing elsewhere in this report.  Throughout this report when we refer to the “Company,” “Guardian,” “we,” “our” or “us,” we mean Guardian Technologies International, Inc.

This discussion and analysis of our financial condition and results of operations is based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition,

intangible assets, and contingencies.  We base our estimates on historical experience, where available, and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions and conditions.

Except for historical information, the material contained in this Management’s Discussion and Analysis is forward-looking.  Our actual results could differ materially from the results discussed in the forward-looking statements, which include certain risks and uncertainties.  These risks and uncertainties include the rate of market development and acceptance of our “intelligent imaging informatics” (“3i”) technology (particularly for our PinPoint product), the unpredictability of our sales cycle, the limited revenues and significant operating losses generated to date, and the possibility of significant ongoing capital requirements.

Our independent registered public accounting firm’s report on the consolidated financial statements included herein as of December 31, 2007 and December 31, 2006, and for each of the three years in the period ended December 31, 2007, contains an explanatory paragraph wherein they express an opinion that there is substantial doubt about our ability to continue as a going concern.

Overview

Guardian Technologies International, Inc. was incorporated in the State of Delaware in February 1996. Please refer to Item 1A - Risk Factors, above for certain risks related to us and our businesses.

Guardian is a technology company that designs and develops imaging informatics solutions for delivery to its target markets:  aviation/homeland security and healthcare.  The Company utilizes imaging technologies and analytics to create integrated information management technology products and services that address critical problems in healthcare and homeland security for corporations and governmental agencies.  Each product and service can improve the quality and response time of decision-making, organizational productivity, and efficiency within the enterprise.  Our product suite integrates, streamlines, and distributes business and clinical information and images across the enterprise.

Guardian’s core technology is an “intelligent imaging informatics” (“3i”) engine that is capable of extracting embedded knowledge from digital images, and has the capacity to analyze and detect image anomalies. The technology is not limited by type of digital format.  It can be deployed across divergent digital sources such as still images, x-ray images, video and hyper-spectral imagery. To date, the technology has been tested in the area of threat detection for baggage scanning at airports and for bomb squad applications. Varying degrees of research and development have been conducted in the areas of detection for cargo scanning, people scanning, military target acquisition in a hyper-spectral environment, and satellite remote sensing ground surveys.  Product development in these areas is ongoing, and while there can be no assurance, we believe that the technology should produce results equal to or gr eater than those currently achieved in baggage scanning.

Currently, we are focused on providing technology solutions and services in two primary markets, healthcare and aviation/homeland security.  However, as new or enhanced solutions are developed, we expect to expand into other markets such as military and defense utilizing hyper-spectral technology, and imaging diagnostics for the medical industry.  We may also engage in one or more acquisitions of businesses that are complementary to our business.  Further, we may form wholly-owned subsidiaries to operate within defined vertical markets.

We offer two principal “intelligent imaging informatics” (“3i”) products, and a third product, FlowPoint, on a limited and reducing basis:

Aviation/Homeland Security Technology Solution – PinPoint

The PinPoint™ product is an “intelligent imaging informatics” (3i™) technology for the detection of guns, explosives, and other threat items contained in baggage in the airport environment or for building security applications.  PinPoint can identify threat items, notify screeners of the existence of threat items, and speed the security process by eliminating unnecessary baggage checks, provide the screener with an instantaneous second opinion, and reduce processing time spent on false positives (baggage selected for security review that contains no threat items).  We market and seek to license the PinPoint™ product primarily to the United States Transportation Services Administration (TSA) for use in airports, the Federal

Protection Services for use in federal buildings and to foreign governments and airport authorities. We compete with manufacturers of baggage screening, luggage and large parcel screening, people screening for weapons and explosive detection, container and vehicle screening, and cargo screening equipment and certain software companies and academic institutions that are developing solutions to detect threat items.  It is also our intent to distribute the product through these manufacturers.

As the global “Homeland Security” marketplace continues to supply more effective next generation terror mitigation technologies, a much greater amount of funding will flow to procurement of technologies and less for labor. Homeland Security Research Corp.’s analysis, the “2006 – 2015 Homeland Security & Homeland Defense Global Market” forecasts that this trend is expected to lead to a tripling of the global Homeland Security market ($60B in 2006 to $180B in 2015), while the global Homeland Security expenditures (the total amount of money allocated) is expected to double.

Information regarding the amount of the TSA’s annual budget allocated for the purchase of software solutions that are able to detect threat items at US airports and other similar facilities, such as PinPoint™, is not readily discernible from publicly available information or independent research reports. However, we estimate, based upon information derived from the FY 2006 and requested FY 2007 United States Department of Homeland Security (DHS) budget, that the DHS budget allocation for FY 2006 for software solutions that are able to detect threat items at U.S. airports and other facilities, such as PinPoint™, was approximately .77% of the DHS’ $41.1B budget, and that the budget allocation for the proposed FY 2007 DHS budget will be approximately 2.25%.  In addition, we estimate that the worldwide market for solutions such as PinPoint™ is approximately twice the United States’ Homeland Security bu dget.

The market for contraband detection systems is anticipated to become intensely competitive and many of our competitors are better capitalized and have greater marketing and other resources than Guardian.  PinPoint™ continues to be developed to address the market for contraband detection. The extended alpha version working model of PinPoint™ has been tested successfully at live carry-on baggage checkpoints in three international airports from the fourth quarter of 2005 through the date of this report. Integration within currently deployed manufacturers’ scanning equipment is a requisite to anticipated sales, and is considered a significant development risk. PinPoint is available for sale to customers; however no sales are anticipated until we are able to seamlessly integrate with the manufacturers’ scanning equipment. Towards that end, we signed a Strategic Alliance and Joint Development Agreement with C ontrol Screening (d.b.a. AutoClear), and are integrating our PinPoint technology with their threat detection hardware (AutoClear 6040 baggage scanner and multi-view AT prototype scanner).

Currently, there are limited standards within the aviation security marketplace for the testing and validation of software technology solutions. The marketplace places a premium on the newest innovations in hardware technology, but fails to grasp how a threat detection software solution could possibly succeed.  Because of that misconception, the marketplace currently has limited standards for the certification of aviation security products other than bulk explosives detection systems and explosives trace detectors, or ETD, which have been developed around chemical analysis and not image analysis.  Our challenge with the PinPoint™ product is to assist in the establishment of the testing and certification standards, to validate through independent parties the efficacy of PinPoint™ as an automated threat detection solution, and to convince the appropriate governmental authorities to commit financial resources to purch ase PinPoint™.

Our initial action to meet the challenge was the execution of a Teaming Agreement with Lockheed Martin Systems Integration, which was executed in December 2004, and expired in December of 2007.  We did not pursue a renewal of the teaming agreement as we have developed direct relationships with the United States Department of Homeland Security Science and Technology Directorate and the Transportation Security Labs (TSL), and other relationships as outlined below.  However, through our joint efforts, we have been able to establish the necessary testing standards and methods; we have made material strides in the development of PinPoint™, the accumulation of a large database of threat and non-threat images, and in the documentation of testing procedures and results.

On February 12, 2008, we extended for a twelve month period (through February 18, 2009) the Cooperative Research and Development Agreement (CRDA) that was initially signed on August 18, 2006, and previously renewed on August 8, 2007, with the United States Department of Homeland Security Science and Technology Directorate, for testing and validation of the PinPoint™ product capabilities at the Transportation Security Labs (TSL).  This is the second of two extensions received by the States Department of Homeland Security Science and Technology Directorate, for testing and validation of the PinPoint™ product. The project began on September 5, 2006 for explosive image collection, which is being

followed by refinement of the development and testing of PinPoint™.  Also, through the date of this filing, the Company has completed the third phase of the CRDA process with the US Department of Homeland Security.  While TSA certification is not absolutely essential to the acceptance of Guardian’s PinPoint™ product, we believe that having TSA certification and a business relationship with the TSA is important to our strategic growth plans, as the relationship represents an important opportunity to obtain contracts for the licensing of our baggage scanning applications and for future aviation and transportation security applications and solutions that we develop or enhance. However, significant development risks still exist for adapting the PinPoint product to various types of scanning equipment in different countries.

As of the date of this filing, the Company has applied for twelve export licenses for our PinPoint™ product and was granted those licenses by the United States Department of Commerce.  An export license granted in March 2007, positioned Guardian for the final phase of the Russian Federation certification process.  As a result, in June 2007, the Company completed the necessary laboratory study by an accredited Russian laboratory, which in October 2007, provided a full report to the Russian Federation representing the final step in the certification process.  We now await the Russian Federation’s approval of our application as the final step in the certification process.  Also, in June 2007, the Company received an order for one license of the PinPoint™ product to be used by the National Bodyguard Association of Russia (NAST), which currently provides training to security screeners for the Russian Fede ration, will train its employees and demonstrate PinPoint’s™ capabilities to potential customers in Russia, Southeast Asia, the Middle East, and the Commonwealth of Independent States.  The export license to sell PinPoint™ to NAST was approved by the US Department of Commerce on September 12, 2007.  In March 2008, we received two export licenses for demonstration purposes, as we pursue opportunities in Saudi Arabia and India.  Such opportunities were at the two countries’ request.

In January, 2007, the Company performed an initial successful Proof of Concept test in Madrid, Spain.  Working with TEDAX, the national bomb technicians’ organization of the Spanish Government, the Company returned to Madrid on October 8, 2007 and collected images of various configurations, artful concealments, and threat weights of specific explosives of interest to the Spanish Government.  Upon the development and integration of these specific detection algorithms, the Company awaits confirmation for a return to Madrid for a final live test of PinPoint™ that is currently expected to be in the spring of 2008.

We are also pursuing an additional market opportunity using our 3i™ platform technology, adding to our detection family of products.  PinPoint nSight™ provides visualization enhancements that allow bomb technicians and investigators to assess the presence of explosives more rapidly and accurately using single-energy x-ray scanners.  The technology adds textural and color components to such images, helping bomb investigation technicians detect threats that would otherwise be unseen by the human eye. The PinPoint nSight™ product is currently being evaluated at the Federal Bureau of Investigation (FBI) Hazardous Device School at Redstone Arsenal, Alabama.  In May 2006, we entered into a Reseller Agreement with Logos Imaging LLC (Logos), a manufacturer of portable bomb scanning equipment, with regard to the distribution of PinPoint nSight™.  During fiscal 2007, we sold Logos 10 licenses of our thr eat assessment software technology for bomb detection scanners, PinPoint nSight™. We are also continuing to develop other distributor relationships in an effort to increase market penetration our nSight ™ product.

Management believes that international market acceptance of PinPoint™ as a viable threat detection solution will not only enhance our ability to sell worldwide, but it will open additional opportunities for the development of PinPoint™ as the “intelligent image” analysis solution for areas such as military target acquisition, satellite remote sensing, and additional opportunities within aviation security such as people portals and cargo scanning.  Additionally, we will seek support of the U.S. Congress and the equipment manufacturers through lobbying and other efforts.  We remain focused on the ongoing development of PinPoint™, particularly with respect to field test results.  This focus must be even sharper as we enter the pilot test arena where the duration of the pilot test, the conditions under which the pilot test is conducted, and the definition of success and failure will vary country-by - -country. Market acceptance is a key to our future success.

Healthcare 3i Technology Solution – “Tissue Characterization” advancing Medical Computer Aided Detection (Medical CAD)

In an effort to expand upon the use of our core technology 3i™ “intelligent imaging informatics,” we have been migrating and adopting our threat detection algorithms and quantitative imaging capabilities for use in the imaging field of diagnostic radiology.  The technology for this developmental project is called Signature Mapping™.  Our Signature Mapping™ technology is in development and, currently, we do not have a product that we may market and sell in the U.S. medical market.  Furthermore, any Signature Mapping™ product we do develop will be subject to Food and Drug

Administration (“FDA”) review and approval, including with regard to its safety and effectiveness, before we may begin marketing and selling any such product in the U.S. Such approval may require us to obtain extensive data from clinical studies to demonstrate such safety or effectiveness.  Also, we may be subject to similar regulatory requirements in any foreign country in which we seek to market and sell our CAD products.  There can be no assurance we will be successful in obtaining any such approval from the FDA and such approval may take approximately two years to obtain.

The challenge for modern radiology is to improve the quality of clinical care while simultaneously reducing costs and improving patient outcomes.  To accomplish this goal, radiology has greatly expanded its use of various imaging modalities to include Nuclear Medicine, Ultrasound, Computer Tomography (“CT”), Magnetic Resonance Imaging (“MRI”), Positron Emission Tomography, and Digital Radiography (X-ray”).

While significant improvements in diagnostic radiology have occurred using these imaging modalities, the same degree of technological advancements has not been available to help radiologists accurately interpret and quantify the rapidly expanding number and diversity of imaging cases generated each day, coupled with the level difficulty, prone to interpretation subjectivities, misreads, and enormous patient loads and time constraints radiologists face each day.  Studies and other literature indicate that radiologists are about 80% accurate at best in reading screening x-ray breast examinations - 75% accurate for women in their 40s. Certain studies have found that lesions are simply not detected 10 to 15% of the time.  Such knowledge has resulted in a tendency towards additional procedures, such as biopsies which sometimes prove unnecessary.

While traditional computer-aided detection (“CAD”) assists radiologists by marking anomalies without providing additional visualization or analytical tools, CAD applications have certain characteristics that limit their capabilities. CAD results are associated with high false positive rates. The pattern recognition algorithms employed by CAD restrict their functionality to searching for a specific disease within a specific imaging modality. Guardian is developing a new approach for medical image analysis called Signature Mapping™.  It is the first image-analysis-based technology that is expected to be capable of “characterizing tissues” across a broad range of digital imaging modalities. The software has been designed to work seamlessly with Digital Imaging and Communication in Medicine (“DICOM”) images generated from any existing imaging modality.  It can be integrated into a PACS network, a stand-alone digital imaging modality, a diagnostic workstation or a clinical review workstation.

Similar to a person’s fingerprint, each tissue has a unique structure. Each structure creates a unique pattern or “signature” that can be extracted from an image to differentiate, locate, identify, and classify by using our Signature Mapping™ technology.  Signature Mapping™ is expected to further help radiologists by visualizing the various structures within a particular tissue so they can be examined and quantified. This capability is expected to provide a next-generation image analysis, clarification, visualization and Signature Mapped “tissue characterization” and detection.  Management believes that it will add significant clinical value to a wide range of difficult to detect diseases in diagnostic radiology by distinguishing and characterizing different tissue types in images regardless of the modality that generated the image.

Based on its unique properties, Signature Mapping is expected to be capable of being used to analyze images generated across all imaging modalities without the need for new image capture hardware costs.  It will serve instead as a software-based, multi-modality approach to image analysis combined with Signature Mapping’s unique “tissue characterization” and detection. As a result, Signature Mapping is expected to be able to differentiate the contrast resolution between different tissue types, even when the material or tissue in the image is very diffuse or obscured by other objects, such as is the case where diseased lung tissue is located behind a rib in an x-ray chest examination. It is capable of displaying these ‘signatures’ in a way that empowers radiologists to make a more informed and confident diagnosis, even for hard to distinguish s tructures such as masses in dense breast tissue.

Rather than solely analyzing the pixel values in an original image, the Signature Mapping process applies a series of proprietary algorithms to iteratively impact the image and cause pixels associated with each material or tissue type to react collectively producing a unique signature.

Multiple iterations of the Signature Mapping process can be employed to process a single image. An initial phase is used to isolate specific tissues (segmentation), while additional processes discriminate structures within the tissue.  For example, a first process may be used to locate and isolate the prostate in an MRI scan while a second process may reveal a signature indicating the presence of a tumor within the prostate.

Signature Mapping appears to provide advantages for providing the knowledge for automatic detection.  The development of a “tissue characterization” and detection model employs the use of supervised machine learning and contextual image analysis to analyze and classify the features associated with the newly created “signatures.”  The fusion of these three technologies is known as Guardian’s Intelligent Imaging Informatics 3i™. Unlike other pattern recognition methodologies, the 3i solution can reveal and differentiate inherent structures for all materials in an image regardless of:

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The imaging modality used to create the image,

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Location within the image,

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Shape or texture, and

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Object orientation even if obscured by its relationship to other materials.

Clinical Experience and Medical Accomplishments

While Signature Mapping is expected to be capable of use in a wide range of medical image analysis applications, our initial application product development efforts are focused in three areas:

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Breast imaging using x-ray mammography, MRI and ultrasound.

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Neurological imaging through the detection and quantification of:

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acute intracranial hemorrhage using non-contrast CT,

o

normal pressure hydrocephalus,

o

multiple sclerosis using MRI.

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Chest radiography targeted at tuberculosis and silicosis detection using digital X-ray and sputum samples.

Our research to-date includes five pilot programs and studies conducted under the direction of the Image Processing and Informatics Laboratory at the University of Southern California (USC) using clinical data and images provided by: the Image Processing and Informatics Laboratory at USC, Howard University, and the South Florida Clinical Mammography Data Base.

Competition is expected to be with existing CAD manufactures such as iCAD, Hologic, Medipatten, Confirma, Siemens, or Carestream Health.  We may also partner with one or more of these existing CAD manufacturers, or an emerging company with new technology for the CAD arena.  Once our products are commercially viable, we anticipate marketing and selling our products through original equipment manufacturers (“OEM”), or system integrators.

Healthcare Technology Solution – FlowPoint

Our FlowPoint products consist of a web-enabled Radiology Information System (RIS) and Picture Archiving & Communication System (PACS), which manages radiology workflow, patient information, treatment history, and billing information. It also manages digital images through image viewers, compression technologies, storage, image archiving, image retrieval and transfer.  

Due to the increased efforts and focus in developing our Signature Mapping imaging technology, we have discontinued active marketing of our FlowPoint products, and seek licensing arrangements with other software or hardware providers, who may use our RIS and PACS systems to complement their existing product line.  Accordingly, during January 2008, we entered into the first such licensing arrangement with Rogan-Delft for a perpetual, nonexclusive and nontransferable license to use, modify, create derivative works from, market and sublicense our FlowPoint Radiology Information System (“RIS”) product.

LIQUIDITY AND CAPITAL RESOURCES

The following table presents a summary of our net cash provided by (used in) operating, investing and financing activities:

	Year Ended December 31
Category	2007	2006	2005
Net cash provided (used) in operating activities	$ (5,522,463)	$ (6,527,312)	$ (7,392,248)
Net cash provided (used) in investing activities	(51,566)	(275,643)	(702,697)
Net cash provided by financing activities	4,942,688	5,098,208	9,622,501
Effect of exchange rates on cash and cash equivalents	(4,946)	777	(12,162)
Net increase (decrease) in cash	$ (636,287)	$ (1,703,970)	$ 1,515,394

Net Cash Used in Operations

Net cash used in operating activities for the fiscal year ended December 31, 2007 (Fiscal 2007) was $5,522,463, compared with net cash used in operating activities of $6,527,312 during the same period for 2006 (Fiscal 2006), a decrease in the use of cash for operating activities of approximately $1,004,849 (15.4%).  The decrease is due to: (i) lower revenue and operating costs of $1,717,706 (23.5%), including a decrease in selling, general and administrative costs (other than depreciation and amortization, stock based compensation, and impairment of goodwill) of $2,083,109 (27.5%), a decrease in cost of sales (other than amortization and impairment costs) of $188,332 (89.0%), offset by a reduction in net revenue of $198,520 (40.7%), and an increase in net other interest expense (other than noncash items) of $286,901 (346.2%); and (ii) offset by net increases in the components of operating assets and liabilities of $712,857, or 91.0 %.

Net cash used in operating activities for the fiscal year ended December 31, 2006 (Fiscal 2006) was $6,527,312, compared with net cash used in operating activities of $7,392,312 during the same period for 2005 (Fiscal 2005), a decrease in the use of cash for operating activities of approximately $864,936 (11.7%).  The decrease in net cash used in operating activities is due to: (i) decrease from a net loss from operations ( other than depreciation and amortization, stock-based compensation, amortization of bridge note discount, and noncash interest expense for the embedded conversion feature) of $36,665 and (ii), offset by net decreases in the components of operating assets and liabilities of $901,601.  

Net Cash Used in Investing Activities

Net cash used in investing activities of $51,566 was for the purchase of equipment and costs incurred for patent applications for Fiscal 2007.  This compares with net cash used for the same activities of $275,643 for the same period for Fiscal 2006, or a decrease of $224,077, or 81.3%.  The net decrease is comprised of a $115,496 (85.0%) decrease in the purchase of furniture, software and equipment, and a decrease of $108,581 (77.7%) for costs associated with the preparation and filing of certain patents with regard to our “3i” technology.  The decrease in equipment purchases is the result of additions made in 2006 for our 2007 requirements, and the decrease in patent costs is due to focus on various patent applications prepared and filed in 2006.  However, we anticipate we will incur additional patent costs during the fiscal year ended December 31, 2008 (Fiscal 2008) related to further protection of our Pi nPoint™ and Signature Mapping™ products.

Net cash used in investing activities for the purchase of equipment, and costs incurred for patent activities for Fiscal 2006 was $275,643.  This compares with net cash used for the same activities of $702,697 for the same period Fiscal 2005, or a decrease in capital projects of $427,054 (60.8%).  The net decrease is comprised of a $401,621 (74.7%) decrease in the purchase of furniture, software and equipment, and a decrease of $25,434 (15.4%) for costs associated with the preparation and filing of certain patents with regard to our “intelligent imaging informatics” (“3i”) technology for PinPoint and Medical CAD applications.

In Fiscal 2005, we used $702,697 for capital projects, comprised of $537,503 for the purchase of furniture, software and equipment, and $165,194 for the development of patents.

Net Cash Provided by Financing Activities

Net proceeds from financing activities were $4,942,688 for Fiscal 2007, compared with $5,098,208 for the same period in Fiscal 2006, a decrease of $155,520 (3.1%).  Of the $4,942,688 proceeds from financing activities, $3,524,941 (71.2%) was from stock-based transactions, including $2,540,000 of new equity financing,  $984,941 for the exercise of options and warrants, $1,517,747 (30.7%) of convertible debt financing net of repayments, and reduced by a repayment of $100,000 (2.0%) of noninterest bearing loans from an executive officer.  Management may seek to raise additional capital through one or more equity or debt financings or bank borrowings and is in discussions with certain investors with regard

thereto.  However, there can be no assurance that the Company will be able to raise such additional equity or debt financing or obtain such bank borrowings on terms satisfactory to the Company.  

Until November 7, 2009, we are prohibited from engaging in any transaction in our securities in which the conversion, exercise or exchange rate or other price of such securities is based upon the trading price of our securities after initial issuance or otherwise subject to reset unless the transaction is (i) approved by purchasers holding at least 67% of the principal amount of our Series A Debentures then outstanding, or (ii) no purchaser then holds more than 20% of the principal amount of the Series A Debentures originally purchased in our Series A Debenture financing.

Proceeds from financing activities in Fiscal 2006 were $5,098,208, compared with cash provided by financing activities of $9,622,501 for Fiscal 2005, a decrease in financing activities of $4,524,293 (47.0%).  Of the $5,098,208 proceeds from financing activities, $1,121,208 (22.0%) was from stock-based transactions, $3,675,000 (72.1%) of convertible debt financing, and $302,000 (5.9%) noninterest bearing loans from an executive officer.  Management is seeking to raise additional capital through one or more equity or debt financings and is in discussions with certain investment banks with regard thereto.  However, there can be no assurance that the Company will be able to raise such additional equity or debt financing on satisfactory terms to us.  Further, until 90 days after the effective date of the registration statement covering the resale of the shares underlying the Debentures and Warrants, we are prohibited from issuing shares of our common stock or common stock equivalents except for an exempt issuance or for the securities contemplated by the securities purchase and other transaction documents.

In Fiscal 2005, we had a net cash inflow from financing activities of $9,622,501.  The funds received for Fiscal 2005, comprised $7,002,941 (72.8%) from private placements of our common stock, $200,000 (2.1%) from the exercise of employee stock options, and $2,419,560 (25.1%) from the exercise of stock warrants.

Cash and Cash Equivalents

Our cash and cash equivalents decreased for Fiscal 2007 by $636,287 (86.3%) to $101,136.  The decrease in cash is the net result of our operating, investing and financing activities outlined above. In summary, the decrease in operating and investing activities were less than the decrease in financing activities.

During Fiscal 2006, our cash and cash equivalents decreased by $1,703,970 to $737,423 or approximately 69.8%.  As discussed above, this decrease was the result of $4,524,293 in lower financing activities during Fiscal 2006 and was offset by a decrease in cash used in operating activities of $851,674, and the reduction of $427,054 for the purchase of equipment.

During Fiscal 2005, the Company’s cash and cash equivalents increased by $1,515,394 to $2,441,393 or approximately 164%.  This increase was the result of $9,622,501 of cash flows received from the private placement of our common stock and warrants, and proceeds from the exercise of stock warrants and employee stock options, offset by the cash used in operating activities and for the purchase of equipment.  We used $7,378,986 in operating activities, and $702,697 for the purchase of equipment and development of patents.

Working Capital Information - The following table presents a summary of our working capital at the end of each fiscal year:

	As of December 31
Category	2007	2006	2005
Cash and cash equivalents	$ 101,136	$ 737,423	$ 2,441,393
Current assets	473,582	947,955	2,938,659
Current liabilities	6,825,988	3,418,773	841,610
Working capital (deficit)	$ (6,352,406)	$ (2,470,818)	$ 2,097,049

At December 31, 2007, we had a working capital deficit of approximately $6,352,406, compared with working capital deficit at December 31, 2006 of $2,470,818, an increase in working capital deficit of approximately $3,881,588 (157.1%). As

of December 31, 2007, the Company had cash and cash equivalents of $101,136 as compared to $737,423 on December 31, 2006.  The decrease in cash is the net result of our operating, investing and financing activities outlined above.  Our revenue generating activities during the period, as in previous years, have not produced sufficient funds for profitable operations, and we have incurred operating losses since inception.  Accordingly, we have continued to utilize the cash raised in our financing activities to fund our operations.  In addition to raising cash through additional financing activities, we may supplement our future working capital needs through the extension of trade payables and increases in accrued expenses.  For Fiscal 2007, overall current liabilities increased $3,407,215 (99.7%), with specific increases in current liabilities of: (i) trade payables of $70,908, (ii) a new convertible promi ssory note of $100,000, (iii) the reclassification to short-terms liabilities of $3,228,205 for the convertible debentures due on November 7, 2008 ($2,228,992 net of discounts) and related outstanding warrants of $1,299,946, (iv) a default contingency provision for the convertible debentures of $645,641, and (v) $780,843 for derivative liabilities related to the convertible debentures.  Decreases in specific current liabilities includes: (i) $23,466 deferred revenue, (ii) repayment of $100,000 towards an outstanding note payable and advances from related parties, (iii) $180,562 in accrued liabilities, (iv) $1,100,000 reduction of bridge note holders ($946,821 net of discounts), with $300,000 converted into shares of common stock and an $800,000 repayment to the bridge holders; (v) $468,266 for reduction in derivative liabilities related to the bridge note holders.  In view of these matters, realization of certain of the assets in the accompanying balance sheet is dependent upon our continued operat ions, which in turn are dependent upon our ability to meet our financial requirements, raise additional financing, and the success of our future operations.

At December 31, 2006, we had a working capital deficit of approximately $2,470,818 compared with working capital of approximately $2,097,049 at December 31, 2005, a decrease in working capital of approximately $4,567,867 (217.8%).  The decrease in working capital is the result of our limited revenue and reduced financing activities.  Our revenue generating activities during the year, as in previous years, have not produced sufficient funds for profitable operations, and we have incurred operating losses since inception.  The increase in current liabilities is due to extending trade payables by $264,831, noninterest bearing loans of $302,000 from our chief executive officer, additional deferral of salaries for executive officers and a consultant of the Company of $659,020, issuing short-term convertible notes for $1,415,087, and lower deferred revenue of $49,633.  Therefore, working capital decreased during the curren t year. In view of these matters, realization of certain of the assets in the accompanying balance sheet is dependent upon our continued operation, which in turn is dependent upon our ability to meet our financial requirements, raise additional financing, and the success of its future operations.

Other Liabilities (short-term convertible notes)

Under a Securities Purchase Agreement, dated November 3, 2006, between the Company and certain institutional accredited investors, the Company sold an aggregate of $5,150,000 in principal amount of our Series A Debentures and Series D Common Stock Purchase Warrants to purchase an aggregate of 4,453,709 shares of our common stock.  The Company issued an aggregate of $2,575,000 in principal amount of Series A Debentures and 4,453,709 Series D Warrants at a first closing held on November 8, 2006 and, due to the conversion feature embedded in the notes and the warrants, the transaction was recognized as a liability under generally accepted accounting principles.  We also issued an aggregate of 623,520 common stock purchase warrants to the placement agent in such financing which were upon terms substantially similar to the Series D Warrants.  Due to milestone-related adjustments, the initial exercise price of $1.15634 may be r eset and the maximum number of shares to be issued under the debentures is indeterminable as of December 31, 2007. The Company issued an additional $2,575,000 in principal amount of the Series A Debentures at a second closing held on April 12, 2007, following the effectiveness of a registration statement registering the shares of our common stock underlying the Series A Debentures and Series D Warrants.  The Company allocated proceeds from the second closing to the embedded conversion features of the Series A Debentures and Series D Warrants and were recognizable as a liability under generally accepted accounting principles.  One-half of the Series D Warrants became exercisable on November 8, 2006 (2,226,854 warrants), and the remaining one-half became exercisable on April 12, 2007 (2,226,855 warrants).  The Series D Warrants and the placement agent’s warrants issued as compensation in the offering to Midtown Partners & Co., LLC, may be exercised via a cashless exercise if certain con ditions are met.  The Company considered Emerging Issues Task Force Issue 00-19 (EITF 00-19), “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” and concluded that there were insufficient shares to share settle the contracts.  The Series D Warrants that became exercisable at the first closing will expire on November 8, 2011, and those related to the second closing will expire in April 12, 2012.  On May 18, 2007, the conversion price of the Series A Debentures and the exercise price of the Series D Warrants held by investors and Placement Agent’s Warrants issued as compensation to Midtown Partners & Co. LLC, were reset to a price of $0.6948 per share effective November 12, 2007, and may be further reset in the event we do not meet certain milestones set forth in the debentures and warrants.  As of December 31, 2007, an aggregate of $1,921,795 in

principal amount of the Series A Debentures have been converted into 2,585,582 shares of common stock, and an aggregate of 864,798 Series D Warrants have been converted into 864,798 shares of common stock.  Accordingly, as of December 31, 2007, $3,228,205 in aggregate principal amount of the Series A Debentures remain unconverted and 3,588,911 Series D Warrants remain unexercised.

The principal amount of the Debentures is due November 7, 2008. We may not prepay any amount of the Debenture without the holder’s consent.  Holders may convert the Debentures at any time into shares of our common stock at the then current conversion price, which as of the balance sheet date is $0.6948 per share. The final reset is for the fiscal quarter ended March 31, 2008, with the calculation taking place five (5) days prior to the date of filing on Form 10-Q for the quarter then ended.  Therefore, we may be required to further re-set the conversion or exercise price of such debentures and warrants and to issue additional shares in the event the price re-set provisions of the Series A Debentures and Series D Warrants are triggered.  The conversion price may be adjusted under anti-dilution and price re-set provisions contained in the Debentures.

The Debentures bear interest at the rate of 10% per annum due on the first day of each calendar quarter, upon conversion or redemption of the Debentures as to the principal amount converted or redeemed, or on the maturity date of the Debentures.  We may elect to pay interest due under the Debentures in cash or registered shares of our common stock.  If we elect to pay the interest due in shares of our common stock, the number of shares to be issued in payment of interest is determined on the basis of 85% of the lesser of the daily volume weighted average price of our common stock as reported by Bloomberg LP (“VWAP”) for the five trading days ending on the date that is immediately prior to (a) date the interest is due or (b) the date such shares are issued and delivered to the holder.  We may pay interest in shares of our common stock only if the equity conditions, described below, have been met during the 20 con secutive trading days prior to the date the interest is due and through the date the shares are issued.

We did not make timely payment of the interest due under our Series A 10% Senior Convertible Debentures on January 1, 2008.  However, the Company has paid all of the interest and late fees due to debenture holders as of April 8, 2008.  The debentures provide that any default in the payment of interest, which default is not cured within five trading days of the receipt of notice of such default or ten trading days after the Company becomes aware of such default, will be deemed an event of default.  If an event of default occurs under the debentures, the debenture holders may elect to require the Company to make immediate repayment of the mandatory default amount, which equals the sum of (i) the greater of either (a) 120% of the outstanding principal amount of the debentures, plus accrued but unpaid interest, or (b) the outstanding principal amount plus accrued but unpaid interest divided by the conversion price on the date the mandatory default amount is either (1) demanded or otherwise due or (2) paid in full, whichever has the lower conversion price, multiplied by the variable weighted average price of the common stock on the date the mandatory default amount is either demanded or otherwise due, whichever has the higher variable weighted average price, and (ii) all other amounts, costs, expenses, and liquidated damages due under the debentures. Also, interest under the debentures accrues at a rate of 18% per annum or the maximum amount allowed under the law and the Company may be subject to a late fee equal to the lesser of 18% per annum or the maximum rate permitted by law.  As of the date of this report, the debenture holders have not made an election requiring immediate repayment of the mandatory amount, although there can be no assurance they will not do so. In anticipation of such an election and measured as of December 31, 2007, the additional amount due is approximately $645,641, and is recorded as an increase t o the carrying value of the debentures.

We may redeem some or all of the Debentures at any time after the effective date of the registration statement covering the shares to be issued upon conversion or exercise of the Debentures or Series D Warrants, if for 20 consecutive trading days the closing price of our common stock exceeds $1.7345 (a “redemption measurement period”).  Upon a redemption, we are required to pay to the holder an amount equal to 110% of the principal amount redeemed as well as any accrued but unpaid interest and liquidated damages.  If we decide to redeem a Debenture, we are required to provide notice to a holder within one trading day of the end of the redemption measurement period and to redeem the Debenture 20 trading days after the date we deliver the notice.  We may only redeem the Debentures if the equity conditions, described below, have been met on each trading day from the date of the notice to the date we redeem the Debe ntures, and the trading volume requirement is met during the redemption measurement period through the date we redeem the shares.   Before a holder receives payment for the redemption from us, the holder may voluntarily convert the Debenture at the then current conversion price.

As discussed above, the payment of interest in shares of our stock, the redemption of the Debentures and the occurrence of certain other events, are subject to a requirement that certain equity conditions (“equity conditions”) have been met, as follows: (i) the registration statement covering the resale of the shares underlying the Debentures and Series D Warrants is effective permitting a holder to utilize the registration statement to resell its shares, (ii) we have honored all conversions and redemptions of a Debenture by the holder, (iii) we have paid all liquidated damages and other amounts due to the holder, (iv) our stock is traded on the OTC Bulletin Board or other securities exchange and all of the shares upon conversion or exercise of the Debentures and Series D Warrants are listed for trading, (v) we have sufficient authorized but unreserved shares of our common stock to cover the issuance of the shares upon conversion or exercise of the Debentures and Series D Warrants, (vi) there is no event of default under the Debentures, (vii) the issuance of the shares would not violate a holder’s 4.99% or 9.99% ownership restriction cap, (viii) we have not made a public announcement of a pending merger, sale of all of our assets or similar transaction or a transaction in which a greater than 50% change in control of Guardian may occur and the transaction has not been consummated, (ix) the holder is not in possession of material public information regarding us, and (x) the daily trading volume of our shares for 20 consecutive trading days prior to the applicable date exceeds 100,000 shares.

The Debentures contain a limitation on the amount of Debenture that may be converted at any one time in the event the holder owns beneficially more than 4.99% of our common stock without regard to the number of shares underlying the unconverted portion of the Debenture.  This limitation may be waived upon 61 days’ notice to us by the holder of the Debenture permitting the holder to change such limitation to 9.99%.

We have agreed to compensate a holder of a Debenture in the event our transfer agent fails to deliver shares upon conversion of the Debentures within three trading days of the date of conversion, and the holder’s broker is required to purchase shares of our common stock in satisfaction of a sale by a holder.  If certain events of default occur under the Debentures, holders could accelerate the due date of the interest and principal due under the Debentures, and we may become obligated to pay all costs, expenses and liquidated damages due under the Debenture plus an amount equal to the greater of (i) 120% of the principal and interest due under the Debenture and (ii) the outstanding principal amount of the Debenture and accrued interest divided by the conversion price on the date the amount is due or paid, whichever is higher, multiplied by the VWAP for our shares on the date of demand or payment, whichever is higher.

The principal amount of Debentures issued carry a bring down of representations and warranties, that there shall have been no material adverse effect regarding our financial condition, the legality or validity of our agreements with investors or our ability to perform our obligations under our agreements with investors, that trading in our common stock shall not have been suspended by the SEC or the OTC Bulletin Board, that trading in securities as generally reported by Bloomberg LP shall not have been suspended or limited, that no banking moratorium shall have been declared by either the United States or New York authorities, or that other material adverse changes in the financial markets shall not have occurred.  

The Series D Warrants are exercisable at the same price as the conversion price of the debentures outline above.  If certain milestones are not met, the conversion price of the Debentures and exercise price of the Series D Warrants may be re-set.  Also, the exercise price may be adjusted under anti-dilution and price re-set provisions contained in the Series D Warrants.  One-half of the Series D Warrants became exercisable on the date of the first closing on November 8, 2006, and the remaining one-half of the Series D Warrants became exercisable on the date of the second closing on April 12, 2007. The original conversion price was $1.1563 per share but has been reset to $.6948 effective October 1, 2007.  The final reset is for the fiscal quarter ended March 31, 2008, with the calculation taking place for the five (5) days prior to the date of filing the Company’s Form 10-Q for the quarter then ended.

The Series D Warrants contain a cashless exercise provision in the event (i) at any time after one year following the date the Series D Warrants are first exercisable there is no registration statement effective covering the resale of the shares underlying the Series D Warrants or (ii) at any time after four years following the date the Series D Warrants were issued.

The Series D Warrants contain a limitation on the amount of Series D Warrants that may be exercised at any one time in the event the holder owns beneficially more than 4.99% of our common stock without regard to the number of shares underlying the unconverted portion of the warrants.  This limitation may be waived upon 61 days’ notice to us by the holder of the Series D Warrants permitting the holder to change such limitation to 9.99%.

At any time after the effective date of the registration statement covering the resale of the shares to be issued upon conversion or exercise of the Debentures and Series D Warrants, we may call for cancellation up to 75% of the Series D Warrants if: (i) the closing bid or closing sale price of the common stock for 20 consecutive trading days (the “measurement period”) exceeds $2.89, (ii) the daily trading volume during the measurement period exceeds 100,000 shares per trading day, and (iii) the holder is not in possession of material nonpublic information regarding us.  We are required to give notice of cancellation to the holders within one trading day of the end of the measurement period. The Series D Warrants covered by the call notice will be cancelled effective 30 trading days after the date of the call notice, subject to certain conditions, including that the holder shall have the right to exercise the Series D Warrant during the measurement period. As not all of these conditions are met, the Debentures and Series D warrants are yet cancelable.

The conversion price of the Debentures and the exercise price of the Series D Warrants or the number of shares to be issued upon conversion or exercise of the Debentures and Series D Warrants are subject to adjustment in the event of a stock dividend, stock split, subdivision or combination of our shares of common stock, reclassification, sales of our securities below their then conversion or exercise price, a subsequent rights offering, or a reclassification of our shares.  Also, if we effect a merger or consolidation with another company, we sell all or substantially all of our assets, a tender offer or exchange offer is made for our shares, or we effect a reclassification of our shares or a compulsory share exchange, a holder that subsequently converts its Debenture will be entitled to receive the same kind and amount of securities, cash or property as if the shares it is entitled to receive on the conversion had been issued and outstanding on the date immediately prior to the date any such transaction occurred. No such events have occurred through the date of this filing.

We are not required to make an adjustment to the conversion or exercise price or the number of shares to be issued upon conversion or exercise of the Debentures and Series D Warrants under the anti-dilution provisions related to an “exempt issuance,” which is defined as: (A) any stock or options that are issued under our stock option plans or are approved by a majority of non-employee directors and issued (i) to employees, officers or directors or (ii) to consultants but only if the amount issued to consultants does not exceed 400,000 in a 12 month period, (B) securities issued under the Debentures or Series D Warrants, (C) shares of common stock issued upon conversion or exercise of, or in exchange for, securities outstanding on the date we entered into the securities purchase agreement, (D) the issuance of the Midtown placement agent’s warrants or the shares underlying the placement agent’s warrants, or (E) the iss uance of securities in an acquisition or strategic transaction approved by our disinterested directors.

We agreed with purchasers of our Debentures and Series D Warrants (“purchasers”) that we would use our best efforts to file a registration statement under the Securities Act within 45 days of the first closing to permit the public resale by purchasers of the shares that may be issued upon conversion of the Debentures and upon exercise of the Series D Warrants, including the shares of our common stock underlying the Debentures to be issued at the second closing.  We are required to keep the registration statement effective until the earlier of either the date all shares underlying the Debentures and Series D Warrants have been sold or such shares are eligible for resale under Rule 144(k), but no later than four years after the effective date of the registration statement.  The registration became effective on April 9, 2007.  We were required to register a number of shares of our common stock equal to 130% of the shares underlying the Debentures and the Series D Warrants.  In view of the adjustments to the conversion and exercise prices, respectively, of the debentures and warrants, the Company expects to file a further registration statement to register additional shares of common stock following the filing of this report.

We also granted to each purchaser of the Debentures and Series D Warrants the right to participate in any offering by us of common stock or common stock equivalents until the later of (i) 12 months after the effective date of the registration statement and (ii) the date a purchaser holds less than 20% of the principal amount of the Debenture the purchaser originally agreed to purchase, except for an exempt issuance or an underwritten public offering of our common stock.  Purchasers may participate in such an offering up to the lesser of 100% of the future offering or the aggregate amount subscribed for under the securities purchase agreement by all purchasers. Although such common stock offerings occurred, the purchasers have not yet elected to participate in any such offerings through the date of the filing of this report.

Also, for three years after the date we entered into the securities purchase agreement, we are prohibited from engaging in any transactions in our securities in which the conversion, exercise or exchange rate or other price of such securities is based upon the trading price of our securities after initial issuance or otherwise subject to re-set unless the transaction is (i) approved by purchasers holding at least 67% of the securities sold in the offering and then outstanding, or (ii) no purchaser then holds more than 20% of the principal amount of the Debentures originally purchased in the offering.

Until November 7, 2007, we were prohibited from effecting a reverse or forward stock split or reclassification of our common stock except as may be required to comply with the listing standards of any national securities exchange. Moreover, for one year after April 9, 2007 (the effective date of the registration statement), we have agreed to exchange the securities issued in the offering for securities issued in a subsequent offering, except for shares issued in an exempt issuance or an underwritten public offering. No such exchanges have occurred through the date of this filing.

The securities purchase agreement also contains representations and warranties of both us and purchasers, conditions to closing, certain indemnification provisions, and other customary provisions.

Midtown Partners & Co., LLC acted as placement agent for the financing pursuant to the terms of a Placement Agent Agreement, dated July 14, 2006, between us and Midtown.  At the first closing, we paid or issued the following compensation to Midtown for its services as placement agent in connection with the offering: (i) sales commissions in the amount of $180,250; (ii) non-accountable expense reimbursement and legal fees of $30,000 of which $10,000 was paid prior to closing, (iii) placement agent’s warrants to purchase an aggregate of 623,520 shares (one half of the Midtown placement agent’s warrants are exercisable commencing on November 6, 2006 and the remaining one-half become exercisable on the second closing).  The second closing took place on April 12, 2007, at which time we paid the following compensation to Midtown for its services as placement agent in connection with the offering: (i) sales commissions in the amount of $180,250; (ii) non-accountable expense reimbursement and legal fees equal to 1% of the second closing or $25,750, (iii) the placement agent’s warrants to purchase an aggregate of 311,760 shares (the remaining one-half of the placement agent’s warrants).  The Midtown placement agent’s warrants are exercisable at a price of $1.15634 per share for a period of five years from the date they become exercisable, the exercise price may be re-set as disclosed above for the convertible debentures, contain a piggyback registration right, a cashless exercise provision and are substantially identical to the warrants issued to purchasers in the Debenture and Warrant offering.

Proceeds of the two offerings were used for the purpose of hiring new personnel, research and development, registration expenses, repaying $200,000 in loans made to us by Mr. Michael W. Trudnak, our Chairman and CEO, and for general working capital purposes.  In connection with the transaction, Mr. Trudnak agreed to amend certain loan agreements with us pursuant to which he had previously loaned to us an aggregate of $402,000.  Mr. Trudnak agreed to extend the date the principal amount is due under such loans until May 31, 2007; however, $100,000 of the principal amount of Mr. Trudnak’s April 21, 2006 loan was due upon our raising $2,500,000 from the closing on sale of our securities after November 6, 2006, and was paid immediately $100,000 following the first closing of the financing, and an additional $100,000 was paid immediately following the second closing of the financing, and the remaining balance of $202,000 will be paid upon our raising an aggregate of $5,000,000 from the closing on sale of our securities after November 6, 2006.

The securities, including certain securities issued to Midtown, were not registered under the Securities Act of 1933 or any state laws and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

Additional Capital

To the extent that additional capital is raised through the sale of our equity or equity-related securities of our subsidiaries, the issuance of our securities could result in dilution to our stockholders.  No assurance can be given that we will have access to the capital markets in the future, or that financing will be available on terms acceptable to satisfy our cash requirements, implement our business strategies, and meet the restrictive requirements of the debenture financing described above.  If we are unable to access the capital markets or obtain acceptable financing, our results of operations and financial condition could be materially and adversely affected.  We may be required to raise substantial additional funds through other means.   We have not begun to receive material revenues from our commercial operations associated with the software products.  Management may seek to raise addition al capital through one or more equity or debt financings or have discussions with certain investors with regard thereto.  We cannot assure our stockholders that our technology and products will be commercially accepted or that revenues will be sufficient to fund our operations.  If adequate funds are not available to us, we may be required to curtail operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies or products.

Financial Condition and Going Concern Uncertainties

As of December 31, 2007, the Company’s revenue generating activities have not produced sufficient funds for profitable operations and the Company has incurred operating losses since inception.  In view of these matters, realization of certain of the assets in the accompanying consolidated balance sheet is dependent upon continued operations of the Company which, in turn, is dependent upon the Company’s ability to meet its financial requirements, raise additional financing on acceptable terms to the Company, and the success of its future operations.  

Our independent registered public accounting firm’s reports on the consolidated financial statements included in our annual report on Form 10-K for the years ended December 31, 2005 and 2006, and in this annual report Form 10-K for the year ended December 31, 2007, contain an explanatory paragraph wherein they expressed an opinion that there is substantial doubt about our ability to continue as a going concern. Accordingly, careful consideration of such opinions should be given in determining whether to continue or become a stockholder of the Company.  

During Fiscal 2007, the Company raised $169,300 from the exercise of employee stock options, received $815,641 net proceeds from the exercise of common stock purchase warrants, received $100,000 from a promissory note, received gross proceeds of $2,550,000 (net proceeds of $2,540,000 after payment of sales commissions to a broker) from the issuance of common stock and warrants in a private placement offering, and completed the second closing of its Series A Debenture and Series D Warrant financing.  Gross proceeds from the second closing were $2,575,000, with net proceeds of $2,217,747 (after payment of sales commissions to a broker and related transaction costs).  In addition, the Company made: (i) $100,000 in principal repayment to Mr. Trudnak, the Company’s Chief Executive Officer, towards his outstanding noninterest-bearing loans, with the remaining net outstanding being $202,000 at December 31, 2007, and (ii) $800,00 0 in principal repayment to a bridge note holder.

Management believes that the cash balance of $101,136 at December 31, 2007, and subsequently $29,079 of collections on outstanding trade receivables, $15,000 received from the exercise of stock options, $4,850,000 received from the sale of securities, and outstanding subscriptions receivable of $1,650,000 due on or about May 30, 2008, to be sufficient to fund the Company’s operations, absent any cash flow from operations, until approximately the end of February 2009.  The Company is currently spending approximately $480,000 per month on operations and the continued research and development of our 3i technologies and products.  Although there can be no assurance, management believes that with the cash balance and other sources of funds received to-date, the Company may not require additional financing to fund the Company’s existing operations through December 31, 2008. This assumes that the Company will be unable to g enerate sufficient operating cash flow to fund its operations during this period.  Also, this assumes that holders of our outstanding debentures convert such debentures into shares of our common stock prior to November 7, 2008, the date we are required to pay the principal amount of such debentures.  We may be required to raise additional capital through an equity or debt financing or though bank borrowing, in the event the debenture holders do not convert such debentures, partially convert such debentures, or effect the buy-in provision of the warrants related to the debentures.  We are also seeking research grant funding from sources in connection with the development of our Medical CAD product. There can be no assurances that the Company will be successful in its efforts to secure such additional financing, any bank borrowing or any grant funding.

During fiscal 2007, the Company’s total stockholders’ deficit increased by $4,344,347 to $7,343,647.  Notwithstanding the foregoing discussion of management’s expectations regarding future cash flows, the Company’s deepening insolvency continues to increase the uncertainties related to its continued existence.  Both management and the Board of Directors are carefully monitoring the Company’s cash flows and financial position in consideration of these increasing uncertainties and the needs of both creditors and stockholders.

In view of the foregoing, from time-to-time, management is required to seek additional capital through one or more equity or debt financings in the event that the cash on hand, collections from customers, and sales of our products do not provide sufficient cash to fund operations.    If adequate funds are not available to us, we may be required to curtail operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies or products.  If we raise additional capital through the sale of equity or equity-related securities, the issuance of such securities could result in dilution to our current stockholders.  No assurance can be given that we will have access to the capital markets in the future, or that financing will be available on terms acceptable to satisfy our cash requirements or to imple ment our business strategies.  If we are unable to access the capital markets or obtain acceptable financing, our results of operations and financial condition could be materially and adversely affected. We may be required to raise substantial additional funds through other means.   We have not begun to receive material revenues from our commercial operations associated with the software products.  Moreover, under the terms

of the 2006 and 2007 convertible debentures and warrant financing, we may not be able to issue additional shares of our common stock or common stock equivalents (except for certain  issuances exempt from this requirement) for up to three years following the April 2007 second closing of the convertible debenture and warrant financing, engage in certain financings in which the conversion, exercise, exchange rate or other price of the securities is based upon the trading price of our securities after the date of issuance of such securities.  These provisions may limit our ability to raise additional financing through the issuance of common stock or common stock equivalents during the period such restrictions are effective.

We anticipate we will need to increase the current workforce significantly to achieve commercially viable sales levels.  There can be no guarantee that these needs will be met or that sufficient cash will be raised to permit operations to continue.  If Guardian is unable to raise sufficient cash to continue operations at a level necessary to achieve commercially viable sales levels, the liquidation value of Guardian’s noncurrent assets may be substantially less than the balances reflected in the financial statements and we may be unable to pay our creditors.

We did not make timely payment of the interest due under our Series A 10% Senior Convertible Debentures on January 1, 2008.  However, the Company has paid all of the interest and late fees due to debenture holders as of April 8, 2008.  The debentures provide that any default in the payment of interest, which default is not cured within five trading days of the receipt of notice of such default or ten trading days after the Company becomes aware of such default, will be deemed an event of default.  If an event of default occurs under the debentures, the debenture holders may elect to require the Company to make immediate repayment of the mandatory default amount, which equals the sum of (i) the greater of either (a) 120% of the outstanding principal amount of the debentures, plus accrued but unpaid interest, or (b) the outstanding principal amount plus accrued but unpaid interest divided by the conversion price on the date the mandatory default amount is either (1) demanded or otherwise due or (2) paid in full, whichever has the lower conversion price, multiplied by the variable weighted average price of the common stock on the date the mandatory default amount is either demanded or otherwise due, whichever has the higher variable weighted average price, and (ii) all other amounts, costs, expenses, and liquidated damages due under the debentures. Also, interest under the debentures accrues at a rate of 18% per annum or the maximum amount allowed under the law and the Company may be subject to a late fee equal to the lesser of 18% per annum or the maximum rate permitted by law.  As of the date of this report, the debenture holders have not made an election requiring immediate repayment of the mandatory amount, although there can be no assurance they will not do so. In anticipation of such an election and measured as of December 31, 2007, the additional amount due is approximately $645,641, and is recorded as an increase t o the carrying value of the debentures.

CONSOLIDATED RESULTS OF OPERATIONS

Fiscal 2007 as Compared with Fiscal 2006

The following analysis reflects the consolidated condensed results of operations of Guardian Technologies International, Inc. and its subsidiaries.

Net Revenues.  Net revenues from product sales and annual maintenance fees decreased by $198,520, or 40.7%, to $289,591.  Three factors impact the reduction in net revenue.  They are: (i) a decrease in maintenance fee revenue during the current period of $96,936, $53,663 of which decrease taking place in the United Kingdom where customers are moving to the UK’s National Health System preferred RIS systems, and a decrease of $43,273 in the U.S. as we have made no new sales of our FlowPoint product; and (ii) a decrease in hardware sales of $16,785; and (iii) a net decrease in software license revenue of $84,799, or 41.4%.  The $84,799 decrease in software license revenue represents a reduction in FlowPoint sales of $204,799, offset partially by $120,000 of revenue for our PinPoint nSight product.

Cost of Sales.  Cost of sales for the year ended December 31, 2007 was $1,272,396 (439.4% of net revenue) compared to $673,494 (138.0% of net revenue) during Fiscal 2006, an increase of approximately $598,902, or 88.9%.  Cost of sales for the period includes the impairment write-off of the Wise Systems’ acquired intangible asset for developed software of $998,247, as well as amortization of the same Wise Systems’ intangible asset of $250,823 in 2007 compared to an amortization expense of $461,836 in 2006.  Other costs of $23,326 in 2007 as compared to $211,658 in 2006, or a decrease of $188,332 (89.0%), represent expenses for purchased equipment and supplies for customers, installation labor and travel costs.  The decrease in other costs arises from no FlowPoint software license revenue in the current period, and includes a

decrease in cost of equipment of $100,660 (91.6%), a decrease in third party software and maintenance fees of $21,627 (85.6%), and a decrease in labor costs of $66,045 (86.3%).

Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the year ended December 31, 2007, decreased $726,787 (8.5%) to $7,863,112 for 2007 as compared to $8,589,899 for the same period in fiscal 2006.  The table below details the components of selling, general and administrative expense, as well as the dollar and percentage changes for the twelve month period ended December 31.

	Twelve Months Ended December 31
	2007	2006	$ Change	% Change
Payroll and related costs	$ 2,515,131	$ 3,635,984	$ (1,120,853)	(30.8)
Professional fees	1,228,870	1,607,980	(379,110)	(23.6)
Research and development costs	901,524	994,569	(93,045)	(9.4)
Insurance costs	156,720	391,693	(234,973)	(60.0)
Rent - building and equipment	285,833	291,091	(5,258)	(1.8)
Travel and related	147,726	231,568	(83,842)	(36.2)
Miscellaneous expenses	395,744	434,897	(39,153)	(9.0)
Depreciation and amortization	143,785	140,073	3,712	2.7
Stock-based compensation	2,087,779	862,044	1,225,735	142.2
Total	$ 7,863,112	$ 8,589,899	$ (726,787)	(8.5)

Payroll (salary, commissions and benefits) and related costs, which includes salaries, commissions, taxes and benefits, decreased approximately $1,120,853 (30.8%) due to reduced employee staffing levels caused by personnel attrition and our decision not to replace such personnel.

Professional fees include legal, accounting, stock transfer agent, SEC filing, and general consulting fees.  Professional fees decreased for the twelve months ended December 31, 2007 versus the same period last year by approximately $379,110 (23.6%) due to: (i) an increase of $172,279 for general consultants, a decrease of $64,610 related to discontinuing specific marketing activities for our FlowPoint product, a decrease of $316,484 for specific consulting activities in 2006 not carried forward into 2007; and (ii) a decrease in accounting and legal fees of $107,042 and $63,253, respectively.  During 2006, the Company incurred additional accounting and legal fees due to the restatement of the Company’s audited financial statements for the years ended December 31, 2003, and 2004, and unaudited interim financial statements during 2005 and related amendments to certain of the Company’s periodic reports filed with the SE C.  The Company filed such amended filings during the third quarter of 2006.  Such decrease in accounting and legal fees relates to the Company not incurring such additional fees in 2007.

Research and development costs decreased for the twelve months ended December 31, 2007, compared to the same period last year by approximately $93,045 (9.4%). Medical Computer Aided Detection project Signature Mapping costs increased in 2007 by $57,356 (49.9%) for total costs for 2007 and 2006 of $172,356 and $115,000, respectively.  Research and development costs for PinPoint were $729,168 for the twelve months ended December 31, 2007 compared to $879,569 for the same period last year, for a decrease of approximately $150,401 or 17.1%.

Insurance costs in the twelve months ended December 31, 2007, were $156,720 compared to $391,693 in the same period in 2006, a decrease of $234,973 (60.0%).  The decrease is attributed to the cancellation of the aviation product liability insurance coverage in November 2006, since the project was still in the development stage.  The Company expects to obtain insurance coverage for the PinPoint aviation product once the Company commences generating sales and in conjunction with other coverage as available from the various governmental agencies for terrorism activities.

Rent decreased by $5,258 (1.8%) to $285,833 in the twelve months of fiscal 2007, as compared to $291,091 for the same period in 2006, due to reduced office furniture rent initiated in December 2006, and a reduction of office space at our Wise Systems location in September 2006.

Travel and entertainment expense for the twelve months ended December 31, 2007 of $147,726 compares to the same period for 2006 of $231,568, or a decrease of $83,842 (36.2%).  During the second half of 2006, the Company commenced building a distributor network to market and sell our products.  The decrease in travel and entertainment expense is due to the building of such distributor network, and a reduction in frequency of travel in all selling and administrative areas.

Miscellaneous expense decreased by $39,153 (9.0%) to $395,744 for the twelve months ended December 31, 2007, as compared to $434,897 for the same period in 2006.  The net decrease is related to an increased cost of $126,875 for the impairment of Goodwill on Wise Systems, a reduction in bad debt expense of $112,851, and a reduction in overall miscellaneous expenses of $53,177.

Depreciation and amortization expense in selling, general, and administrative for the twelve months ended December 31, 2007 of $143,785 compares to the same period for 2006 of $140,073, or an increase of $3,712 (2.7%).  The additional expense is due to capital expenditures during the second half of 2006 for increased equipment for simulation requirements in meeting the Company’s expanded product development activities, offset by the expiration of depreciation expense in the current quarter for 2004 acquired assets.

Stock-based compensation, which represents a noncash expense category, is the amortization of the estimated fair value of stock-based compensation to employees, non-employee directors, and consultants in lieu of cash compensation.  During the twelve months ended December 31, 2007, the Company recognized an expense associated with employee stock option compensation of approximately $1,770,855 and approximately $316,924 of consulting expense.  During the same period of 2006, the Company recognized stock-based compensation expense for employees of $495,143 and consultants of $366,901.  The increase in stock-based compensation for employees and non-employee members of our Board of Directors of $1,275,712 (257.6%) represents the impact of accelerating in the fourth quarter of 2005 the expense of key management and staff hiring incentives using stock options.  Therefore, no compensation expense of unvested 2005 and prior y ear options carryforward into fiscal 2006 and 2007.  The Company did not grant incentive stock options to existing employees, only to new hires and non-qualified stock options to members of the Board of Directors.  In January 2007, the Company granted stock options to all employees and non-employee members of our Board of Directors and, in October 2007, the Company granted stock options to three executive officers as compensation for their continued deferral of a portion of their 2006 salaries, all resulting in additional expense over the two year vesting period beginning in 2007.  The decrease in stock-based compensation expense for consultants of $49,977 (13.6%) reflects decreased usage of stock-based compensation versus cash compensation for consultants.

Employee stock option expense in 2006 and 2007 represents the amortization of the Black-Scholes fair value as outlined above in accordance with the use of Statement of Financial Accounting Standards No.123(R) (SFAS 123(R)) “Stock-Based Payment,” which was effective January 1, 2006.  SFAS 123(R) requires the recognition of all share-based payments to employees or to non-employee directors, as compensation for service on the Board of Directors, as compensation expense in the consolidated financial statements. The amount of compensation is measured based on the estimated fair values of such stock-based payments on their grant dates, and is amortized over the estimated service period to vesting.  Consulting expense for stock-based payments to consultants is based on the fair value of the stock-based compensation at inception and amortized over the estimated service period but, in accordance with EITF 96-18, is remeasured on each reporting date.

Other Income (Expense). Other expense includes interest income, interest expense and other non-operating income.  Other expense for the twelve months ended December 31, 2007 was $1,663,829 compared to $1,318,597 for the same period last year, for a net increase of $345,232 (26.2%).

There were no fixed asset disposals during Fiscal 2007, compared to $2,254 during Fiscal 2006.

Interest income for Fiscal year 2007 of $11,032 is derived from interest bearing accounts.  The $7,180 (39.4%) decrease from the same period last year is attributed to a lower average daily cash balance in interest bearing accounts during the course of the year ended December 31, 2007.

Interest expense (not including other non-operating income) for the twelve months ended December 31, 2007 was $1,705,167, compared to $1,334,555 for the same period last year, for an increase of $370,612 (27.8%).  The components of

2007 include: $58,817 for the August/September 2006 bridge notes that were outstanding during the period and $2,703 from other short-term notes; $361,797 of interest for the convertible debentures outstanding during the period, $2,866,139 for amortization of the fair value of the embedded conversion feature in the November 2006 warrants and debentures issued in conjunction with the convertible debentures and $153,179 for amortization of the fair value of the embedded conversion feature in the August/September bridge note; $344,831 for amortization of deferred financing costs for the November 2006 and April 2007 convertible debenture financing; and $3,040,562 for the fair value of warrants issued during the period, and $645,641  contingency for the   default event on the convertible debentures.  Interest expense was reduced by $272,788 in connection with the fair value adjustments to derivative instruments rel ated to the conversions of bridge notes and debentures, and further reduced by $5,495,713 for the revaluation of the derivative liabilities associated with the financings.  The interest expense outlined above includes noncash elements of $1,294,059.  The noncash portion reflects the impact of the price reset provisions in the Series A 10% Senior Convertible Debenture.  As outlined above in the Notes to Condensed Consolidated Financial Statements, “Summary of Significant Accounting Policies”, the reset provision causes the determination that there are insufficient authorized shares to settle financing contracts, and the requirement that warrants be classified as a liability.  As such, the warrants are required to be remeasured at each balance sheet date, and the increase or decrease in the fair value of the warrants is charged or credited to interest expense.

Non-operating income for the current year was $30,306 and represents a short-swing profit recapture from a shareholder.

Net Loss and Net Loss per Share.  Net loss for Fiscal 2007 was $10,509,746, compared to $10,093,879 in Fiscal 2006, for an increased net loss of approximately $415,867 (4.2%).  Net loss per share for the 2007 was $0.28 compared to $0.30 in the same period 2006, based on the weighted average shares outstanding of 37,761,058 and 33,914,850 respectively. The increased net loss for the twelve months ended December 31, 2007 compared to the same period in 2006 arose from the following: (i) additional costs including $1,125,122 for the impairment of intangible asset and goodwill related to Wise Systems, (ii) increased stock-based compensation for employees, non-employee members of our Board of Directors and consultants of $1,225,735, (iii) an increase in other net non-operating expense of $345,232 for accrued interest expense on debt, the amortization of debt discount for the 2006 and 2007 debentures and 2006 and 2007 convertible notes, the revaluation of the derivative liabilities for the debentures and convertible notes, adjustments to the fair value of derivative liabilities related to the conversion of notes and debentures, other related financing expenses, and lower interest income, (iv) lower net revenue of $198,520, (v) lower cost of sales for equipment, labor and third party software of $188,332, (vi) lower depreciation and amortization expense in cost of sales and selling, general and administrative of $207,301, and (vii) decreased selling, general and administrative expenses (other than depreciation and amortization, stock-based compensation expense and goodwill impairment) of $2,083,109.

Fiscal 2006 as Compared with Fiscal 2005

Net Revenues.  Net revenues from operations in Fiscal 2006 were $488,111, an increase of approximately 12.9%, or $55,925, as compared to Fiscal 2005.  Net revenues were derived from the sale of the FlowPoint product and software maintenance fees.  Net revenues for Fiscal 2005 were $432,186.

Cost of Sales.  Cost of sales for Fiscal 2006 was $673,494 (138.0% of net revenue) versus Fiscal 2005 of $805,503 (186.4% of net revenue), a decrease in costs of approximately $132,009, or 236.0% of the $55,925 net revenue increase.  Cost of sales for the period includes fixed expense for the amortization of the Wise intangible asset for developed software of $461,836 in Fiscal 2006 and $409,779 in Fiscal 2005.  The increase is due to currency fluctuations in the British pound versus the US dollar.  Other costs for Fiscal 2006 of $211,658 and in Fiscal 2005 of $395,724 represent expenses for purchased equipment and supplies for customers, installation labor and travel costs.  The decrease in costs is due to lower equipment and material costs for Fiscal 2006.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses for Fiscal 2006 decreased $4,215,939, or 32.9%, to $8,589,899, as compared to $12,805,838 for the comparable period in Fiscal 2005.  The table below details the components of selling, general and administrative expense, as well as the dollar and percentage changes for the twelve months ended December 31.

Category	Twelve Months Ended December 31
	2006	2005	$ Change	% Change
Payroll and related costs	$ 3,635,984	$ 3,283,028	$ 352,956	10.8
Professional fees	1,607,980	1,800,235	(192,255)	(10.7)
Research and development costs	994,569	858,218	136,351	15.9
Insurance costs	391,693	339,958	51,735	15.2
Rent - building and equipment	291,091	335,006	(43,915)	(13.1)
Travel and related	231,568	424,287	(192,719)	(45.4)
Miscellaneous expenses	434,897	474,717	(39,820)	(8.4)
Depreciation and amortization	140,073	93,520	46,553	49.8
Stock-based compensation	862,044	5,196,869	(4,334,825)	(83.4)
Total	$ 8,589,899	$ 12,805,838	$ (4,215,939)	(32.9)

Payroll (salary, commissions and benefits) and related costs increased approximately $352,956 (10.8%).  The increase is due to greater salary cost of $369,097 (12.7%) in response to a higher level of technical staff, and lower overall employee benefits and taxes of $16,141 (4.2%).  

Professional fees include legal, accounting, stock transfer agent, SEC filing, and general consulting fees.  Professional fees decreased for Fiscal 2006 by approximately $192,255 (10.7%) due to: (i) a decrease of $185,113 (35.9%) in legal fees; (ii) a decrease of $215,294 (20.2%) in technical consultants by shifting the activities in-house; (iii) an increase of $176,641 (114.7%) in accounting fees as a result of the 2005 SEC review and restatement of our consolidated financial statements for the years ended December 31, 2003 and 2004, and for each of the quarterly periods in the nine months ended September 30, 2005; and (iv) an increase in various other outside services of $31,511 (33.5%).

Research and development (R&D) costs increased in Fiscal 2006 by $136,351 (15.9%), due to initiating research activities for the Medical Computer Aided Diagnosis (CAD) project.  R&D costs for PinPoint were $879,569 and $115,000 for the Medical CAD project.

We incurred insurance costs of $391,693 or a $51,735 (15.2%) increase over Fiscal 2005.  

Rent expense for building and equipment decreased $43,915 (13.1%) to $291,091 in Fiscal 2006.  The reduction is due to lower building rent expense of $17,900 and lower equipment rental of $26,015.

Travel and related expense in selling, general, and administrative for the Fiscal 2006 of $231,568, compares to the same period for Fiscal 2005 of $424,287, or a decrease of $192,719 (45.4%).  The reduction in frequency of travel in all selling and administrative areas is because of establishing a distributor network system during Fiscal 2006.

Miscellaneous expense for Fiscal 2006 of $434,897 compares to the same period for Fiscal 2005 of $474,717, or a decrease of $39,820 (8.4%).  Fiscal 2006 includes a provision for doubtful accounts of $103,033 versus no provision in the same period of 2005, offset by a reduction in marketing and trade show costs of $130,896 and other miscellaneous expense reduction of $11,957.

Depreciation and amortization expense in selling, general, and administrative for Fiscal 2006 of $140,073 compares to the same period for 2005 of $93,520, or an increase of $46,553 (49.8%).  The additional expense is due to capital expenditures during the course of Fiscal 2005 for computer and office equipment to meet our expanded staffing level and a full year amortization in Fiscal 2006 versus the same period in Fiscal 2005.

Stock-based compensation, which represents a noncash expense category, is the amortization of the estimated fair value of stock-based compensation to employees and consultants in lieu of cash compensation.  During Fiscal 2006, we recognized an expense associated with employee stock option compensation of approximately $495,143 and approximately $366,901 of consulting expense.  During the same period of Fiscal 2005, we recognized stock-based compensation expense for employees of $1,540,025 and consultants of $3,656,844.  The decrease in stock-based compensation for employees of $1,044,882 (67.8%) represents the impact of accelerating in the fourth quarter of 2005 the expense of key management and

staff hiring incentives using stock options.  Therefore, no amortization expense was carried forward into Fiscal 2006.  The decrease in stock-based compensation expense for consultants of $3,289,943 (90.0%) reflects the end of the amortization period in the second quarter of 2005 for retention consulting arrangements after the reverse acquisition in June 2003.  Also, there was less dependency on stock-based compensation in 2006 for employees and consultants.

The employee stock option expense recorded in Fiscal 2005 represents the amortized value of the stock options in excess of their estimated fair value at the date of grant.  Whereas the employee stock option expense in Fiscal 2006 represents the amortization of the Black-Scholes fair value as outlined above in accordance with the use of SFAS 123(R) “Accounting for Stock-Based Compensation,” effective January 1, 2006.  SFAS 123(R) requires all share-based payments to employees or to non-employee directors as compensation for service on the Board of Directors, to be recognized as compensation expense in the consolidated financial statements based on the estimated fair values of such payments amortized over the estimated service period to vesting.  Consulting expense for stock-based compensation to consultants is based on the fair value of the stock compensation, as remeasured on each reporting date, and amortized o ver the service period.

Interest Income (Expense).  Interest income from interest-bearing accounts decreased approximately $13,497 (42.6%), to $18,212 for Fiscal 2006.  The decrease is attributed to a lower average daily cash balance in interest-bearing accounts during Fiscal 2006, as a result of a decrease in funds due to lower proceeds from the issuance of common stock, exercise of stock options and warrants and convertible debt during Fiscal 2006 than in Fiscal 2005 to cover operating expenses.  Interest expense for 2006 of $1,334,555 includes $101,082 for accrued interest,  $644,192 for the amortization of debt discount associated with the August/September 2006 note financing, and the November convertible debentures $560,616 for the fair value of the embedded conversion feature in the warrants, and $28,665 for amortization of deferred financing costs for the November 2006 convertible debenture financing.

Net Loss and Net Loss per Share.  Net loss for Fiscal 2006 was $10,093,879, compared to Fiscal 2005 of $13,147,446, or a decreased net loss of approximately $3,053,567 or 23.2%.  Net loss per share for Fiscal 2006 was $0.30, versus Fiscal 2005 of $0.43, based on weighted average shares outstanding of 33,914,850 and 30,563,516 respectively.   The categories effecting net loss for Fiscal 2006 versus the Fiscal 2005 are associated with: (i) lower stock-based compensation expense for employees and consultants by $1,044,882 and $3,289,943 respectively; (ii) decreased cost of sales by $132,009; (iii) increased revenue by $55,925; (iv) increase in net interest expense of $1,334,555; and (v) increase in operating expenses (other than stock-based compensation) of $118,886.

Contractual Obligations and Commitments.  The following table summarizes scheduled maturities of our contractual obligations for which cash flows are fixed and determinable as of December 31, 2007.

Category	Payments Due in Fiscal
	Total	2008	2009	2010	2011	2012	Thereafter
Short-term convertible debentures and notes (1)	$ 3,957,476	$ 3,957,476	$ -	$ -	$ -	$ -	$ -
Long-term debt	-	-	-	-	-	-	-
Interest payments (2)	282,286	282,286	-	-	-	-	-
Operating lease commitments (3)	633,779	278,391	267,291	88,097	-	-	-
Unconditional purchase obligations (4)	-	-	-	-	-	-	-
Total contractual obligations	$ 4,873,541	$ 4,518,153	$ 267,291	$ 88,097	$ -	$ -	$ -
(1) Includes amounts accrued for debenture default provisions of $645,641.
(2) Projected interest on debt, with the assumption of no further conversion of the short-term debentures that mature on November 8, 2008.
(3) Total rental expense included in the accompanying consolidated statements of earnings was $285,833 in fiscal 2007, $291,091 in fiscal 2006, and $335,006 in fiscal 2005.
(4) The company currently does not have any outstanding unconditional purchase obligations.  They would though include inventory commitments, future royalty, consulting agreements, other than month-to-month arrangements, or commitments pursuant to executive compensation arrangements.

In addition to the above obligations, we are conditionally obligated to redeem shares related to the acquisition of intellectual property (IP) from Difference Engines.  As of December 31, 2007, and as more fully disclosed in Note 6, Acquisitions, a conditional redemption value of $178,311 was estimated and recorded.

CRITICAL ACCOUNTING POLICIES

In December 2001 and January 2002, the Securities and Exchange Commission (“SEC”) requested that all registrants list their three to five most “critical accounting policies” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations.  The SEC defined a “critical accounting policy” as one which is both important to the portrayal of the company’s financial condition and results of operations, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition.  Revenues are derived primarily from the sublicensing and licensing of computer software, installations, training, consulting, software maintenance and sales of PACS, RIS and RIS/PACS solutions.  Inherent in the revenue recognition process are significant management estimates and judgments, which influence the timing and amount of revenue recognized.

For software arrangements, we recognize revenue according to the AICPA SOP 97-2, “Software Revenue Recognition,” and related amendments.  SOP No. 97-2, as amended, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of those elements.  Revenue from multiple-element software arrangements is recognized using the residual method, pursuant to SOP No. 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.”  Under the residual method, revenue is recognized in a multiple element arrangement when vendor-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement.  We allocate revenue to each undelivered element in a multiple elemen t arrangement based on its respective fair value, with the fair value determined by the price charged when that element is sold separately.  Specifically, we determine the fair value of the maintenance portion of the arrangement based on the renewal price of the maintenance offered to customers, which is stated in the contract, and fair value of the installation based upon the price charged when the services are sold separately.  If evidence of the fair value cannot be established for undelivered elements of a software sale, the entire amount of revenue under the arrangement is deferred until these elements have been delivered or vendor-specific objective evidence of fair value can be established.

Revenue from sublicenses sold on an individual basis and computer software licenses is recognized upon shipment provided that evidence of an arrangement exists, delivery has occurred and risk of loss has passed to the customer, fees are fixed or determinable and collection of the related receivable is reasonably assured.

Revenue from software usage sublicenses sold through annual contracts and software maintenance is deferred and recognized ratably over the contract period.  Revenue from installation, training, and consulting services is recognized as services are performed.

Cost of goods sold incorporates our direct costs of raw materials, consumables, staff costs associated with installation and training services, and the amortization of the intangible assets (developed software) related to products sold.

Research and Development.  Costs incurred in connection with the development of software products that are intended for sale are accounted for in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.”  Costs incurred prior to technological feasibility being established for the product are expensed as incurred.  Technological feasibility is established upon completion of a detail program design or, in the absence, completion of a working model.  Thereafter, as long as no high-risk development issues exist, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value.  Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product.  Amortization commences when the product is available for general release to customers.

Valuation of Long-Lived Assets Including Acquired Intangibles.  We review property and equipment and certain identifiable intangible assets for impairment, whenever events or changes in circumstances indicate the carrying amount of such an asset may not be recoverable.  Recoverability of these assets is measured by comparison of their carrying amount to future undiscounted cash flows that the assets are expected to generate.  If such assets are considered to be impaired, the

impairment to be recognized in earnings equals the amount by which the carrying value of the assets exceeds their fair estimated value, or net realizable value in the case of software technology.

On December 19, 2003, Guardian purchased certain intellectual property (IP) owned by Difference Engines, including, but not limited to, certain compression software technology described as Difference Engine’s Visual Internet Applications or DEVision, as well as title and interest in the use of the name and the copyright of Difference Engines.  This transaction has been accounted for as an asset acquisition.  The purchase price for these assets has been allocated to acquired intangible assets (software).  As of December 31, 2004, based on net realizable value calculation, the asset was deemed impaired, and we took a $1,498,731 write off, which is reflected in cost of sales.

Impairment of Excess of Purchase Price Over Net Assets Acquired.  We have adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.”   Under this standard, goodwill is no longer amortized over its useful life, but is tested for impairment on an annual basis and whenever indicators of impairment arise.  Under the provisions of SFAS No. 142, any impairment loss identified upon adoption of this standard is recognized as a cumulative effect of a change in accounting principle.  Any impairment loss incurred subsequent to the initial adoption of SFAS No. 142 is recorded as a charge to current period earnings.

OFF-BALANCE SHEET ARRANGEMENTS

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities as of December 31, 2007 2006 and 2005.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51” (“SFAS No. 160”) to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  Among other requirements, SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is to be reported as a separate component of equity in the consolidated financial statements.  SFAS No. 160 also requires consolidated net income to include the amounts attributable to both the parent and the noncontrolling interest and to disclose those amounts on the face of the consolidated statement of income.  SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, beginning in our fiscal 2009). Earlier adoption is prohibited.  This Statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value, and also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities.  SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007.  The Company has evaluated the impact of this statement and does not expect the adoption of this standard to have a material impact on the Company’s consolidated results of operations and financial position.

In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”).  SFAS No. 141(R) replaces SFAS No. 141, “Business Combinations,” however, it retains the fundamental requirements of the former Statement that the acquisition method of accounting (previously referred to as the purchase method) be used for all business combinations and for an acquirer to be identified for each business.  SFAS No. 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control.  Among other requirements, SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the identifiable assets acquired, liabilities assu med and any noncontrolling interest in the acquiree at their acquisition-date fair values, with limited exceptions; acquisition-related costs generally will be expensed as incurred.  SFAS No. 141(R) requires certain financial statement disclosures to enable users to evaluate and understand the nature and financial effects of the business

combination.  This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (that is, beginning in our fiscal 2009).  An entity may not apply it before that date.

On December 21, 2007, the SEC staff issued Staff Accounting Bulletin No. 110 (“SAB 110”), expressing the views of the staff regarding the use of a “simplified” method, as discussed in SAB No. 107 (“SAB 107”), in developing an estimate of expected term of “plain vanilla” share options in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), Shared-Based Payment.  In particular, the staff indicated in SAB 107 that it will accept a company’s election to use the simplified method, regardless of whether the company has sufficient information to make more refined estimates of expected term.  At the time SAB 107 was issued, the staff believed that more detailed external information about employee exercise behavior (e.g., employee exercise pattern by industry and/or other categories of companies) would, over time, become readily available t companies. &n bsp;Therefore, the staff stated in SAB 107 that it would not expect a company to use the simplified method for share option grants after December 31, 2007.  The staff understands that such detailed information about employee exercise behavior may not be widely available by December 31, 2007.  Accordingly, the staff will continue to accept, under circumstances, the use of the simplified method beyond December 31, 2007.

In September 2006, the SEC staff issued Staff Accounting Bulleting No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.”  SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. Traditionally, there have been two widely-recognized methods for quantifying the effects of financial statement misstatements: the “roll-over” method and the “iron curtain” method. The roll-over methods focuses primarily on the impact of a misstatement on the income statement-including the reversing effect of prior year misstatements-but its use can lead to the accumulation of misstatements in the balance sheet. The iron-curtain method, on the other hand, focuses primarily on the effect of correcting the period-end balance s heet with less emphasis on the reversing effects of prior year errors on the income statement. Currently, we use the roll-over method for quantifying identified financial statement misstatements.   

In SAB 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of our financial statements and the related financial statement disclosures. This model is commonly referred to as a “dual approach,” because it requires quantification of errors under both the iron curtain and the roll-over methods. SAB 108 also permits existing public companies to initially apply its provisions either by (i) restating prior financial statements as if the “dual approach” had always been used or (ii) recording the cumulative effect of initially applying the “dual approach” as adjustments to the carrying values of assets and liabilities as of January 1, 2006, with an offsetting adjustment recorded to the opening balance of retained earnings. Use of the “cumulative effect” transition method re quires detailed disclosure of the nature and amount of each individual error corrected through the cumulative adjustment and how and when it arose.  We will adopt the provisions of SAB 108 in connection with the preparation of our annual financial statements for the year ending December 31, 2006.  There was no significant impact on results of operations or financial condition.

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 157, "Fair Value Measurements" ("SFAS No. 157") to clarify the definition of fair value, establish a framework for measuring fair value and expand the disclosures on fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). SFAS No. 157 also stipulates that, as a market-based measurement, fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability, and establishes a fair value hierarchy that distinguishes between (a) market participant assumptions developed based on market data obtained fr om sources independent of the reporting entity (observable inputs) and (b) the reporting entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). SFAS No. 157 becomes effective for financial statements issued for fiscal years beginning after November 15, 2007. Currently, we are evaluating the impact of the provisions of SFAS No. 157 on our consolidated financial statements.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation Number (“FIN”) 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”).  FIN 48 establishes a recognition threshold and measurement for income tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 also prescribes a two-step evaluation process for tax positions.  The first step is recognition and the second step is measurement.  For recognition, an enterprise judgmentally determines whether it is more-

likely-than-not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position.  If the tax position meets the more-likely-than-not recognition threshold it is measured and recognized in the financial statements as the largest amount of tax benefit that is greater than 50% likely of being realized.  If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of the position is not recognized in the financial statements.

Tax positions that meet the more-likely-than-not recognition threshold at the effective date of FIN 48 may be recognized or, continued to be recognized, upon adoption of FIN 48.  The cumulative effect of applying the provision of FIN 48 shall be reported as an adjustment to the opening balance of retained earnings for that fiscal year.  FIN 48 will apply to fiscal years beginning after December 15, 2006 with earlier adoption permitted.  We are currently evaluating the impact FIN 48 will have on our consolidated financial statements when it becomes effective for us in fiscal 2007 and are unable, at this time, to quantify the impact, if any, to retained earnings at the time of adoption.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155 “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.”  This Statement shall be effective for all financial instruments acquired, issued, or subject to a remeasurement (new basis) event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of this Statement may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of Statement 133 prior to the adoption of this Statement. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period, for that fiscal year.   We are currently evaluating the impact of the provisions of SFAS No. 155 on our consolidated financial statements.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk is confined to changes in foreign currency exchange rates and potentially adverse effects of differing tax structures.   International revenues in Fiscal 2007 from Wise Systems, our subsidiary located in the United Kingdom, were approximately $147,928 (51.1%) of total revenue.  International sales are made mostly from our foreign subsidiary and are typically denominated in British pounds.  In Fiscal 2007, approximately $2,816 (9.7%) of total consolidated accounts receivable and $14,034 (1.7%) of total consolidated accounts payable were denominated in British pounds.  Additionally, our exposure to foreign exchange rate fluctuations arises in part from inter-company accounts which are charged to Wise and recorded as inter-company receivables on the books of the U.S. parent company.  We are also exposed to foreign exchange rate fluctuations as the financial results of Wise are translated into U .S. dollars in consolidation.  As exchange rates vary, those results when translated may vary from expectations and adversely impact overall expected profitability.

As of December 31, 2007, $132 (0.1%) of our cash and cash equivalents balance was included in our foreign subsidiaries.  

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See our Consolidated Financial Statements, which incorporates the supplementary data beginning on page 106.

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Effective July 19, 2005, Guardian dismissed its principal independent registered public accountant, Aronson & Company. Aronson & Company had been engaged by Guardian as the principal registered accountant to audit the financial statements of Guardian for the fiscal years ended December 31, 2003 and 2004. Aronson & Company’s reports on the financial statements of Guardian filed with the Securities and Exchange Commission with regard to the fiscal years ended December 31, 2003 and 2004, contained no adverse or disclaimer of opinion; however, each of its reports did contain a going concern explanatory paragraph.  The decision to change accountants was recommended by Guardian’s Audit Committee and approved by the board of directors of Guardian.

In connection with the audit of Guardian’s financial statements for the fiscal years ended December 31, 2003 and 2004, and in connection with the subsequent interim period up to the date of dismissal, there were no disagreements with Aronson & Company on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Aronson & Company, would have caused Aronson & Company to make reference to the subject matter of the disagreements in connection with its reports.

Effective July 19, 2005, upon the recommendation of Guardian’s Audit Committee, Guardian's board of directors approved the engagement of Goodman & Company, L.L.P. to serve as Guardian's independent registered public accountants and to be the principal independent registered public accountants to conduct the audit of Guardian's financial statements for the fiscal year ending December 31, 2005, replacing the firm of Aronson & Company.

Effective May 5, 2006, upon the recommendation of Guardian’s Audit Committee, Guardian's board of directors approved the engagement of Goodman & Company, L.L.P. to serve as Guardian's independent registered public accountants and to be the principal registered public accountants to conduct the re-audit of Guardian's financial statements for the fiscal years ended December 31, 2003 and December 31, 2004, replacing the firm of Aronson & Company.

ITEM 9A(T).  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Report, the Chief Executive Officer and Chief Financial Officer of the Company (the “Certifying Officers”) conducted evaluations of the Company’s disclosure controls and procedures.  As defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure the information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that informatio n required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure.

Based on this evaluation and for the reason outlined below, the Certifying Officers determined that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures were not effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by the Company in the Reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding disclosure.  On August 6, 2007, the Company filed a Form 8-K with the SEC regarding unregistered sales of certain equity securities to accredited investors.  On or about November 9, 2007, the Company determined that such Form 8-K required amendment to include additional disclosures regarding the terms and conditions of the investment by one of such investors.  On November 12, 2007, the Company filed a Form 8-K/A to amend and restate such disclosure.  On April 9, 2008, the Company filed a Form 8-K regarding sales of certain unregistered securities as required under Item 3.02, triggering events that accelerate or increase a direct financial obligation under Item 2.04, and other events under Item 8.01.  Disclosure of certain sales of unregistered securities included in such report was required to be reported during December 2007.  In addition, the Company has identified certain material weaknesses in its internal controls over financial reporting discussed below.

Management of the Company and the Audit Committee considered what further changes, if any, are necessary to the Company’s disclosure controls and procedures and internal controls over financial reporting to ensure that the errors described above do not recur and the material weaknesses identified by management are remedied. The Audit Committee determined that these matters could be best addressed by: (a) reviewing accounting literature and other technical materials with the Company’s independent registered public accountants to ensure that the appropriate personnel have a full awareness and understanding of the applicable accounting pronouncements and how they are to be implemented, (b)

additional education and professional development for the Company’s accounting and other staff on new and existing accounting pronouncements and their application and applicable SEC filing requirements, certain applicable SEC disclosure requirements, and the timing of the filing thereof, and (c) requiring senior accounting staff and outside consultants with technical accounting expertise to review complex transactions to evaluate and approve the accounting treatment for such transactions, including those items for which the Company has restated its financial statements.  As previously disclosed in our periodic filings, the implementation of certain of these steps commenced in the second quarter of 2006 and is to be ongoing.  The Audit Committee continues to believe that the above remedial steps will help assure this error does not recur.  Accordingly, the Audit Committee has recommended to management and mana gement has agreed that the Company’s accounting staff, including its Chief Financial Officer, undertake additional training on an accelerated basis and that such training, in view of the complexity of certain generally accepted accounting principles and other matters, be ongoing. Further, to continue to retain and review with an outside public accounting consultant the application of certain accounting principles to help assure the consolidated financial statements prepared by the Company and furnished to its independent registered public accountants for review or audit reflect the application of such accounting principles.

Management’s Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting of the Company in accordance with Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of the Company’s management, including the Certifying Officers, we conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

The Company’s internal control over financial reporting is a process designed by, and under the supervision of, its principal executive and principal financial officers, or person performing similar functions, and effected by the Company’s board of directors, management and other personnel,  to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordan ce with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

A material weakness is a control deficiency, or a combination of control deficiencies, that result in more than a remote likelihood that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected.  In connection with management’s assessment of our internal control over financial reporting described above, management has identified the following material weaknesses in the Company’s internal control over financial reporting as of December 31, 2007.

1.

Several matters involving the application of Generally Accepted Accounting Principles to the Company’s complex financial instruments resulted in material audit adjustments to the Company’s consolidated financial statements. The adjustments were related to certain complex provisions of derivative liabilities, including our convertible debentures and warrants, and the interpretation of Emerging Issues Task Force Issue 00-19 (EITF 00-19), “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” and Statement of Financial Accounting Standards No. 5 “Accounting for Contingencies.” These deficiencies did not result in errors to the Company’s consolidated financial statements.

2.

As of December 31, 2007, the Company did not have personnel with the appropriate technical accounting expertise to sufficiently address the accounting and financial reporting issues that arise from time to time with respect to these complex financial instruments.

Based on our assessment, and because of the material weaknesses described above, management has concluded that our internal controls over financial reporting were not effective as of December 31, 2007.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm, pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report at this time.

Changes in Internal Controls

There were no changes in the Company’s internal controls over financial reporting during the period covered by the Report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

ITEM 9B.    OTHER INFORMATION

The Company plans to hold its next Annual Meeting of Stockholders on Friday, October 10, 2008, in Herndon, Virginia.  If a stockholder wishes to submit a proposal for the Company’s 2008 Annual Meeting, the deadline for submitting such proposals to the Company is Monday, July 7, 2008.

PART III

ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table sets forth the current directors and executive officers of Guardian:

Name	Age	Title
Michael W. Trudnak	55	Chairman of the Board, Chief Executive Officer, Secretary, Treasurer, Director  - Class III
William J. Donovan	56	President, Chief Operating Officer and Director - Class III
Charles T. Nash	57	Director - Class I
Ronald R. Polillo	59	Director - Class I
Henry A. Grandizio	51	Director - Class II
Sean W. Kennedy	58	Director - Class II
Gregory E. Hare	54	Chief Financial Officer
Richard F. Borrelli	56	Vice President
Carl C. Smith, Jr.	59	Vice President

Under Guardian’s Certificate of Incorporation, the board of directors is divided into three classes and, if the board consists of seven directors, the first class shall consist of three directors to hold office for a term of one year from the date of the ratification of their election by stockholders at the next meeting of stockholders held to consider such matter, the second class shall consist of two directors to hold office for a term of two years from the date of the ratification of his election by stockholders at the next meeting of stockholders held to consider such matter, and the third class shall consist of two directors to hold office for a term of three years from the date of the ratification of their election by stockholders at the next meeting of stockholders held to consider such matter.  At each succeeding annual meeting of stockholders, the successors to the class of directors who se terms shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting.  Messrs. Nash and Polillo have been designated by the board as Class I directors, Messrs. Kennedy and Grandizio have been designated as Class II directors, and Messrs. Trudnak and Donovan have been designated as Class III directors.

Biographical information with respect to the present executive officers and directors of Guardian are set forth below. There are no family relationships between any present executive officers or directors.

Michael W. Trudnak, Chairman of the Board, Chief Executive Officer, Secretary, Treasurer and Director.  Mr. Trudnak was appointed Chairman of the Board, Secretary, and Chief Executive Officer and became a Class III director in June 2003.  From March 2003 and until the present, Mr. Trudnak has been Chairman of the Board, Chief Executive Officer,

Secretary, Treasurer and a director of RJL. From October 2002 to March 2003, Mr. Trudnak was a consultant to certain telecommunications services companies. From April 2002 to October 2002, Mr. Trudnak was Chief Operating Officer and subsequently President, Chief Executive Officer and a director of Advanced Data Centers, Inc., a privately held telecommunications services company. From July 2001 to March 2002, Mr. Trudnak served as Vice President of Mid-Atlantic Sales for Equant N.V, a leading provider of global IP and data services to multinational companies. Prior to Equant's acquisition of Global One, Inc., in July 2001, Mr. Trudnak served as an Executive Director for South East Region Sales for Global One from June 1998 to July 2001, and from January 1996 to June 1998, served as Managing Director of Global One's sales and operations in France and Germany. From November 1989 through December 1995, Mr. Trudnak served as director of facilities engineering and then Senior Group Manager for Sprint International, a global telecommunications services provider. Mr. Trudnak has over twenty-five years of diversified executive management, sales, business operations, technical and administrative experience in the telecommunications industry. Mr. Trudnak served in the Marine Corps from April 1972 through January 1976.

William J. Donovan, President, Chief Operating Officer and Director. Mr. Donovan became a Class II director in August 2006. Mr. Donovan has been President and Chief Operating Officer since November 21, 2005. Also, from August 18, 2003, until January 30, 2006, Mr. Donovan was Chief Financial Officer. From January 2003 until August 2003, Mr. Donovan was an independent consultant to an affiliate of American Express Small Business Services. From September 1999 through December 2002, Mr. Donovan was CFO of Streampipe.com, Inc., a privately held streaming communications media company.  From October 1996 to August 1999, Mr. Donovan was Chief Operating and Financial Officer for TDI, Inc., a privately held international wireless telecommunications services company.   From October 1986 to October 1996, Mr. Donovan was Chief Financial Officer, Secretary, Treasurer and a director at Riparius Corporation, a privately hel d holding company with operating subsidiaries in the areas of real estate development, property management, general contracting, government contracting, and telecommunications engineering.  From October 1980 to October 1986, Mr. Donovan was the Controller for McCormick Properties, Inc., a publicly held commercial real estate subsidiary of McCormick & Company.  From July 1973 to October 1980, Mr. Donovan was the Controller for AMF Head Sports Wear, Inc., a privately held international sporting goods manufacturer and a subsidiary of AMF, Inc., a publicly held company.  Mr. Donovan received a Bachelor of Arts in History in 1973, from the University of Maryland, an MBA from the Sellinger School of Business, Loyola College, Baltimore, Maryland in 1982, and a Certificate in Accounting from the University of Maryland in 1978.  Mr. Donovan has been a Certified Public Accountant since 1982.  He is also a Certified Business Valuation & Transfer Agent, Business Brokers Network, 2002. &n bsp;He has been on the Advisory Board for Nogika Corporation, a privately held software company, since 2001.

Gregory E. Hare, Chief Financial Officer.  Mr. Hare was appointed Chief Financial Officer on January 30, 2006.  From May 2001 through January 2006, Mr. Hare served as a financial executive of Jane Cosmetics, a national mass market cosmetics manufacturing and distribution company headquartered in Baltimore, Maryland. There he served three years as Director of Finance for the wholly owned subsidiary of The Estee Lauder Companies, Inc. and the most recent two years as CFO/Controller of the privately held Jane & Company, LLC.  Prior to that, Mr. Hare held positions including CFO/Controller for a privately held hospitality company LFB Enterprises, with locations in and around Baltimore and Washington, DC; Manager, Pricing Group for the Industrial Division of McCormick & Company, a publicly held international spice company headquartered in Hunt Valley, Maryland; and CFO/Controller for Acordia Collegiate Be nefits, Inc., a for-profit subsidiary of Blue Cross and Blue Shield of Indiana. Mr. Hare received a Bachelor of Science degree from the University of Baltimore School of Business and an MBA from the Sellinger School of Business of Loyola College, Baltimore, Maryland. Mr. Hare has been a Certified Public Accountant since 1979.

Charles T. Nash, Director.  Mr. Nash became a Class I director of Guardian in June 2004. Mr. Nash has approximately 23 years of military experience plus six years of leadership experience in emerging technology in the private sector.  Since October 2000, Mr. Nash has been President of Emerging Technologies International, Inc. (“ETII”), a privately held consulting company. ETII works to get high level technologies developed by small commercial companies inserted quickly, efficiently and inexpensively into applications/tools for immediate military use.  The company also works with government laboratories and acquisition agencies to facilitate speedy and effective “lab to fleet” technology interchanges and discussions. From April 1998 to October 2000, Mr. Nash was vice president of Emerging Technology Group of Santa Barbara Applied Research, Inc., a privately held defense consulting and emer ging technology marketing company.  Prior to that, Mr. Nash served in various strategic military leadership positions, including: head of Strike/Anti-Surface Unit Warfare and Air to Air/Strike Support section on the staff of the Chief of Naval Operations, overseeing budget planning of approximately $18 billion; executive assistant to the Deputy Commander in Chief, U.S. Naval Forces Europe; and executive and commanding officer, Strike Fighter Squadron 137.  Mr. Nash retired from the U.S. Navy in 1998 with the rank of Captain U.S.N.  Mr. Nash

is a frequent guest military and aviation analyst for Fox News Channel, WABC Talk Radio and several regional radio stations.  Mr. Nash earned a BS Aeronautics degree in 1973 from the Parks College of Aeronautical Technology, Saint Louis University, Cahokia, Illinois.

Ronald R. Polillo, Director. Mr. Polillo became a Class I director of Guardian on August 17, 2007.  Since July 2007 to the present, Mr. Polillo has been President Chief Executive Officer of RP-Security Solutions, LLC, a privately held company that provides engineering and scientific development and support services in the area of explosives, baggage and people screening for all types of transportation.   From May 2004 until June 2007, Mr. Polillo was vice president of Homeland Security and Defense for Hi-Tec Systems, Inc.  From August 2000 to April 2004, Mr. Polillo was a business and special projects manager with the Department of Homeland Security’s TSA Transportation Security Laboratory.   As the FAA's Security Equipment Integrated Product Team Lead, from October 1996 to July 2000, Mr. Polillo led an aviation industry and government team in the first major acquisiti on and deployment of Explosive Detection Systems in airports throughout the U.S.  From January 1983 to September 1996, Mr. Polillo held various project development and research positions with the Federal Aviation Administration, including related to the development and deployment of airport security technologies.  Mr. Polillo received a Masters in Aviation Management from Embry Riddle Aeronautical University and a Bachelor of Sciences in Mathematical Sciences from Florida Institute of Technology.

Henry A. Grandizio, Director.  Mr. Grandizio became a Class II director of Guardian on September 17, 2007.  Since 2006 to present, Mr. Grandizio has been the managing partner at Grandizio, Wilkins, Little & Matthews, LLP, a certified public accounting firm.  From 1986 until 2006, Mr. Grandizio was shareholder and vice president of Scheiner, Mister & Grandizio, P.A.  From 1978 to 1986, Mr. Grandizio was a audit and accounting manager for McGrow, Pridgeon and Company, P.A.  Mr. Grandizio received a Masters in Science, Taxation from the University of Baltimore and a Bachelor of Arts in Accounting from Loyola College.  

Sean W. Kennedy, Director.  Mr. Kennedy became a Class II director in July 2003.  From January 2001 to the present, Mr. Kennedy has been President and Chief Executive Officer of BND Group, Inc., a privately held software development company.  From October 1999 to December 2000, Mr. Kennedy was divisional Vice President of Votenet Solutions, a Web development and consultant for trade associations, political parties and related organizations. From April 1994 to October 1999, Mr. Kennedy was President and CEO of Raintree Communications Corporation, a privately held telecommunications services company, focused on providing technology tools for legislative lobbying to Trade Associations and Fortune 500 companies. From June 1989 to April 1994, Mr. Kennedy was President and CEO of Electronic Funds Transfer Association, a trade association for the electronic payments systems industry.  Mr. Kennedy is a graduate of Mount Saint Mary’s College in Emmitsburg, Maryland.

Richard F. Borrelli, Vice President.  Mr. Borrelli has been a Vice President for Guardian’s Healthcare Systems Division since June 2004, and became an officer of the Company on August 9, 2007.  Mr. Borrelli is a healthcare and radiology expert with 28 years of worldwide clinical, business development, marketing and sales experience in healthcare radiology informatics and image management. From 2002 to 2004, Mr. Borrelli was a principal with Healthcare Consulting Group, a privately-held healthcare business consulting company.  From 2000 to 2002, Mr. Borrelli was the Director of Implementation and Professional Services, Radiology Information and Image Management Division, at IDX Systems Corporation, a healthcare software technology company.  From 1997 to 2000, Mr. Borrelli was Director of Business Development and then Director of Sales, Marketing and Customer Support at Analogic Corporation, a compan y that designs and manufactures high performance medical and security imaging systems. From 1989 to 1997 he held senior management positions including Vice President of Marketing at Polaroid’s healthcare division. Prior to 1989 Mr. Borrelli held marketing management, program management and sales management of increasing responsibility with Johnson and Johnson, AGFA and General Electric’s medical divisions.  Mr. Borrelli received a BA in bio-physics from Wittenberg University and an MBA from Cleveland State University and is a licensed radiographic technologist.

Carl C. Smith, Jr., Vice President.   Mr. Smith was promoted to Vice President of Operations and officer of Guardian on August 9, 2007, responsible for all research, development, production, and customer support.  From June 2005 until August 2007, Mr. Smith was Director of Operations for Guardian’s Aviation Security group. From 1998 to June 2005, Mr. Smith served as Vice President, Systems Engineering Division, Delex Systems, Inc., a privately held systems engineering company, and was responsible for providing business and technical advice to senior decision makers within several federal agencies.  From 1989 to 1998, Mr. Smith was co-founder of The Prometheus Co., Inc., a consulting company focused on project and financial management in major defense acquisition programs.  From 1980 to 1989, Mr. Smith was a

Senior Manager with the aerospace and defense practice of KPMG Peat Marwick, providing consulting services to both Department of Defense and Industry clients.  Mr. Smith was a naval aviator in various operations and training billets during the 10 years of active service, and also holds a commercial pilot license.  He retired from the U.S. Naval Reserve with the rank of Captain.  Mr. Smith received a B.S. from the U.S. Naval Academy and an M.S. in Systems Management from the University of Southern California.

Each officer of Guardian is appointed by the board of directors and holds his office at the pleasure and discretion of the board of directors or until his earlier resignation, removal or death.

There are no material proceedings to which any director, officer or affiliate of Guardian, any owner of record or beneficially of more than five percent of any class of voting securities of Guardian, or any associate of any such director, officer, affiliate of Guardian or security holder is a party adverse to Guardian or any of its subsidiaries or has a material interest adverse to Guardian or any of its subsidiaries.

Independent Directors

Our board of directors has determined that the following directors are independent as “independence” is defined in Section 121A of the American Stock Exchange listing standards, the standard we have adopted for determining the independence of our directors: Henry A. Grandizio, Sean W. Kennedy, Charles T. Nash, and Ronald R. Polillo.  The board of directors maintains an audit committee, nominating committee and compensation committee as discussed under Item 10 – Directors and Executive Officers of the Registrant, above.  The current members of such committees as of the date of the filing of this report are as follows:

Audit

-

Henry A. Grandizio, Chairman

Sean W. Kennedy

Charles T. Nash

Compensation

-

Sean W. Kennedy, Chairman

Charles T. Nash

Henry A. Grandizio

Nominating

-

Charles T. Nash, Chairman

Sean W. Kennedy

Ronald R. Polillo

The Board of Directors

The Board oversees the business affairs of Guardian and monitors the performance of management. During the fiscal year ended December 31, 2007, the Board held three meetings and handled certain business through unanimous written consents of its board in accordance with its by-laws and applicable Delaware law.  Members of the board of directors attended all of such meetings. Guardian has a policy of requesting all directors to attend annual meetings of stockholders.  Currently, the Board has three committees, an Audit, Compensation and Nominating Committee.  The membership and functions of such committees are described below.

Audit Committee

The Audit Committee consists of Henry A. Grandizio, Sean W. Kennedy and Charles T. Nash.  During 2007, the Audit Committee chairman was Mr. Michael M. Mace, who resigned on September 17, 2007.  Also on September 17, 2007, Mr. Henry A. Grandizio was elected a director and appointed chairman of the Audit Committee.  The Audit Committee held four meetings during fiscal 2007.   Mr. Kennedy attended all of such meetings, Messrs. Nash and Grandizio attended three of such meetings, and Mr. Mace did not attend any of such committee meetings.  The board of directors has determined that each member of the Audit Committee is independent, as independence is defined in Section 121A of the American Stock Exchange listing standards.

The board of directors has adopted a written charter for the Audit Committee which provides that the Audit Committee's primary functions are to (a) oversee the integrity of Guardian’s financial statements and Guardian’s compliance with legal and regulatory reporting requirements, (b) appoint a firm of certified public accountants whose duty it is to audit Guardian’s  financial records for the fiscal year for which it is appointed, (c) evaluate the qualifications and independence of

the independent auditors, (d) oversee the performance of Guardian’s internal audit function and independent auditors, and (e) determine the compensation and oversee the work of the independent auditors. It is not the duty of the Audit Committee to plan or conduct audits or to determine that Guardian’s financial statements are complete and accurate and are prepared in accordance with generally accepted accounting principles in the United States.  Management is responsible for preparing Guardian’s financial statements, and the independent auditors are responsible for auditing those financial statements.

Compensation Committee

The Compensation Committee consists of Sean W. Kennedy, Charles T. Nash and Henry A. Grandizio.  Mr. Kennedy was appointed chairman on September 14, 2004.  The board of directors has adopted a written charter for the Compensation Committee. The Compensation Committee held seven meetings during fiscal 2007.  During 2007, the then current members of Messrs. Kennedy and Nash attended all of such meetings.  Mr. Grandizio was appointed to the committee effective January 1, 2008.

The Compensation Committee's primary functions are to:

·

evaluate the performance of the CEO and determine the CEO’s total compensation and individual elements thereof;

·

determine the compensation level of the CEO and President and review and approve corporate goals and objectives relevant to senior executive compensation (including that of the CEO), evaluate senior management's performance in light of those goals and objectives, and determine and approve senior management's compensation level based on their evaluation;

·

evaluate the performance of other executive officers and determine their total compensation and individual elements thereof;

·

make all grants of restricted stock or other equity based compensation to executive officers;

·

administer Guardian's compensation plans and programs;

·

recommend to the board for approval equity based plans and incentive compensation plans;

·

review management development and succession programs; and

·

review appropriate structure and amount of compensation for board members.

The board of directors has determined that all members of the Compensation Committee currently are independent within the meaning set forth in Section 121A of the American Stock Exchange Company Guide.

Nominating Committee

The Audit Committee consists of three members, Sean W. Kennedy, Charles T. Nash and Ronald R. Polillo.  During 2007, Mr. Nash served as chairman.  Mr. Ronald R. Polillo was appointed to the Nominating Committee effective January 1, 2008.  The Nominating Committee held four meetings during fiscal 2007.   Messrs. Nash and Kennedy attended all of such meetings. The board has adopted a written charter for the Nominating Committee.

The Nominating Committee's primary functions are to:

·

consider, recommend and recruit candidates to serve on the board and to recommend the director nominees selected by the Committee for approval by the board and the stockholders of Guardian;

·

recommend to the board when new members should be added to the board;

·

recommend to the board the director nominees for the next annual meeting;

·

when vacancies occur or otherwise at the direction of board, actively seek individuals whom the Committee determines meet the criteria and standards for recommendation to the board;

·

consider recommendations of director nominees by stockholders and establish procedures for shareholders to submit recommendations to the Committee in accordance with applicable SEC rules and applicable listing standards;

·

report, on a periodic basis, to the board regarding compliance with the Committee’s Charter, the activities of the Committee and any issues with respect to the duties and responsibilities of the Committee;

·

establish a process for interviewing and considering a director candidate for nomination to the board;

·

recommend to the board guidelines and criteria as to the desired qualifications of potential board members;

·

provide comments and suggestions to the board concerning board committee structure, committee operations, committee member qualifications, and committee member appointment;

·

review and update the Committee’s charter at least annually, or more frequently as may be necessary or appropriate; and

·

perform such other activities and functions related to the selection and nomination of directors as may be assigned from time to time by the board of directors including, but not limited to, preparing or causing to be prepared any reports or other disclosure required with respect to the Committee by any applicable proxy or other rules of the SEC or as required by the rules and regulations of the American Stock Exchange or any other exchange or over-the-counter market on which the securities of Guardian may then be listed or quoted.

 ADVISORY BOARD

On November 7, 2007, we established an advisory board to advise and make non-binding recommendations to our board of directors and management regarding the strategic positioning of our new products, future product development, industry trends, and potential research collaborations with third parties.  Members serve for a term of one year.  Currently, our advisory board consists of two members, including Mr. Polillo, who also acts as the chairman of the advisory board.  The other member includes Dr. Ronald Schilling.

Each member of the Advisory Board of the Corporation (other than the Chairman of the Advisory Board) to be paid or provided as annual compensation an aggregate of 15,000 non-qualified stock options to purchase common stock, $.001 par value per share, of the Corporation pursuant to the Plan, each such option to be exercisable at a price equal to the fair market value of the Common Stock on the date of grant, such options to be exercisable immediately following the date of grant and for a term of ten (10) years thereafter (unless terminated earlier in accordance with the terms of the Plan).  Such compensation was recommended by the compensation committee, and approved by the board of directors of the Company.

AUDIT COMMITTEE EXPERT

We have designated Mr. Henry A. Grandizio as our “audit committee financial expert.”

CODE OF ETHICS

On August 29, 2003, we adopted a Code of Ethics for our chief executive officer, chief financial officer, principal accounting officer or controller, and persons performing similar functions.  A copy of the Code of Ethics has been posted to our website.  Our website address is www.guardiantechintl.com.  

SECTION 16(a) COMPLIANCE AND REPORTING

Under the securities laws of the United States, the Company’s directors, executive officers, and certain securities holders of the Company’s common stock are required to report their initial ownership of the Company’s common stock and any subsequent changes in that ownership to the SEC.  Specific due dates for these reports have been established and the Company is required to disclose any failure to file by these dates.

Based on our review of Forms 3, 4 and 5 submitted to us pursuant to Rule 16a-3 under the Exchange Act by our executive officers and directors with respect to our most recent fiscal year, except as note below for the year ended December 31, 2007, there were no known (1) late reports, (2) transactions that were not reported, or (3) known failures to file a required report by such executives officers and directors.  Each of Messrs. Richard F. Borrelli, Henry A. Grandizio, Ronald R. Polillo, and Carl C. Smith late filed their Forms 3.

Late filing of Form 4 and the number of occurrences: Messrs. Henry A. Grandizio (one), Gregory E. Hare (one), Sean W. Kennedy (three), and Charles T. Nash (three).

ITEM 11.     EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Overview

The material principles underlying our goals for executive compensation policies and decisions are intended to:

• implement compensation packages which are competitive with comparable organizations and allow us to attract and retain the best possible executive talent;

• relate annual and long-term cash and stock incentives to achievement of measurable corporate and individual performance objectives;

• appropriately balance the mix of cash and noncash short and long-term compensation;

• encourage integrity in business dealings through the discretionary portion of our compensation package; and

• align executives’ incentives with long-term stockholder value creation.

We determine the appropriate levels of total executive compensation, including for our named executive officers, and each compensation element, based on several factors, such as an informal benchmarking of our compensation levels to those paid by comparable companies, our overall performance, each individual executive officer’s performance, the desire to maintain level equity and consistency among our executive officers, and other considerations that we deem to be relevant.  

In an effort to assist the Compensation Committee in the evaluation process, in August 2005, we engaged an independent compensation consultant to evaluate certain aspects of our compensation practices and to assist in developing our executive compensation program. To this end, the consultant developed a competitive peer group and performed benchmarking analyses of competitive compensation levels, and used the following companies as a source of the analysis: Merge eFilm, IDX Systems Corporation, DexCom, Inc, NeuStar Inc, Sybari Software, Inc, Technology Spectrum, Inc, Optio Software, Inc, and RadView Software, Ltd.  However, we have not implemented any formal or informal policy for allocating compensation between long-term and short-term, between cash and noncash or among the different forms of noncash compensation.   We did not engage a compensation consultant during 2006 or 2007.

Our Compensation Committee reviews and approves all of our compensation policies.   Our Compensation Committee is responsible for evaluating the performance of all our named executive officers, their compensation levels, criteria for grants of stock options, and reviewing and evaluating the terms of their employment agreements.  Our Compensation Committee performs such tasks periodically and solicits the input of our executive officers.  The compensation levels for our named executive officers are based upon management recommendations, including the recommendations of our CEO.

Our executive compensation program during 2007 consisted of three principal elements: base salary, stock options, and severance and change in control benefits.  We also provided to two employees a car allowance. Except for Messrs. Borrelli and Smith, we compensate our named executive officers according to the terms of their employment agreements with us. Messrs. Borelli and Smith’s salaries were determined based on market levels at the time of employment, individual responsibilities, performance, and experience.  We made no change to Mr. Borrelli’s salary at the time he became a named executive officer.  Mr. Smith received an increase at the time of his promotion in August 2007, and such increase was based on the new responsibilities, performance and in relation to the salaries we pay our other executive officers.  Our ability to provide any cash incentive compensation, plan or non-plan has been constra ined by our limited cash resources. Accordingly, our executive compensation arrangements have been relatively straight forward.

Moreover, due to our limited available cash, during 2006, four of our then named executive officers deferred a significant portion of their base salaries.  During 2007, three of our named executives have deferred a small portion of their base salaries.  As of December 31, 2007, the Company has an aggregate salary deferral of approximately $570,425.

 Elements of Compensation

The principal elements of our compensation package are as follows, although we have not provided cash based compensation other than for base salary. We may consider in the future other cash based compensation once we become able to do so.

• base salary;

• annual cash incentive bonuses;

• long-term incentive plan awards using stock options;

• severance benefits;

• change in control benefits;

• 401(k) savings plans;

• Retirement benefits;

• Perquisites and other compensation.

Base Salary

The amount of base salary paid to our named executive officers is used to recognize the experience, skills, knowledge and responsibilities required of all our employees, including our named executive officers. When establishing base salaries for the executives, the Compensation Committee and management consider a number of factors, including the seniority of the individual, the functional role of the position, the level of the individual’s responsibility, the ability to replace the individual, the base salary of the individual at his prior employment and various qualified candidates to assume the individual’s role. Generally, we believe our executive’s base salaries should be targeted near the median of the range of salaries for executives in similar positions at comparable companies.

Except for Mr. Borelli and Mr. Smith, the base salary of each of our named executive officers is determined on the basis of such officer’s employment agreement with us.  At a minimum, our Compensation Committee reviews annually each executive officer’s base salary during our performance review. Base salaries may be adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance, experience and the our cash position.  During 2007, we did not increase the base salary of any of Messrs. Trudnak, Donovan, Hare or Borrelli, and do not expect to be able to do so in the near future.  Mr. Smith received an increase at the time of his promotion, and such increase was based on his new responsibilities, performance and the level of salaries we pay our other named executive officers.  We do not expect to increase Mr. Smith’s salary in the near future.

Also, as discussed above, and due to our limited available cash, during 2006, four of our then named executives deferred a significant portion of their base salaries.  During 2007, three of our five named executives have deferred a small portion of their base salaries.  As of December 31, 2007, the Company has an aggregate salary deferral of approximately $570,425.

Annual Cash Incentive Bonus

Due to the limited cash available to us, we currently do not have a bonus plan and, during 2007, we did not make any annual cash incentive award to our employees, including our named executive officers.

 Long-Term Incentive Plan Awards

We believe our long-term performance is fostered by a compensation methodology which compensates all employees, including our named executive officers, through the use of stock-based awards that foster a continuing stake of each employee in our long-term success.    We currently utilize stock options, and reserve the right at a later date to utilize restricted stock awards and other rights to receive compensation based on the value of our stock. Currently, we do not have a plan requiring us to make any grant or award of stock options or other equity based awards, except for certain annual awards to members of our board of directors who are also independent, discussed under “Director Compensation and Benefits,” below.

Our policy is to grant stock options to new employees pursuant to our 2003 Stock Incentive Plan for the reasons discussed above.  The amount of such grant is determined by the Compensation Committee.  During 2006 and 2007, we granted stock options to our new employees.  Generally, the options vest 50% after the first year of employment and the remaining 50% after the second year of employment and have an exercise price equal to the fair market value of our stock on the date of grant.  In October 2007, as part of Mr. Carl C. Smith, Jr. promotion to Vice President of the Company, he received

50,000 options at the fair value on the date of grant and vesting over a two year period. In January 2007 and 2008, the Compensation Committee approved the grant of stock options to all current employees, including our named executives, as an incentive for continued contributions in moving our product development efforts forward. The options vest over a two year period from the date of grant.  Stock options granted during 2006 and 2007, were based on management’s recommendation and discussions with the Compensation Committee.  Factors considered in granting stock options included: (i) our general policy of not increasing base salaries of all employees during the past four years and in the foreseeable future, (ii) the performance of employees, and (iii) the employees’ increasing responsibilities in a dynamic, and shrinking organization.

Our 2003 Stock Incentive Plan was adopted by our board of directors on August 29, 2003, and amended and restated on December 2, 2003.  The Plan was approved by stockholders at the special meeting of our stockholders that was held on February 13, 2004 which was to provide certain of our employees, including our executive officers, with incentives to help align those employees’ interests with the interests of our stockholders. Recently, our 2003 Stock Incentive Plan has been the principal method for our executive officers to acquire equity interests in us. We believe that the annual aggregate value of these awards should be set near competitive median levels for comparable companies. However, due to the early stage of our business, we expect to provide a greater portion of total compensation to our executives through stock options rather than cash-based compensation.

Our Compensation Committee administers the 2003 Stock Incentive Plan, and consists of two or more directors appointed by our board of directors each of whom is a non-employee director and an outside director within the meaning of Section 162(m) of the Internal Revenue Code, and determines the type and amount of awards to be granted to eligible employees, directors and consultants based upon the principles underlying our executive compensation program.  Awards under our 2003 Stock Incentive Plan are made throughout the year and are generally tied to Compensation Committee meetings. A total of 30,000,000 shares of our common stock are currently authorized for issuance under the 2003 Stock Incentive Plan. Shares subject to awards which expire, or are cancelled, or forfeited will again become available for issuance under the 2003 Stock Incentive Plan as described below. As of December 31, 2007, there were 7,240,654 shares reserved for issuance under the 2003 Stock Incentive Plan and 21,121,346 shares available for future awards.

Under the Plan, Guardian may issue options which will result in the issuance of up to an aggregate of 30,000,000 shares of our common stock. This aggregate number of shares and the number of shares in an award (as well as the option price) may be adjusted if the outstanding shares of Guardian are increased, decreased or exchanged through merger or other stock transaction.  The Plan provides for options which qualify as incentive stock options (Incentive Options or ISOs) under Section 422 of the Internal Revenue Code of 1986, as well as the issuance of non-qualified options (Non-Qualified Options) which do not so qualify. The shares issued by Guardian under the Plan may be either treasury shares or authorized but unissued shares as Guardian’s board of directors or the Compensation Committee may determine from time to time.

Under the Plan, Guardian may grant Non-Qualified Options to independent directors or consultants of Guardian and its subsidiaries at any time and from time-to-time as shall be determined by the Compensation Committee. The Plan also provides for the issuance of Incentive Options to any officer or other employee of Guardian or its subsidi­aries as selected by the Compensation Committee. Options granted under the Plan must be evidenced by a stock option agreement in a form consistent with the provisions of the Plan.

The price at which shares of common stock covered by the option can be purchased is determined by the Compensation Committee. In the case of an Incentive Option, the exercise price shall not be less than the fair market value of Guardian’s common stock on the date the option was granted or in the case of any optionee who, at the time such incentive stock option is granted, owns stock possess­ing more than ten percent of the total combined voting power of all classes of stock of Guardian or a subsidiary, not less than one hundred ten percent of the fair market value of such stock on the date the Incentive Option is granted.

To the extent that an Incentive Option or Non-Qualified Option is not exercised within the period in which it may be exercised in accordance with the terms and provisions of the Plan described above, the Incentive Option or Non-Qualified Option will expire as to any then unexercised portion. To exercise an option, the Plan participant must provide written notice of the exercise setting forth the number of shares with respect to which the option being exercised to Guardian and tender an amount equal to the total option exercise price of the underlying shares in accordance with the relevant option agreement. The right to purchase shares is cumulative so that once the right to purchase any shares has vested; those shares or any portion of those shares may be purchased at any time thereafter until the expiration or termination of the option.

Except as specifically provided in an option agreement, options granted under the Plan may not be sold, pledged, transferred or assigned in any way, except by will or by the laws of descent and distribution, and during the lifetime of a participant to whom the Incentive Option is granted, the Incentive Option may be exercised only by the participant.

The Plan may be modified or terminated at any time.  Any such amendment or termination will not affect outstanding options without consent of the optionee.

The following is a brief summary of the principal income tax consequences of awards under the Plan. This summary is based on current federal income tax laws and interpretations thereof, all of which are subject to change at any time, possibly with retroactive effect.  This summary is not intended to be exhaustive.

·

Non-Qualified Options.  A participant who receives Non-Qualified Options does not recognize taxable income upon the grant of an option, and Guardian is not entitled to a tax deduction.  Guardian is generally entitled to tax a deduction in an amount equal to the amount taxable to the participant as ordinary income in the year the income is taxable to the participant (generally when the option is exercised).  Any appreciation in value after the time of exercise will be taxable to the participant as capital gain (assuming it is a capital asset) and will not result in a deduction by Guardian.

·

Incentive Options.  A participant who receives an Incentive Option does not recognize taxable income upon the grant or exercise of the option and Guardian is not entitled to a tax deduction.  The difference between the option price and the fair market value of the option shares on the date of exercise, however, will be treated as an item of adjustment for purposes of determining the alternative minimum tax liability, if any, of the participant in the year of exercise.

·

A participant will recognize gain or loss upon the disposition of shares acquired from the exercise of ISOs.  The nature of the gain or loss depends on how long the option shares were held.  If the option shares are not disposed of pursuant to a “disqualifying disposition” (i.e., no disposition occurs within two years from the date the option was granted or one year from the date of exercise), the participant will recognize long-term capital gain or capital loss depending on the selling price of the shares.  If the option shares are sold or disposed of as part of a disqualifying disposition, the participant must recognize ordinary income in an amount equal to the lesser of the amount of gain recognized on the sale or the difference between the fair market value of the option shares on the date of exercise and the option price.  Any additional gain will be taxable to the participant as a long-term or sh ort term capital gain, depending on how long the option shares were held.  Guardian is generally entitled to a deduction in computing its federal income taxes for the year of disposition in an amount equal to any amount taxable to the participant as ordinary income.

Stock Options:   

Stock option grants are typically made at the commencement of employment and generally thereafter by the Compensation Committee upon achievement of key strategic goals and on the anniversary of previous grants. Periodic stock option grants are made at the discretion of the Compensation Committee, and in appropriate circumstances the Compensation Committee may consider the recommendation of members of management. In January 2007 and 2008, most employees were awarded qualified stock options, including the named executives officers, as footnoted in the below “Grants of Plan- Based Awards” table. The Compensation Committee determines the exercise price of options awards granted under our 2003 Stock Incentive Plan, but with respect to qualified stock options intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code, the exercise price must at least b e equal to the fair market value of our common stock on the date of grant.

Our Compensation Committee determines the term of all options with a goal of competitiveness in the marketplace. Generally, the option awards vest 50% per year, over a two year period.  Each option shall expire on the earliest of (a) ten years from the date it is granted, (b) sixty days after the optionee dies or becomes disabled, (c) immediately upon the optionee's termination of employment or service or cessation of board service, whichever is applicable, or (d) such date as the board of directors or Compensation Committee shall determine, as set forth in the relevant option agreement; provided, however, that no ISO which is granted to an optionee who, at the time such option is granted, owns stock possessing more than ten percent of the total combined voting power of all classes of stock of Guardian or any of its subsidiaries, shall be exercisable after the expiration

of five years from the date such option is granted. Option holders are also generally allowed to exercise a stock option at any time after the option has vested and become exercisable.

Unless otherwise determined by the Compensation Committee, the 2003 Stock Incentive Plan does not allow for the sale or transfer of awards under the plan other than by will or the laws of descent and distribution, and may be exercised only during the lifetime of the participant and only by such participant. We do not have a policy to recover awards if relevant performance measures upon which they were based are restated or otherwise adjusted in a manner that would reduce the size of a payment. Our 2003 Stock Incentive Plan terminates on August 29, 2013.

In anticipation of implementation of SFAS 123R, we accelerated the vesting of the outstanding options in December 2005, prior to adopting SFAS 123R.  We applied the guidance of SAB 107 in conjunction with the adoption of SFAS 123R.  This acceleration was for all employees, including the named executive officers.

Restricted Stock:

Currently, we do not utilize restricted stock as a means of compensating our employees, including our named executive officers; however, we may do so in the future.    

Severance and Change in Control Benefits

Three of our five named executive officers are covered by employment agreements which specify payments in the event the executive’s employment is terminated. The type and amount of payments vary by executive level and the nature of the termination. These termination benefits are payable if and only if the executive’s employment terminates as specified in the applicable employment agreement.  Also, two of our named executive officers, Mr. Donovan and Mr. Hare, have employment agreements that require us to make certain payments in the event of a change in control and upon the occurrence of certain other material events.

Our primary reason for including termination and change in control benefits in compensation packages is to attract and retain the best possible executive talent. We believe our termination benefits are competitive with general industry packages. For a further description of these severance benefits, see “—Employment Agreements” and “Severance and Change in Control Benefits” below.

In addition, our 2003 Stock Incentive Plan provides that in the event of our “change in control,” the Compensation Committee may otherwise determine the status of unvested options or restricted stock, including, without limitation, whether the successor corporation will assume or substitute an equivalent award, or portion thereof, for each outstanding award under the plan or, if there is no assumption or substitution of unvested outstanding awards, such unvested awards may be canceled.

 401(k) Savings Plan

We maintain a tax-qualified retirement plan that provides eligible employees with an opportunity to save for retirement on a tax advantaged basis. Eligible employees are able to participate in the 401(k) plan as of the first day of the month following 90 days of employment. The 401(k) plan permits us to make profit sharing contributions to eligible participants, although we currently do not match contributions. Pre-tax contributions are allocated to each participant’s individual account and are then invested in selected investment alternatives according to the participants’ directions. All employee contributions are 100% vested. The 401(k) plan is intended to qualify under Sections 401(a) and 501(a) of the Internal Revenue Code. As a tax-qualified retirement plan, contributions to the 401(k) plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan. We believe tha t offering a 401(k) retirement plan fosters our ability to attract and retain the best possible executive talent.

Deferred Compensation and Pension Plans

Currently, we do not have a company sponsored deferred compensation or pension plan for all employees, including our named executive officers. 

Perquisites and Other Compensation

During the each of the two fiscal years ended December 31, 2007, two of our named executive officers received reimbursement of up to $6,000 annually for automobile expenses as required under the terms of their employment agreements. See “—Employment, Severance and Change in Control Arrangements,” below.  Currently, we do not provide short or long term disability or life insurance coverage for employees, including our named executive officers, as a result of our current cash position.  We do provide health care benefits to all employees including our named executive officers, and such benefits are contributory.

We intend to continue to maintain executive benefits and perquisites for officers, however, the Compensation Committee may in its discretion revise, amend or increase named executive officers’ perquisites as it deems advisable. We believe these benefits and perquisites are currently not above median competitive levels for comparable companies and are beneficial in attracting and retaining executive talent.

Equity Ownership Guidelines

Currently, we do not have any equity ownership guidelines for our executive officers or directors.

Role of Executive Officers in Executive Compensation

The Compensation Committee considers management’s recommendation and other factors mentioned above in determining the compensation payable to each of the named executive officers as well as the compensation of the members of the board of directors.

Summary Compensation Table

The following Summary Compensation Table sets forth the compensation earned or awarded to our CEO, President and COO, CFO and other named executive officers during each of the two fiscal years ended December 31, 2007.

Name and Principal Position	Year	Compensation ($)
		Salary	Bonus	Stock Options Awards (1)	All Other (2)	Total
Michael W. Trudnak (3)	2006	$ 275,000	$ -	$ -	$ 6,000	$ 281,000
Chairman, CEO	2007	275,000	-	517,843	6,000	798,843
William J. Donovan (4)	2006	265,000	-	-	6,000	271,000
President/COO	2007	265,000	-	305,341	6,000	576,341
Gregory E. Hare (5)	2006	200,000	-	412,000	-	612,000
Chief Financial Officer	2007	200,000	-	280,211	-	480,211
Carl C. Smith, Jr. (6)	2006	130,000	-	-	-	130,000
Vice President	2007	144,585	-	117,750	-	262,335
Richard F. Borrelli (7)	2006	113,000	-	-	-	113,000
Vice President	2007	112,000	-	77,280	-	189,280
Steven V. Lancaster (8)	2006	125,000	-	-	-	125,000
Vice President	2007	84,000	-	-	-	84,000
Darrell E. Hill (9)	2006	125,000	-	-	-	125,000
Vice President	2007	-	-	-	-	-
(1) Reflects the grant date fair value of the options estimated using option-pricing models calculated in accordance with FAS 123(R). See Note 2 "Significant Accounting Policies" to the Consolidated Financial Statements for a discussion of the relevant assumptions used in calculating the grant date fair value pursuant to FAS 123(R).
(2) All Other Compensation consists of monthly automobile allowance expenses.
(3) For Mr. Trudnak, includes 2007 accrued and unpaid salary of 17,296, for a cumulative deferral of $252,243.
(4) For Mr. Donovan, includes 2007 accrued and unpaid salary of $16,677, for a cumulative deferral of $140,722.
(5) For Mr. Hare, includes 2007 accrued and unpaid salary of $12,381, for a cumulative deferral of $122,717.
(6) For Mr. Smith, includes 2007 accrued and unpaid salary of $2,585. On August 9, 2007 was promoted to Vice President and Officer of the Company.
(7) For Mr. Borrelli, includes 2007 accrued and unpaid salary of $3,692. On August 9, 2007 was elected as an Officer of the Company.
(8) Mr. Lancaster resigned effective August 25, 2007.
(9) For Mr. Hill, includes a cummulative deferral of $48,493 at December 31, 2007, and $49,993 at December 31, 2006. Mr. Hill resigned effective September 8, 2007.

Grants of Plan-Based Awards Table

The following table sets forth information regarding stock option awards to our named executive officers under our 2003 Stock Incentive Plan during the two fiscal years ended December 31, 2007.

Name	Fiscal Year	Grant Date	All Other Option Awards: Number of Securities Underlying Options (#)	Exercise or Base Price of Option Awards ($/Share)
Michael W. Trudnak	2006	-	0	$0.00
	2007	1/14/2007 (1)	125,000	0.90
	2007	10/8/2007 (2)	707,530	0.81
William J. Donovan	2006	-	0	0.00
	2007	1/14/2007 (1)	125,000	0.82
	2007	10/8/2007 (2)	353,372	0.73
Gregory E. Hare	2006	1/16/2006 (1)	200,000	2.40
	2007	1/14/2007 (1)	125,000	0.82
	2007	10/8/2007 (2)	312,840	0.73
Carl C. Smith, Jr.	2006	-	0	0.00
	2007	1/14/2007 (1)	125,000	0.82
	2007	10/18/2007 (1)	50,000	0.75
Richard F. Borrelli	2006	-	0	0.00
	2007	1/14/2007 (1)	112,000	0.82
Steven V. Lancaster (resigned 8/25/07)	2006	-	0	0.00
	2007	1/14/2007 (3)	0	0.00
Darrell E. Hill (resigned 9/8/07)	2006	-	0	0.00
	2007	1/14/2007 (3)	0	0.00
(1) Two year vesting period with 50% vested after year one, and 50% vested after year two.
(2) Options issues on October 8, 2007 are in lieu of compensation for the named executives for deferring a significant portion of their 2006 salaries, due to continued cash flow shortage.
(3) Options were granted but forfeited upon resignation.

Outstanding Equity Awards at Fiscal Year-End Table

The following table sets forth information for each named executive officer regarding the number of shares subject to exercisable and unexercisable stock options for the two fiscal years ended December 31, 2007.

Name	Option Awards (1)
	Number of Securities Underlying Unexercised Options (#)		Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)	Option Exercise Price ($)	Option Expiration Date
	Exercisable	Unexercisable
Michael W. Trudnak	450,000	0	0	$0.36	2/18/2014
	10,000	0	0	3.60	2/18/2014
	0	125,000	0	0.90	1/14/2017
	707,530	0	0	0.81	10/8/2017
William J. Donovan	200,000	0	0	0.50	8/18/2013
	600,000	0	0	0.50	2/18/2014
	10,000	0	0	3.60	2/18/2014
	200,000	0	0	2.67	11/21/2015
	0	125,000	0	0.82	1/14/2017
	353,372	0	0	0.73	10/8/2017
Gregory E. Hare	100,000	100,000	0	2.40	1/16/2016
	0	125,000	0	0.82	1/14/2017
	312,840	0	0	0.73	10/8/2017
Carl C. Smith, Jr.	0	125,000	0	0.82	1/14/2017
	0	50,000	0	0.75	10/18/2017
Richard F. Borrelli	0	112,000	0	0.82	1/14/2017
Steven V. Lancaster	10,000	0	0	3.60	2/18/2014
Darrell E. Hill	10,000	0	0	3.60	2/18/2014

Option Exercises Table

The following table sets forth information for each named executive officer regarding the number of shares acquired upon the exercise of stock options during the two years ended December 31, 2007, and the aggregate dollar value realized upon the exercise of the option.  We currently do not have stock appreciation rights (SARs) or restricted stock plans.

Name	Fiscal Year	Option Awards
		Number of Shares Acquired on Exercise (#)	Value Realized On Vesting ($) (1)
Michael W. Trudnak	2006	0	$ 0
	2007	0	0
William J. Donovan	2006	0	0
	2007	0	0
Gregory E. Hare	2006	0	0
	2007	0	0
Carl C. Smith, Jr.	2006	0	0
	2007	0	0
Richard F. Borrelli	2006	0	0
	2007	0	0
Steven V. Lancaster	2006	400,000	540,000
	2007	250,000	140,500
Darrell E. Hill	2006	200,000	320,000
	2007	70,000	18,100
(1) Represents the difference between the market price at exercise and the exercise price.

Employment, Severance and Change in Control Arrangements

The employment agreements for each named executive officer (except for Messrs. Borelli and Smith with whom we have not entered into any employment agreement) are multiple years in duration and automatically renew unless terminated by either party in accordance with its terms. Each of the named executive officers employment agreement provides for an annual base salary and a discretionary annual incentive cash bonus and/or equity awards.  In subsequent years, the amount of annual incentive cash and/or equity award bonus is subject to determination by our board of directors without limitation on the amount of the award. Each of the agreements provides for a severance payment over a prescribed term in the event the named executive is terminated without cause, including for Mr. Donovan and Mr. Hare, if their duties are materially changed in connection with a change in control. Each agreement also provides that no severance payment is du e in the event of termination for cause, which includes termination for willful misconduct, conviction of a felony, dishonesty or fraud. Each agreement further contains an agreement by the named executive officer not to compete with us for a defined term equal in length to the applicable severance payment in the respective employment agreement, which we feel is reasonable and consistent with industry guidelines.

Michael W. Trudnak.   Mr. Trudnak serves as Chairman of the Board, Secretary, and Chief Executive Officer and is a Class III director.  We entered into an employment agreement with Mr. Trudnak, which commenced on January 1, 2003.  We amended his agreement effective December 10, 2004. The amended agreement is for a three year term commencing June 26, 2003, and automatically renews for successive one year terms unless earlier terminated.  Mr. Trudnak’s employment agreement automatically renewed for a further one year term on June 25, 2006.  The employment agreement provides for annual compensation to Mr. Trudnak of $275,000 and a monthly automobile allowance of $500.  The agreement provides for incentive compensation and/or bonuses as determined by Guardian, participation in Guardian’s stock option plan, and participation in any Guardian employee benefit policies or plans.  The employment agreement m ay be terminated upon the death or disability of the employee or for cause, in which event Guardian’s obligation to pay compensation shall terminate immediately.  In the event the agreement is terminated by us other than by reason of the death or disability of the employee or for cause, the employee is entitled to payment of his base salary for one year following termination.  The employee may terminate the agreement on 30 days’ prior notice to Guardian. The employee has entered into an employee proprietary information, invention assignment and non-competition agreement, pursuant to which the employee agrees not to disclose confidential information regarding Guardian, agrees that inventions conceived during his employment become the property of

Guardian, agrees not to compete with the business of Guardian for a period of one year following termination of employment, and agrees not to  solicit employees or customers of Guardian following termination of employment.

William J. Donovan.   Mr. Donovan serves as President and Chief Operating Officer of Guardian, and previously served as Chief Financial Officer.  We entered into a new employment agreement with Mr. Donovan on November 21, 2005, which superseded his previous employment agreement with Guardian, dated effective August 18, 2003.  The new employment agreement is for a term of three (3) years unless earlier terminated, and is automatically renewed for a one (1) year term unless earlier terminated.  The employment agreement provides for an annual salary of $265,000.  The agreement provides for annual performance bonuses based on goals established by Guardian and agreed to by Mr. Donovan, a monthly automobile allowance of $500, participation in our stock option and other award plans (which options or awards shall immediately vest upon a “change in control”), and participation in any benefit policies or plans adopted by us on the same basis as other employees at Mr. Donovan’s level.

The employment agreement may be terminated by Mr. Donovan on 30 days’ prior written notice.  The employment agreement may be terminated by us by reason of death, disability or for cause.  In the event the agreement is terminated for death or disability of the employee, our obligation to pay compensation to the employee shall terminate immediately; provided that if we do not maintain disability insurance for the employee, he is entitled to be paid his base salary for one year following his disability.  In the event the he is terminated other than by reason of his death, disability, for cause, or change in control, Mr. Donovan is entitled to payment of his base salary for one year following termination.  Further if Mr. Donovan terminates his employment for the following material reasons (each a “material reason”): written demand by us to change the principal workplace of the employee to a location outsid e of a 50-mile radius from the current principal address of Guardian; a material reduction in the number or seniority of personnel reporting to employee or a material reduction in the frequency  or in nature of matters with respect to which such personnel are to report to employee, other than as part of a company-wide reduction in staff; an adverse change in employee’s title; a material decrease in employee’s responsibilities; or a material demotion, Mr. Donovan is entitled to be paid the greater of the base salary remaining under the employment agreement or twelve months base salary.

In the event of a “change in control” of Guardian and, within 12 months of such change of control, employee’s employment is terminated or one of the events in the immediately preceding sentence occurs, Mr. Donovan is entitled to be paid his base salary for 18 months following such termination or event.  A “change in control” would include the occurrence of one of the following events:

·

the approval of the stockholders for a complete liquidation or dissolution of Guardian;

·

the acquisition of 20% or more of the outstanding common stock of Guardian or of voting power by any person, except for purchases directly from Guardian, any acquisition by Guardian, any acquisition by a Guardian employee benefit plan, or a permitted business combination;

·

if two-thirds of the incumbent board members as of the date of the agreement cease to be board members, unless the nomination of any such additional board member was approved by three-quarters of the incumbent board members;

·

upon the consummation of a reorganization, merger, consolidation, or sale or other disposition of all or substantially all of the assets of Guardian, except if (i) all of the beneficial owners of Guardian’s outstanding common stock or voting securities who were beneficial owners before such transaction own more than 50% of the outstanding common stock or voting power entitled to vote in the election of directors resulting from such transaction in substantially the same proportions, (ii) no person owns more than 20% of the outstanding common stock of Guardian or the combined voting power of voting securities except to the extent it existed before such transaction, and (iii) at least a majority of the members of the board before such transaction were members of the board at the time the employment agreement was executed or the action providing for the transaction.

Also, Mr. Donovan has entered into a proprietary information, invention assignment and non-competition agreement (“non-competition agreement”), pursuant to which he has agreed not to disclose confidential information regarding us, agrees that inventions conceived during his employment become our property, agrees not to compete with our business for a period of one year following termination or expiration of his employment, and agrees not to solicit our employees or customers

following termination of his employment.  The employment agreement provides for arbitration in the event of any dispute arising out of the agreement or his employment, other than disputes arising under the non-competition agreement.

Gregory E. Hare.  Mr. Hare serves as our Chief Financial Officer. We entered into an employment agreement with Mr. Hare commencing on January 30, 2006. The employment agreement is essentially the same as the agreement we entered into with Mr. Donovan, except that the agreement is for a term of two (2) years unless earlier terminated and is automatically renewed for an additional one (1) year term unless earlier terminated.  The employment agreement provides for a base salary of $200,000 per annum and no automobile allowances. The agreement provides for annual performance bonuses based on goals established by us and agreed to by Mr. Hare, participation in our stock option and other award plans, and participation in any company benefit policies or plans adopted by us on the same basis as other employees at Mr. Hare’s level.  We agreed to grant to Mr. Hare, subject to approval of our Compensation Committee, stock options to purcha se 200,000 shares of our common stock pursuant to our 2003 Stock Incentive Plan, one-half of which options will vest on the one year anniversary of the commencement of his employment and the remaining options vesting on the two year anniversary of the commencement of his employment.

Also, Mr. Hare has entered into a proprietary information, invention assignment and non-competition agreement (“non-competition agreement”), pursuant to which he has agreed not to disclose confidential information regarding us, agrees that inventions conceived during his employment become our property, agrees not to compete with our business for a period of one year following termination or expiration of his employment, and agrees not to  solicit our employees or customers following termination of his employment.  The employment agreement provides for arbitration in the event of any dispute arising out of the agreement or his employment, other than disputes arising under the non-competition agreement.

Steven V. Lancaster and Darrell E. Hill. We entered into employment agreements with Mr. Hill, Vice President, Program Management, and Mr. Lancaster, Vice President, Business Development which we amended on December 10, 2004.  The amended agreements are essentially the same as the agreements with Mr. Trudnak, except that the agreements provide for base salaries of $125,000 per annum and no automobile allowances. Each of Messrs. Lancaster’s and Hill’s employment agreements automatically renewed for a further one year term on May 19, 2006.  Messrs. Lancaster and Hill resigned from their positions with the Company on August 25, 2007 and September 8, 2007, respectively.

Each of the foregoing agreements provides that the employee shall be entitled to participate in any stock option plan that we subsequently adopt, including the 2003 Stock Incentive Plan. Mr. Trudnak’s original employment agreement provided for the grant of an aggregate of 400,000 shares of our restricted stock. However, effective June 21 2004, Mr. Trudnak agreed to accept in lieu of the issuance of such shares, ten year nonqualified options to purchase an aggregate of 400,000 shares of common stock at an exercise price of $.36 per share. Also, each of Messrs. Hill’s and Lancaster’s original employment agreements provided for the grant of 200,000 shares of our restricted stock. However, effective June 21 2004, each of Messrs. Hill and Lancaster agreed to accept in lieu of the issuance of such shares, ten year nonqualified options to purchase an aggregate of 200,000 shares of common stock at an exercise price of $.50 per sh are.

Carl C. Smith, Jr. and Richard F. Borrelli. Messrs. Smith and Borrelli employment, as Vice Presidents and Officers for the Company, are at-will, and thus have not entered into employment agreements.  Therefore, there is no employment, severance or change of control arrangements.

Potential Payments upon Termination or Change in Control

As described under “Employment, Severance and Change in Control,” above, we are required to make certain severance payments to all of our named executive officers and provide certain change in control benefits to Mr. Donovan and Mr. Hare.  In the event of the occurrence of such events, such named executive officer, as applicable, would be entitled to (a) cash payments of any unpaid base salary through the date of termination and any accrued vacation pay and severance pay and (b) in certain cases, the accelerated vesting of outstanding stock options and restricted stock.  Healthcare benefits would be continued at the individuals’ election and cost through the COBRA plan.  Perquisites would be discontinued upon termination.

Cash Severance and Change in Control Payments

The following table summarizes the potential payments and benefits payable to each of our named executive officer upon termination of employment or change in our control assuming our named executive officers were terminated on December 31, 2007:

Name	Other Than Death, Disability, or Cause (1)	Disability (1)	Material Reason (1)	Change in Control (2)
Michael W. Trudnak	$ 275,000	$ -	$ 0	$ 0
William J. Donovan	265,000	265,000	265,000	397,500
Gregory E. Hare	200,000	200,000	200,000	300,000
(1) Represent 12 months salary, and does not include accrued and unpaid salary, nor earned and unused vacation.
(2) Represent 18 months salary, and does not include accrued and unpaid salary, nor earned and unused vacation.

Acceleration o f Vesting of Option Awards

If our named executive officers were terminated on December 31, 2007, the applicable officer is entitled to automatically and immediately vest in his or her outstanding stock options, as described in the table below:

Name/Circumstances	Description of Equity Awards
Michael W. Trudnak (Change of Control)	125,000 options granted on Januray 14, 2007 would immediately vest and become exercisable in full at a total exercise value of $112,500 (average of $0.90 per share).
	707,530 options granted on October 8, 2007 have immediately vested and become exercisable in full at a total exercise value of $573,099 (average of $0.81 per share).
William J. Donovan (Change of Control, Death, or Disability)	125,000 options granted on January 14, 2007 would immediately vest and become exercisable in full at a total exercise value of $102,500 (average of $0.82 per share).
	353,372 options granted on October 8, 2007 have immediately vested and become exercisable in full at a total exercise value of $257,962 (average of $0.73 per share).
Gregory E. Hare (Change of Control, Death, or Disability)	200,000 options granted on January 16, 2006 would immediately vest and become exercisable in full at a total exercise value of $480,000 (average of $2.40 per share).
	125,000 options granted on Januray 14, 2007 would immediately vest and become exercisable in full at a total exercise value of $102,500 (average of $0.82 per share).
	312,840 options granted on October 8, 2007 have immediately vested and become exercisable in full at a total exercise value of $228,373 (average of $0.73 per share).

Pension Benefits

None of our named executive officers participate in or have account balances in qualified or non-qualified defined benefit plans sponsored by us.

Non-Qualified Deferred Compensation

None of our named executive officers participate in or have account balances in non-qualified defined contribution plans or other deferred compensation plans by us. The Compensation Committee may elect to provide our officers and other employees with non-qualified defined contribution or deferred compensation benefits if the Compensation Committee determines that doing so is in our best interests.

Director Compensation and Benefits

During 2006 and 2007, under our “Policy Regarding Compensation of Independent Directors,” which we adopted on December 22, 2005, we furnished the following compensation to our independent directors:

·

At the beginning of each calendar year, each independent director receives annual compensation in the form of non-qualified options to purchase 5,000 shares of common stock and 2,500 non-qualified options for each board committee of which he or she is a member (which options vest and become exercisable one year after the date of grant), or a pro rata portion of such number if a director is elected after the beginning of the year.  

·

Each newly appointed director receives a one-time grant of 10,000 non-qualified stock options, which options vest and become exercisable one year after the date of grant.  

·

Each director who was a director on January 1, 2005, also receives a one-time (true-up) grant of 10,000 non-qualified stock options that vest and become exercisable one year from the grant date.

·

Effective December 31, 2005, the vesting of options issued to our current directors was accelerated and such options became immediately exercisable.  

·

We reimburse our independent directors for out of pocket expenses in connection with travel to and attending board and committee meetings.

On December 6, 2007, based upon the recommendation of the Compensation Committee, the Board adopted an “Amended Policy Regarding Compensation of Independent Directors,” pursuant to which we will furnish the following compensation to our independent directors effective January 1, 2008:

·

At the beginning of each calendar year, each independent director will receive annual compensation in the form an award of non-qualified options to purchase 25,000 shares of common stock, an annual retainer of non-qualified options to purchase 24,000 shares of common stock, 3,000 non-qualified options for each board committee of which he or she is a member, and 2,000 non-qualified options for each board committee of which he or she is a chairperson, or a pro rata portion of such number if a director is elected after the beginning of the year.

·

We reimburse our independent directors for out of pocket expenses in connection with travel to and attending board and committee meetings.  

All of the options we issue to independent directors are pursuant to our 2003 Stock Incentive Plan.  The options are exercisable for a period of ten years and at a price equal to the fair market value of Guardian’s common stock on the date of grant.

The board, at its discretion, may grant additional awards of options, restricted stock and/or cash compensation to its independent directors as it may determine from time to time.  

Our Policy may be amended, altered or terminated at the election of the board, provided no amendment, alteration or terminations shall have a retroactive effect or impair the rights of an independent director under any option grant theretofore granted.

Our directors who are also officers of or employed or engaged as consultants by Guardian or any of its subsidiaries are not additionally compensated for their board activities.

The following table sets forth compensation to our independent directors for the two fiscal years ended December 31, 2007. Currently, our independent directors only receive stock option awards as compensation for their services to us and do not receive any cash compensation other than reimbursement of expenses.

Name	Fiscal Year	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($) (1)	Non-Equity Incentive Plan Compensation ($)	Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)	All Other Compensation ($)	Total $
Sean W. Kennedy	2006 (2)	$ 0	$ 0	$ 15,525	$ 0	$ 0	$ 0	$ 15,525
	2007 (2)	0	0	8,625	0	0	0	8,625
Charles T. Nash	2006 (2)	0	0	15,525	0	0	0	15,525
	2007 (2)	0	0	8,625	0	0	0	8,625
Ronold R. Polillo (3)	2006	0	0	0	0	0	0	0
	2007	0	0	7,363	0	0	0	7,363
Henry A. Grandizio (4)	2006	0	0	0	0	0	0	0
	2007	0	0	7,556	0	0	0	7,556
Gina Marie Lindsey (5)	2006	0	0	21,100	0	0	0	21,100
Marko A. Zorko (6)	2006	0	0	0	0	0	0	0
Michael Mace (7)	2007	0	0	0	0	0	0	0
(1) Reflects the grant date fair value estimated using option-pricing models calculated in accordance with FAS 123(R). See Note 2 "Significant Accounting Policies" to the Consolidated Financial Statements for a discussion of the relevant assumptions used in calculating the grant date fair value pursuant to FAS 123(R).
(2) Represents options granted in January 2007.  Fiscal 2006 includes: (i) 10,000 options for a true-up of 2005 options, and (ii) 12,500 options related to calendar year 2006 director activities.  Fiscal 2007 includes 12,500 options related to calendar year 2007 director activities.  The issuances were consistent with provisions in the adoption on December 22, 2005 of "Policy Regarding Compensation of Independent Directors" as outlined above. The options have a grant date fair value calculated in accordance with FAS 123(R).
(3) New director effective August 17, 2007.  Represent: (i) 10,000 options as a newly appointed director, and (ii) 1,875 options for the prorated annual retainer.
(4) New director effective September 17, 2007.  Represents: (i) 10,000 options as a newly appointed director, (ii) 1,458 options for the prorated annual retainer, and (iii) 729 options for the prorated audit committee member.
(5) Resigned effective August 17, 2007. Excludes 10,000 options that were granted on January 11, 2007 and forfeited upon resignation from the Board.
(6) Resigned effective December 21, 2006.  No options were granted to Mr. Zorko in 2006.
(7) Resigned effective September 17, 2007.  Excludes 12,500 options that were granted on January 25, 2007 and forfeited upon resignation from the Board.

Other Arrangements

We maintain a “claims made” officers and directors liability insurance policy with coverage limits of $5,000,000 and a maximum $200,000 deductible amount for each claim.

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table shows, as of April 11, 2008, the beneficial ownership of our common stock by (i) any person we know who is the beneficial owner of more than 5% of our common stock, (ii) each of our directors and executive officers, and (iii) all of our directors and executive officers as a group.  As of April 11, 2008 there were 49,324,549 shares of our common stock issued and outstanding.

Name of Beneficial Owner (1)	Number of Shares Beneficially Owned (1)		% of Common Stock Beneficial Ownership
Michael W. Trudnak	6,081,030	(2)	12.0%
William J. Donovan	1,436,072	(3)	2.8%
Gregory E. Hare	575,340	(4)	1.2%
Richard F. Borrelli	176,900	(5)	*
Carl C. Smith, Jr.	140,000	(6)	*
Sean W. Kennedy	88,550	(7)	*
Charles T. Nash	60,500	(8)	*
Ronald R. Polillo	-	(9)	*
Henry A. Grandizio	-	(10)	*
All executive officers and directors as a group (9 individuals)	8,558,392	(11)	16.2%
Estate of Robert A. Dishaw	4,494,644	(12)	9.1%
* Represents less than 1%

(1)	Beneficial ownership is determined in accordance with Rule 13d-3 under the Exchange Act, and is generally determined by voting powers and/or investment powers with respect to securities.  Unless otherwise noted, all shares of common stock listed above are owned of record by each individual named as beneficial owner and such individual has sole voting and dispositive power with respect to the shares of common stock owned by each of them.  Such person or entity’s percentage of ownership is determined by assuming that any options or convertible securities held by such person or entity which are exercisable within 60 days from the date hereof have been exercised or converted as the case may be.  All addresses, except as noted, are c/o Guardian Technologies International, Inc., 516 Herndon Parkway, Herndon, Virginia 20170.
(2)	Mr. Trudnak - includes 1,230,030 shares underlying options to purchase shares of common stock which are currently exercisable. Does not include shares underlying 397,400 options that are not currently exercisable.
(3)	Mr. Donovan - includes 1,425,872 shares underlying options to purchase shares of common stock which are currently exercisable. Does not include 385,100 shares underlying options that are not currently exercisable.
(4)	Mr. Hare – includes 575,340 shares underlying options to purchase shares of common stock which are currently exercisable.  Does not include shares underlying 306,000 options that are not currently exercisable.
(5)	Mr. Borrelli – includes 176,000 shares underlying options to purchase shares of common stock which are currently exercisable. Does not include shares underlying 192,300 options that are not currently exercisable.  Also includes 900 shares of common stock owned jointly with Mr. Borrelli’s wife and claims beneficial ownership.
(6)	Mr. Smith – includes 97,500 shares underlying options to purchase shares of common stock which are currently exercisable. Does not include shares underlying 87,500 options that are not currently exercisable. Also includes 7,000 shares of common stock owned jointly with Mr. Smith’s wife and claims beneficial ownership, and 35,500 common stock shares owned indirectly through his IRA.
(7)	Mr. Kennedy - includes 60,500 shares underlying options to purchase shares of common stock which are currently exercisable.  Includes 10,550 shares of common stock owned by Mr. Kennedy’s wife with respect to which Mr. Kennedy disclaims beneficial ownership.  Does not include shares underlying 77,500 options that are not currently exercisable.
(8)	Mr. Nash - includes 53,500 shares underlying options to purchase shares of common stock which are currently exercisable.  Does not include shares underlying 77,500 options that are not currently exercisable.
(9)	Ms. Polillo - does not include shares underlying 65,875 options that are not currently exercisable.

(10)	Mr. Grandizio - does not include shares underlying 69,187 options that are not currently exercisable.
(11)	All executive officers and directors as a group (9 individuals) - includes shares underlying options to purchase an aggregate of 1,230,030, 1,425,872, 575,340, 176,000, 97,500, 60,500, and 53,500 shares of common stock which are currently exercisable that have been granted to Messrs. Trudnak, Donovan, Hare, Borrelli, Smith, Kennedy, and Nash, respectively.  Does not include shares underlying options to purchase an aggregate of 397,400, 385,100, 306,000, 192,300, 282,300, 77,500, 77,500, 65,875,  69,187, shares of common stock that are not currently exercisable that have been granted to Messrs. Trudnak, Donovan, Hare, Borrelli, Smith, Kennedy, Nash, Polillo, and Grandizio, respectively.
(12)	Includes 10,000 shares underlying options to purchase shares of common stock which are currently exercisable.   The number of shares owned by the estate of Mr. Dishaw is based solely upon information contained in a Form 4 filed by Mr. Dishaw on October 18, 2007.  The address for Mr. Dishaw’s executor is Allen Joseph, Esq., 1001 Brickell Bay Drive, Suite 2002, Miami, FL 33133.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

In addition to the executive and director compensation arrangements, including employment and change in control arrangements discussed above under Item 11 - Executive Compensation, the following is a description of transactions since January 1, 2006, to which we have been a party in which the amount involved in the transaction exceeded or will exceed the lesser of $120,000 or one percent of the average of our total assets as at the year end for the last two completed fiscal years, and in which any of our directors, executive officers or beneficial holders of more than 5% of our capital stock, or any immediate family member of, or person sharing the household with, any of these individuals, had or will have a direct or indirect material interest.

Consulting Agreement with Mr. Dishaw and Change-in-Control Arrangement

Effective November 21, 2005, Mr. Robert A Dishaw resigned as President and Chief Operating Officer of Guardian and Guardian and we agreed with him to terminate his employment agreement, dated December 10, 2004.  However, Mr. Dishaw remained a director and provided consulting services to Guardian under a consulting services agreement, dated effective November 21, 2005.  Mr. Dishaw resigned as a director on August 14, 2006, and remained a principal stockholder until his death on December 24, 2007. The Estate of Mr. Dishaw continues to be major shareholder of the Company.

The consulting services agreement provided for Mr. Dishaw to perform services with regard to the distribution of our products through EGC International, Inc., and to be the primary intermediary with EGC. The agreement was for a term of three (3) years unless earlier terminated.  We agreed to pay him a consulting fee of $180,000 during year one, $130,000 during year two, and $80,000 during year three.  Mr. Dishaw was also entitled to be paid a sales override commission of 3% of gross revenues from sales of Guardian products to EGC or its resellers and 3% of gross revenues from sales of our products to certain approved clients.  Mr. Dishaw was entitled to continue to participate in our benefit policies and plans and to receive reimbursement of reasonable expenses.  The agreement terminated on August 2, 2007 by mutual agreement between the Company and Mr. Dishaw, and the Company made a payment to Mr. Dishaw in the amoun t of $150,000 for outstanding deferred and accrued salaries.  We had accrued $187,511 in anticipation of the outstanding deferred and accrued salary.

Consulting Agreement with McBee Strategic Consulting

On March 15, 2006, we entered into an agreement with McBee Strategic Consulting.  Under the agreement, McBee has agreed to provide to us certain general business and governmental consulting related to federal legislative and regulatory activity.  The agreement provides that we will pay to McBee a monthly retainer of $15,000.  The agreement is for a term of one year with annual renewals unless otherwise terminated by either party.  During fiscal year 2007 and 2006, we paid to McBee approximately $180,000 and $142,500, respectively.  Ms. Lindsey, who became a director of Guardian in August 2006, was employed as a Vice President of McBee, but did not have an ownership interest in McBee.  Ms. Lindsey received a salary and employee benefits from McBee Strategic Consulting and, to the extent thereof, may be deemed to have an interest in the transaction.  The agreement with McBee was reviewed and approved by the board of directors prior to the appointment of Ms. Lindsey to the board of directors.  Ms. Lindsay resigned from Guardian’s Board on August 17, 2007 to pursue an opportunity with the Transportation Service Administration.

Loans from Our Chief Executive Officer

On April 21, 2006, we entered into a Loan Agreement with Mr. Michael W. Trudnak, the Chairman and Chief Executive Officer pursuant to which Mr. Trudnak loaned us $200,000.  We issued a non-negotiable promissory note, dated effective April 21, 2006, to Mr. Trudnak in the principal amount of $200,000.  The note is unsecured, non-negotiable and non-interest bearing.  Initially the note was repayable on the earlier of (i) six months after the date of issuance, (ii) the date the Company receives aggregate proceeds from the sale of its securities after the date of the issuance of the Note in an amount exceeding $2,000,000, or (iii) the occurrence of an event of default.  The following constitute an event of default under the note: (a) the failure to pay when due any principal or interest or other liability under the loan agreement or under the note; (b) the material violation by us of any representation, warranty, covenant or agreement contained in the loan agreement, the note or any other loan document or any other document or agreement to which we are a party or by which we or any of our properties, assets or outstanding securities are bound; (c) any event or circumstance shall occur that, in the reasonable opinion of the lender, has had or could reasonably be expected to have a material adverse effect; (d) an assignment for the benefit of our creditors; (e) the application for the appointment of a receiver or liquidator for us or our property; (f) the issuance of an attachment or the entry of a judgment against us in excess of $100,000; (g) a default with respect to any other obligation due to the lender; or (h) any voluntary or involuntary petition in bankruptcy or any petition for relief under the federal bankruptcy code or any other state or federal law for the relief of debtors by or with respect to us, provided however with respect to an involuntary petition in bankruptcy, such petition has not been dismissed within 3 0 days of the date of such petition.  In the event of the occurrence of an event of default, the loan agreement and note shall be in default immediately and without notice, and the unpaid principal amount of the loan shall, at the option of the lender, become immediately due and payable in full.  We agreed to pay the reasonable costs of collection and enforcement, including reasonable attorneys’ fees and interest from the date of default at the rate of 18% per annum.  The note is not assignable by Mr. Trudnak without our prior consent.  We may prepay the note in whole or in part upon ten days notice.  On October 21, 2006, Mr. Trudnak extended the due date of the loan to December 31, 2006. Subsequently, on October 3 and October 18, 2006, Mr. Trudnak loaned to us $102,000 and $100,000, respectively, on substantially the same terms as the April 21, 2006 loan, except that each loan is due six months after the date thereof.  Accordingly, following such additional loans, we owed an aggregate of approximately $402,000 to Mr. Trudnak.  On November 10, 2006, Mr. Trudnak extended the due dates of such loans to May 31, 2007, except that $100,000 of the April 21, 2006, loan becomes due upon our raising $2,500,000 in financing after November 6, 2006, and the remaining amount of such loans become due upon our raising an aggregate of $5,000,000 in financing after November 6, 2006, and prior to May 31, 2007.  Following the first closing of our Debenture and Series D Warrant financing on November 8, 2006, we repaid $100,000 in principal amount of the April 1, 2006, and paid an additional $100,000 to Mr. Trudnak on April 17, 2007 upon the second closing of our Debenture and Series D Warrant financing.  On May 31, 2007, Mr. Trudnak extended the due date of the remaining $202,000 notes to May 31, 2008, and without any contingencies or future event criteria.  As of December 31, 2007 and the date of this report, we owed Mr. Trudnak an aggregate of approximately $202,000.  T he terms of the above transaction were reviewed and approved by our audit committee and by our board of directors.

Employment Agreement with Ms. Ruth Taylor

On August 4, 2003, we entered into an employment agreement with Ruth Taylor, pursuant to which Mrs. Taylor is employed as an accountant.  Mrs. Taylor is the daughter of the late Mr. Robert A. Dishaw, whose estate is a major shareholder of Guardian.  At the time of the agreement, Mr. Robert A. Dishaw was the President, Chief Operating Officer, director and a principal stockholder of Guardian.  The employment agreement provided for an annual base salary of $60,000 per annum.  The agreement is for a term of one year and is automatically renewed for one year terms unless earlier terminated.  The agreement provides for an annual performance bonus as determined by Guardian, participation in Guardian’s stock option plan, and participation in Guardian’s benefit policies and plans.  The agreement provides for the issuance pursuant to Guardian’s stock option plan of 100,000 n on-qualified stock options vesting immediately and exercisable at a price of $.50 per share, and 100,000 non-qualified stock options vesting one year from the anniversary date of employee’s employment and exercisable at a price of $.50 per share.  The agreement may be terminated upon the death or disability of employee or for cause.  If the employee is terminated by reason of death, disability (except as noted below) or for cause, no further compensation is payable to employee.  If employee is terminated other than by reason of death, disability or cause, or if no disability insurance is provided and employee becomes disabled, employee is entitled to be paid her base salary for six months.  Employee may terminate her employment agreement on 30 days’ prior written notice.  We have also entered into a non-competition, confidentiality, proprietary rights and non-solicitation agreement (proprietary information agreement) with Mrs. Taylor, pursuant to which employee has agreed n ot to disclose confidential information regarding Guardian, agreed that proprietary rights conceived during her employment are the property of Guardian, and agreed not to solicit Guardian’s customers or attempt to hire our employees for twelve months following termination of her

employment.  The employment agreement provides for arbitration in the event of any dispute arising out of the employment agreement or employee’s employment, other than disputes under the proprietary information agreement.During 2004, Guardian granted to Mrs. Taylor 10,000 incentive stock options at an exercise price of $3.60, on October 4, 2005, granted to Mrs. Taylor 15,000 options at an exercise price of $3.00 per share, and on January 14, 2007 granted Mrs. Taylor 80,000 options at an exercise price of $0.82 per share. Also during 2007, Mrs. Taylor’s base salary was increased to $70,000, based on increased responsibilities, and performance.

ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES

To ensure the independence of Guardian’s independent auditor and to comply with applicable securities laws, the Audit Committee is responsible for reviewing, deliberating and, if appropriate, pre-approving all audit, audit-related, and non-audit services to be performed by Guardian’s independent registered public accountants.  For that purpose, the Audit Committee has established a policy and related procedures regarding the pre-approval of all audits, audit-related, and non-audit services to be performed by Guardian’s independent accountants (the "Policy").

The Policy provides that Guardian’s independent accountant may not perform any audit, audit-related, or non-audit service for Guardian, subject to those exceptions that may be permitted by applicable law, unless (1) the service has been pre-approved by the Audit Committee, or (2) Guardian engaged the independent registered public accountant to perform the service pursuant to the pre-approval provisions of the Policy. In addition, the Policy prohibits the Audit Committee from pre-approving certain non-audit services that are prohibited from being performed by Guardian’s independent accountant by applicable securities laws. The Policy also provides that the Chief Financial Officer will periodically update the Audit Committee as to services provided by the independent auditor. With respect to each such service, the independent registered public accountant provides detailed back-up documentation to the board and the Chief Financia l Officer.

Pursuant to its Policy, the Audit Committee has pre-approved certain categories of services to be performed by the independent registered public accountant and a maximum amount of fees for each category. The Board annually re-assesses these service categories and the associated fees. Individual projects within the approved service categories have been pre-approved only to the extent that the fees for each individual project do not exceed a specified dollar limit, which amount is re-assessed annually. Projects within a pre-approved service category with fees in excess of the specified fee limit for individual projects may not proceed without the specific prior approval of the Audit Committee. In addition, no project within a pre-approved service category will be considered to have been pre-approved by the Board if the project causes the maximum amount of fees for the service category to be exceeded, and the project may only proceed with the prior approval of the Audit Committee to increase the aggregate amount of fees for the service category.

The Audit Committee of the Board of Directors of the Company has appointed the firm of Goodman & Company, L.L.P. to serve as independent auditors of the Company for the fiscal year ending December 31, 2007.  Goodman & Company, L.L.P. was first appointed on July 19, 2005.  Goodman & Company, L.L.P. audited the Company’s financial statements as of, and for the years ended, December 31 of each year since the initial appointment, as well as the reaudit of fiscal years ended December 31, 2003 and 2004.  Goodman & Company, L.L.P. also reviewed our interim reports for fiscal years ended December 31, 2004 through 2007. The London office of Moore Stephens International performs an audit of Wise Systems, in accordance with the statutory requirements of the UK, and provides related tax services.

The Audit Committee has also approved the firm of Ryan, Sharkey & Crutchfield, LLP (“RSC”) to serve as consultant of the Company during 2007.  RSC provides assistance for the review of accounting matters including derivative liabilities and deferred income tax services, and assisted in the planning and identification of testing requirements for the SOX 404(a) internal control over financial reporting.

For the fiscal years ended December 31, 2007, and 2006, the Company paid (or will pay) the following fees for services rendered during the year or for the audit in respect of those years:

Fee Type	2007	2006
Audit Fees (1)	$ 142,398	$ 275,337
Audit Related Fees (2)	12,708	62,498
Tax Fees (3)	13,500	12,767
All Other Fees (4)	-	-
Total	$ 168,606	$ 350,602
(1) Represents fees for professional services rendered in connection with the audit of the annual financial statements, and review of the quarterly financial statements for each fiscal year.  For the 2007 Fiscal year, such fees for Goodman and Company, L.L.P. were approximately $127,398 and for Moore Stephens, $15,000.  Fiscal 2006 disclsoures, reflect fees to Goodman & Company, L.L.P., including $171,790 for the reaudit and related reviews for Fiscal 2003, 2004, and the first quarter of Fiscal 2005, and $88,293 for the audit and related reviews for Fiscal 2006.  Audit fees to Moore Stephens for Fiscal 2006 were $15,254.
(2) Represents fees for professional services that  principally include due diligence in connection with acquisitions or dispositions, accounting consultantations, and assistance with internal control documentation and information systems audits. The assurance and related services reasonably related to the performance of the audit or review of the Company's financial statements, such as SEC filings.  Fiscal 2007 aggregate fees billed for all audit related services for the most recent fiscal year by Goodman & Company, L.L.P. were approximately $3,500 and by Ryan, Sharkey & Crutchfield, LLP were $9,208.  Fiscal year 2006 diclosures reflect fees to Goodman & Company, L.L.P. of $39,992, Aronson & Company of $9,749, and Ryan, Sharkey & Crutchfield, LLP were $12,757.
(3) Represents fees for tax compliance services.  Fiscal year 2007 represents fees to Goodman & Company, L.L.P. of $9,500, and to Moore Stephens for Wise Systems of $4,000.  Fiscal 2006 disclosures represent amounts paid to Goodman & Company, L.L.P. of $9,181 and to Moore Stephens of $3,586.
(4) Represents fees for professional services other than those described above.  No other such services were approved nor rendered pursuant to the de minimis exception provided in Rule 2-01 (7) (i)(C) of Regulation S-X.

PART IV

ITEM 15.     EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

FINANCIAL STATEMENTS

The financial statements of the Company for the fiscal years covered by this Annual Report are located on page 106 of this Annual Report.

(a) The following financial statements and those financial statement schedules required by Item 8 hereof are filed as part of this report:

1. Financial Statements

Report of Independent Registered Public Accounting Firm,

Consolidated Balance Sheets as of December 31, 2007 and 2006,

Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005,

Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2007, 2006 and 2005,

Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005,

Notes to Consolidated Financial Statements.

2. Financial Statement Schedules:

The financial statements are set forth under Item 8 of this Annual Report on Form 10-K.  Financial statement schedules have been omitted since they are not required, not applicable, or the information is otherwise included.

(b) The following exhibits are filed as part of this Annual Report on Form 10-K:

The following exhibits are filed as part of this Registration Statement:

EXHIBITS

		Incorporated by Reference From
Exhibit No.	Exhibit Description	Form	Filing Date	Filed Herewith
2.1	Amended and Restated Agreement and Plan of Reorganization dated effective June 12, 2003, by and among the Company, RJL Marketing Services, Inc., and the shareholders of RJL Marketing Services, Inc.	8-K	06/27/2003
2.2	Stock Purchase Agreement, dated July 27, 2004, by and among the Company, Guardian Healthcare Systems UK Ltd., Wise Systems Ltd., Martin Richards and Susan Richards.	8-K	07/30/2004
2.3	Promissory Note, dated July 27, 2004, by and among the Company, Guardian Healthcare Systems UK Ltd., Wise Systems Ltd., Martin Richards, and Susan Richards.	8-K	07/30/2004
2.4	Cash Escrow Agreement, dated July 27, 2004, by and among the Company, Guardian Healthcare Systems UK Ltd., The Business Bank of Virginia, Martin Richards, and Susan Richards.	8-K	07/30/2004
2.5	Stock Escrow Agreement, dated July 27, 2004, by and among the Company, Guardian Healthcare Systems UK Ltd., Mintz Levin, Martin Richards, and Susan Richards.	8-K	07/30/2004
3.1	Certificate of Incorporation	10-KSB	04/15/2004
3.2	Articles of Amendment to Certificate of Incorporation	10-KSB	04/15/2004
3.3	Certificate of Designation of Rights and Preferences of Series A Convertible Preferred Stock.	10-QSB	08/15/2003
3.4	Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock.	10-QSB	08/15/2003
3.5	Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock, dated September 24, 2003.	10-QSB	11/14/2003
3.6	Certificate of Amendment to Certificate of Designation of Preferences and Rights of Series B Convertible Preferred Stock, dated October 27, 2003.	10-QSB	11/14/2003
3.7	Certificate of Amendment to Certificate of Designations of Rights and Preferences of Series A Convertible Preferred Stock, dated November 24, 2004
3.8	By-Laws	10-KSB	04/15/2004
4.1	Form of Common Stock Certificate	SB-2	03/22/96
10.5	Employment Agreement, dated August 4, 2003, between the Registrant and Ruth H. Taylor.	10-QSB	11/14/2003
10.6	Employment Agreement, dated August 18, 2003, between the Registrant and William J. Donovan.	10-QSB	11/14/2003
10.13	Placement Agent’s Warrant, dated October 14, 2003, between the Registrant and Berthel Fisher & Company Financial Services, Inc.	10-QSB	11/14/2003

10.16	Asset Purchase Agreement, dated October 23, 2003, between the Registrant, Difference Engines Corporation and Certain Stockholders.	10-QSB	11/14/2003
10.17	Amendment Agreement, dated September 23, 2003, between the Registrant and Berthel Fisher & Company Financial Services, Inc.	10-QSB	11/14/2003
10.19	Note and Warrant Purchase Agreement, dated as of December 8, 2003 between the Registrant and each of the undersigned purchasers:  Charles Bell, Daniel Denardis, Scott Porter, Alan Stamper, Edward Tschiggfrie, and Bret Williams.	10-KSB	04/15/2004
10.23	Convertible Promissory Note, dated December 19, 2003, between the Registrant and Dan Denardis.	10-KSB	04/15/2004
10.24	Common Stock Warrant Agreement, dated December 19, 2003, between the Registrant and Dan Denardis.	10-KSB	04/15/2004
10.25	Supplemental Common Stock Warrant Agreement, dated December 19, 2003, between the Registrant and Daniel Denardis.	10-KSB	04/15/2004
10.26	Convertible Promissory Note, dated December 19, 2003, between the Registrant and Scott Porter.	10-KSB	04/15/2004
10.27	Common Stock Warrant Agreement, dated December 19, 2003, between the Registrant and Scott Porter.	10-KSB	04/15/2004
10.28	Supplemental Common Stock Warrant Agreement, dated December 19, 2003, between the Registrant and Scott Porter.	10-KSB	04/15/2004
10.29	Convertible Promissory Note, dated December 8, 2003 between the Registrant and Alan Stamper.	10-KSB	04/15/2004
10.30	Common Stock Warrant Agreement, dated December 8, 2003, between the Registrant and Alan Stamper.	10-KSB	04/15/2004
10.31	Supplemental Common Stock Warrant Agreement, dated December 8, 2003, between the Registrant and Alan Stamper.	10-KSB	04/15/2004
10.32	Convertible Promissory Note, dated December 8, 2003, between the Registrant and Edward D. Tschiggfrie.	10-KSB	04/15/2004
10.33	Common Stock Warrant Agreement, dated December 8, 2003, between the Registrant and Edward D. Tschiggfrie.	10-KSB	04/15/2004
10.34	Supplemental Common Stock Warrant Agreement, dated December 8, 2003, between the Registrant and Edward D. Tschiggfrie.	10-KSB	04/15/2004
10.35	Convertible Promissory Note, dated December 19, 2003, between the Registrant and Edward D. Tschiggfrie.	10-KSB	04/15/2004
10.36	Common Stock Warrant Agreement, dated December 19, 2003, between the Registrant and Edward D. Tschiggfrie.	10-KSB	04/15/2004
10.37	Supplemental Common Stock Warrant Agreement, dated December 19, 2003, between the Registrant and Edward D. Tschiggfrie.	10-KSB	04/15/2004
10.41	Amended And Restated 2003 Stock Incentive Plan.	10-KSB	04/15/2004
10.44	Amended Employment Agreement, dated December 10, 2004, between the Registrant and Michael W. Trudnak.	8-K	12/20/2004
10.46	Amended Employment Agreement, dated December 10, 2004, between the Registrant and Darrell Hill.	8-K	12/20/2004
10.47	Amended Employment Agreement, dated December 10, 2004, between the Registrant and Steven Lancaster.	8-K	12/20/2004
10.48	Placement Agreement, dated January 26, 2005 between the Registrant and Berthel Fisher & Company Financial Services, Inc.	8-K	02/02/2005
10.51	Form of Incentive Stock Option Award Agreement.	10-Q	08/12/2005

10.52	Form of Non-Qualified Stock Option Award Agreement.	10-Q	08/12/2005
10.56	Form of Systems Implementation Agreement.	10-Q	11/14/2005
10.57	Employment Agreement, dated December 21, 2005, between the Registrant and Mr. Gregory E. Hare	8-K	01/31/2006
10.58	Distributor Agreement, dated March 30, 2004, between the Registrant and EGC International Corporation.	10-K	5/16/06
10.59	Strategic Partnership Agreement, dated June 21, 2005, between the Registrant and Bridgetech International Corporation.	10-K	5/16/06
10.60	Consulting/Sales Agreement, dated August 6, 2005, between the Registrant and Fowler International.	10-K	5/16/06
10.61	Loan Agreement, dated April 21, 2006, by and between the Registrant and Mr. Michael W. Trudnak.	8-K/A	5/25/06
10.62	Consulting Agreement, dated January 1, 2006, by and between Registrant and Redwood Consultants LLC.	10-Q	8/11/06
10.63	Agreement, dated July 6, 2006, by and between Registrant and The Research Works, LLC	10-Q	8/11/06
10.64	Distribution Agreement, dated July 6, 2006, by and between Registrant and Ultimate Medical Services, Inc.	10-Q	8/11/06
10.65	Distribution Agreement, dated July 20, 2005, by and between Registrant and Elecectronica y Medicina, S.A.	10-Q	8/11/06
10.66	Reseller Agreement, dated July 25, 2006, by and between Registrant and Logos Imaging, LLC.	10-Q	8/11/06
10.67	Securities Purchase Agreement, dated November 3, 2006, by and among Registrant and Certain purchasers.	8-K	11/8/06
10.68	Form of Series A 10% Senior Convertible Debenture, due November 8, 2008.	8-K	11/8/06
10.69	Form of Registration Rights Agreement by and among Registrant and Certain Purchasers.	8-K	11/8/06
10.70	Form of Series D Common Stock Purchase Warrant Issued to Certain Purchasers.	8-K	11/8/06
10.71	Escrow Deposit Agreement, dated November 1, 2006, by and among Registrant, Midtown Partners & Co., LLC, and Signature Bank.	8-K	11/8/06
10.72	Amendment No. 1 to Escrow Deposit Agreement, dated November 3, 2006, by and among Registrant, Midtown Partners & Co., LLC, and Signature Bank.	8-K	11/8/06
10.73	Amendment No. 2 to Escrow Deposit Agreement, dated November 7, 2006, by and among Registrant, Midtown Partners & Co., LLC, and Signature Bank.	8-K	11/8/06
10.74	Placement Agent Agreement, dated July 14, 2006, by and between Registrant and Midtown Partners & Co., LLC.	8-K	11/8/06
10.75	Form of Placement Agent’s Warrant issued to Midtown Partners & Co., LLC and its designees	8-K	11/8/06
10.76	Distribution Agreement, dated August 20, 2006, by and between Registrant and MTS Delft.	10-Q	11/14/06
10.77	Distribution Agreement, dated August 20, 2006, by and between Registrant and Calyx (UK) Limited.	10-Q	11/14/06
10.78	Amendment Agreement, dated October 21, 2006, by and between Registrant and Mr. Michael W. Trudnak.	10-Q	11/14/06
10.79	Amendment Agreement, dated November 10, 2006, by and between Registrant and Mr. Michael W. Trudnak.	10-Q	11/14/06
10.80	Escrow Deposit Agreement, dated April 10, 2007, by and among Registrant, Midtown Partners & Co., LLC, and Signature Bank.	8-K	4/13/07
10.81	Collaboration Agreement, dated March 23, 2007, by and between Registrant and Confirma, Inc.	10-Q	5/18/07

10.82	Public and Investor Relations Agreement, dated May 8, 2007, by and between Registrant and Trilogy Capital Partners, Inc.	10-Q	8/17/07
10.83	Consulting Agreement, dated June 4, 2007, by and between Registrant and Fowler International LLC.	10-Q	8/17/07
10.84	Software License Agreement, dated June 26, 2007, by and between Registrant and NAST.	10-Q	8/17/07
10.85	Consultant Agreement, dated July 19, 2007, by and between Registrant and Medical Image Informatics.	10-Q	8/17/07
10.86	Securities Purchase Agreement, dated August 6, 2007, by and among Registrant and Certain purchasers.	8-K	8/7/07
10.87	Form of Series F and G Common Stock Purchase Warrant Issued to Certain Purchasers.	8-K	8/7/07
10.88	Form of Non-Qualified Stock Option Award Agreement Issued to Certain Executive Officers Related to Continued Deferral of Salary	10-Q	11/13/07
10.89	Strategic Alliance and Joint Development Agreement, dated October 16, 2007, by and between Registrant and with Control Screening, LLC, d/b/a AutoClear.			X
10.90	Marketing License Agreement, dated November 1, 2007, by and between Registrant and EGC Informatics, Inc., d/b/a International Threat Detection Systems (“ITDS”).			X
10.91	Sales, Installation, and Servicing Agreement Term Sheet, dated January 14, 2008, by and between Registrant and Hi-Tec India Aviation Safety & Security Systems Pvt. Ltd.			X
10.92	Distributor Agreement, dated March 14, 2008, by and between Registrant and Borlas Security Systems, Ltd.			X
14.1	Code of Ethics for Chief Executive Officer and Senior Financial Officers	10-KSB	4/15/04
21	List of Subsidiaries.			X
23.1	Consent of Goodman & Company, LLP.			X
31.1	Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CEO)			X
31.2	Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CFO)			X
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CEO)			X
32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CFO)			X

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

By:

/s/ Michael W. Trudnak

              Michael W. Trudnak

              Chief Executive Officer

              (Principal Executive Officer)

By:        /s/ Gregory E. Hare

              Gregory E. Hare

              Chief Financial Officer

              (Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Michael W. Trudnak Michael W. Trudnak	Chairman of the Board, Chief Executive Officer and Secretary, Director (Principal Executive Officer)	April 15, 2008
/s/ William J. Donovan William J. Donovan	President and Chief Operating Officer, Director	April 15, 2008
/s/ Gregory E. Hare Gregory E. Hare	Chief Financial Officer (Principal Financial and Accounting Officer)	April 15, 2008
/s/ Henry A. Grandizio Henry A. Grandizio	Director	April 15, 2008
/s/ Sean W. Kennedy Sean W. Kennedy	Director	April 15, 2008
/s/ Charles T. Nash Charles T. Nash	Director	April 15, 2008
/s/ Ronald R. Polillo Ronald R. Polillo	Director	April 15, 2008

GUARDIAN TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

TOGETHER WITH THE REPORT OF THE INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Guardian Technologies International, Inc.

We have audited the accompanying consolidated balance sheets of Guardian Technologies International, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating t he overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Guardian Technologies International, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the financial statements, the Company has incurred significant operating losses since inception and is dependent upon its ability to obtain additional funding through debt or equity financing to continue operations.  As a result, the Company may not be able to continue to meet obligations as they come due.   These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans regarding these matters also are described in Note 1.  The financial statements do not include any adjustments that might arise from the outcome of this uncertainty.

/S/ Goodman & Company, L.L.P.

Norfolk, Virginia

April 14, 2008

CONSOLIDATED BALANCE SHEETS

GUARDIAN TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
		December 31
		2007	2006
ASSETS
Current Assets
	Cash and cash equivalents	$     101,136	$     737,423
	Accounts receivable	29,079	108,713
	Other current assets	1,864	-
	Prepaid expenses	341,503	101,819
	Total current assets	473,582	947,955
Equipment, net		517,667	611,548
Other Assets
	Other noncurrent assets	88,976	453,448
	Goodwill	-	128,633
	Intangible assets, net	313,383	1,568,629
	Total assets	$  1,393,608	$  3,710,213
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
	Accounts payable	$     808,033	$     737,125
	Other accrued liabilities	739,609	920,171
	Note payable and advances from related parties	202,000	302,000
	Debentures and convertible notes payable, less discount	2,974,633	946,821
	Derivative liabilities - embedded conversion feature of debentures and convertible notes	780,843	468,266
	Derivative liabilities - embedded conversion feature of detachable warrants	1,299,946	-
	Deferred revenue	20,924	44,390
	Total current liabilities	6,825,988	3,418,773
Noncurrent Liabilities
	Debentures payable, less discount	-	473,080
	Derivative liabilities - embedded conversion feature of detachable warrants	-	2,472,327
	Warrant liabilities	1,732,956	-
	Total noncurrent liabilities	1,732,956	2,945,407
Common shares subject to repurchase, stated at estimated redemption value; 302,222 shares outstanding at December 31, 2007 and 401,550 shares outstanding at December 31, 2006
		178,311	345,333
Stockholders' Equity (Deficit)
	Convertible preferred stock, $0.20 par value; authorized 1,000,000 shares
	Shares issued and outstanding at December 31, 2007 - none
	Shares issued and outstanding at December 31, 2006 - none	-	-
	Common stock, $0.001 par value; authorized 200,000,000 shares
	Shares issued and outstanding at December 31, 2007 - 42,223,126
	Shares issued and outstanding at December 31, 2006 - 34,494,575	39,286	34,494
	Additional paid-in capital	62,206,362	56,031,948
	Accumulated comprehensive income	64,827	78,634
	Deficit accumulated	(69,654,122)	(59,144,376)
	Total stockholders' equity (deficit)	(7,343,647)	(2,999,300)
	Total liabilities and stockholders' equity (deficit)	$  1,393,608	$  3,710,213
See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS

GUARDIAN TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
	Year Ended December 31
	2007	2006	2005
Net revenues	$         289,591	$         488,111	$         432,186
Cost of sales	1,272,396	673,494	805,503
Gross profit (loss)	(982,805)	(185,383)	(373,317)
Selling, general and administrative expense	7,863,112	8,589,899	12,805,838
Operating loss	(8,845,917)	(8,775,282)	(13,179,155)
Other income (expense)
Loss on disposal of fixed asset	-	(2,254)	-
Interest income	11,032	18,212	31,709
Interest expense	(1,674,861)	(1,334,555)	-
Total other income (expense)	(1,663,829)	(1,318,597)	31,709
Net loss	$ (10,509,746)	$ (10,093,879)	$ (13,147,446)
Net loss per common share:
Basic and diluted	$           (0.28)	$           (0.30)	$           (0.43)
Weighted average number of common shares used in computing basic and diluted net loss per share
	37,761,058	33,914,850	30,563,516
See notes to consolidated financial statements.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)

GUARDIAN TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
									Total Accumulated Comprehensive Loss
				Deferred Stock Compensation	Stock Subscription Receivable	Other Comprehensive Income (Loss)		Total Stockholders' Equity (Deficit)
	Common Stock		Additional				Accumulated Deficit
	Shares	Amount	Paid-In Capital
Balance, December 31, 2004	28,042,320	$         28,043	$    42,806,680	$    (5,029,116)	$      (999,638)	$           111,628	$ (35,903,051)	$     1,014,546	$   (35,791,423)
Proceeds from sale of common stock for cash, net	3,624,000	3,624	6,074,679	-	999,638	-	-	7,077,941	-
Employee stock options exercised	400,000	400	199,600	-	-	-	-	200,000	-
Exercise of warrants for the purchase of common stock for cash	913,264	913	2,418,647	-	-	-	-	2,419,560	-
Cashless exercise of common stock purchase warrants	14,646	15	(15)	-	-	-	-	-	-
Exchange of commission for common stock	26,062	26	52,097	-	-	-	-	52,123	-
Forfeiture of common stock	(35,580)	(36)	36	-	-	-	-	-	-
Remeasurement of stock issued pursuant to consulting agreements	-	-	(162,522)	162,522	-	-	-	-	-
Amortization of deferred compensation expense	-	-	28,775	4,852,194	-	-	-	4,880,969	-
Reclassification of common shares previously subject to repurchase	-	-	377,442	-	-	-	-	377,442	-
Gain on remeasurement of common shares subject to repurchase	-	-	360,366	-	-	-	-	360,366	-
Amortization of warrants issued pursuant to consulting agreement for services	-	-	-	315,900	-	-	-	315,900	-
Stock issued for consulting services	105,000	105	309,695	(309,800)	-	-	-	-	-
Foreign currency translation	-	-	-	-	-	(238,470)	-	(238,470)	(238,470)
Net loss	-	-	-	-	-	-	(13,147,446)	(13,147,446)	(13,147,446)
Comprehensive loss	-	-	-	-	-	-	-	-	(13,385,916)
Balance, December 31, 2005	33,089,712	$         33,090	$    52,465,480	$          (8,300)	$                 -	$         (126,842)	$ (49,050,497)	$     3,312,931	$   (49,177,339)
Classification adjustment	-	-	100	-	-	-	-	100	-
Proceeds from sale of common stock for cash, net	513,254	513	820,695	-	-	-	-	821,208	-
Employee stock options exercised	677,778	678	579,322	-	-	-	-	580,000	-
Cashless exercise of common stock purchase warrants	5,926	6	(6)	-	-	-	-	-	-
Common stock issued for consulting services	51,000	51	381,749	(381,800)	-	-	-	-	-
Common stock warrants issued for consulting services	-	-	155,300	(155,300)	-	-	-	-	-
Common stock issued pursuant to renegotiated warrant terms	92,500	92	(92)	-	-	-	-	-	-
Exchange of commission for common stock	100,000	100	(100)	-	-	-	-	-	-
Forfeiture of common stock	(35,595)	(36)	36	-	-	-	-	-	-
Amortization of warrants issued pursuant to consulting agreement for services	-	-	-	155,300	-	-	-	155,300	-
Remeasurement of stock issued pursuant to consulting agreements	-	-	(113,855)	113,855	-	-	-	-	-
Amortization of deferred compensation expense	-	-	-	211,601	-	-	-	211,601	-
Amortization of employee stock option	-	-	215,142	-	-	-	-	215,142	-
Relative fair value allocated to warrants in consideration of convertible notes	-	-	631,734	-	-	-	-	631,734	-
Reclassification of common shares previously subject to repurchase	-	-	177,055	-	-	-	-	177,055	-
Gain on remeasurement of common shares subject to repurchase	-	-	784,032	-	-	-	-	784,032	-
Foreign currency translation	-	-	-	-	-	205,476	-	205,476	205,476

Net loss	-	-	-	-	-	-	(10,093,878)	(10,093,878)	(10,093,878)
Comprehensive loss	-	-	-	-	-	-	-	-	(9,888,402)
Balance, December 31, 2006	34,494,575	$         34,494	$     56,096,592	$        (64,644)	$                  -	$             78,634	$ (59,144,375)	$   (2,999,299)	$   (59,065,741)
Remeasurement of stock issued pursuant to consulting agreements	-	-	191,785	(191,785)	-	-	-	-	-
Proceeds from sale of common stock for cash, net of allocation of proceeds to warrant liabilities	3,223,214	286	32,572	-	-	-	-	32,858	-
Common stock issued for consulting services	142,461	143	118,403	(44,357)	-	-	-	74,189	-
Forfeiture of common stock	(35,579)	(36)	36	-	-	-	-	-	-
Employee stock options exercised	368,000	368	168,932	-	-	-	-	169,300	-
Exercise of common stock purchase warrants	1,144,873	1,145	1,435,435	-	-	-	-	1,436,580	-
Conversion of bridge notes	300,000	300	327,450	-	-	-	-	327,750	-
Conversion of debentures	2,585,582	2,586	1,919,209	-	-	-	-	1,921,795	-
Reclassification of common shares previously subject to repurchase	-	-	78,556	-	-	-	-	78,556	-
Gain on remeasurement of common shares subject to repurchase	-	-	88,466	-	-	-	-	88,466	-
Amortization of consultants deferred compensation expense	-	-	-	278,857	-	-	-	278,857	-
Amortization of employee stock option	-	-	1,770,855	-	-	-	-	1,770,855	-
Foreign currency translation	-	-	-	-	-	(13,807)	-	(13,807)	(13,807)
Net loss	-	-	-	-	-	-	(10,509,746)	(10,509,746)	(10,509,746)
Comprehensive loss	-	-	-	-	-	-	-	-	(10,523,553)
Balance, December 31, 2007	42,223,126	$         39,286	$     62,228,291	$        (21,929)	$                  -	$             64,827	$ (69,654,121)	$   (7,343,646)	$   (69,589,294)
See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

GUARDIAN TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
	Year Ended December 31
	2007	2006	2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$(10,509,746)	$(10,093,879)	$(13,147,446)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	394,609	601,911	549,777
Stock-based compensation expense	2,087,779	862,044	5,323,992
Amortization of bridge notes and debentures discounts	3,019,318	1,204,808	-
Fair value of warrants issued - derivative instruments	3,040,562	-	-
Revaluation of derivative instrument (income)	(4,850,072)	-	-
Other noncash interest expense	72,043	-	-
Noncash broker compensation expense	-	112,421	-
Noncash classification adjustment to paid-in capital	27,750	100	-
Loss on disposal of fixed assets	-	2,254	-
Impairment of acquired intangible assets	1,125,122	-	-
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable	81,278	95,703	(142,869)
Decrease (increase) in other current assets	(1,864)	76,528	(51,344)
Decrease (increase) in prepaid expenses	(239,692)	124,455	(225,971)
Decrease (increase) in other noncurrent assets	364,472	(364,473)	(80,094)
Increase (decrease) in accounts payable	70,930	258,173	200,991
Increase (decrease) in accrued expenses	(180,562)	644,878	142,987
Increase (decrease) in deferred revenue	(24,390)	(52,235)	37,729
Net cash flows used in operating activities	(5,522,463)	(6,527,312)	(7,392,248)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment	(20,386)	(135,882)	(537,503)
Investment in patents	(31,180)	(139,761)	(165,194)
Net cash flows used in investing activities	(51,566)	(275,643)	(702,697)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net	2,540,000	821,208	7,002,941
Proceeds from exercise of employee stock options	169,300	300,000	200,000
Proceeds from exercise of stock warrants	815,641	-	2,419,560
Proceeds from (payments on) short-term note payable, related parties	(100,000)	302,000	-
Proceeds from (payments on) short-term convertible notes, net	(700,000)	1,100,000	-
Proceeds from debenture financing, net	2,217,747	2,575,000	-
Net cash flows provided by financing activities	4,942,688	5,098,208	9,622,501
Effect of exchange rate changes on cash and cash equivalents	(4,946)	777	(12,162)
Net increase (decrease) in cash and cash equivalents	(636,287)	(1,703,970)	1,515,394
Cash and cash equivalents at beginning of the year	737,423	2,441,393	925,999
Cash and cash equivalents at end of the year	$     101,136	$     737,423	$   2,441,393
Supplemental disclosure of cash flow information:
Remeasurement of common stock subject to repurchase	$       88,466	$    784,032	$     360,366
Reclassification of common stock previously subject to repurchase	78,556	177,055	377,442
Conversion of bridge notes to common stock	327,750	-	-
Conversion of convertible debenture to common stock	1,921,795	-	-
Cashless exercise of common stock purchase warrants	-	6	-
See notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.   BASIS OF PRESENTATION AND GOING CONCERN CONSIDERATIONS

Guardian Technologies International, Inc. (along with its subsidiaries, the “Company” or “Guardian”) is the successor consolidated entity formed by a reverse acquisition on June 26, 2003, by RJL Marketing Services, Inc. (“RJL”) of Guardian Technologies International, Inc., a publicly held company.  

The Company employs high-performance imaging technologies and advanced analytics to create integrated information management products and services.  It primarily focuses on the areas of healthcare radiology and transportation security scanning.  The Company’s products and services automate the processing of large quantities of graphic, numeric, and textual data so organizations can efficiently detect, extract, analyze or effectively act upon the information gleaned from the data.  The Company’s solutions are designed to improve the quality and speed of decision-making and enhance organizational productivity and accuracy.

In July 2004, the Company acquired Wise Systems Ltd. (“Wise”) which provided the Company with a business dedicated to the development of healthcare products for the radiology marketplace.  The acquisition of Wise Systems Ltd. provides the Company with a branded product, a client referral base, and an entrée to the healthcare marketplace for the Company’s intelligent imaging technologies.

Reclassifications

Certain reclassifications of previously reported amounts have been made to conform to the current period presentation.  These classifications had no effect on the previously reported net loss.

Financial Condition and Going Concern Considerations

As of December 31, 2007, the Company’s revenue generating activities have not produced sufficient funds for profitable operations and the Company has incurred operating losses since inception.  In view of these matters, realization of certain of the assets in the accompanying consolidated balance sheet is dependent upon continued operations of the Company which, in turn, is dependent upon the Company’s ability to meet its financial requirements, raise additional financing on acceptable terms to the Company, and the success of its future operations.  

Our independent registered public accounting firm’s reports on the consolidated financial statements included in our annual report on Form 10-K for the years ended December 31, 2005 and 2006, and in this Form 10-K for the year ended December 31, 2007, contain an explanatory paragraph wherein they expressed an opinion that there is substantial doubt about our ability to continue as a going concern.

During Fiscal 2007, the Company raised $169,300 from the exercise of employee stock options, received $815,641 net proceeds from the exercise of common stock purchase warrants, received $100,000 from a promissory note, received gross proceeds of $2,550,000 (net proceeds of $2,540,000 after payment of sales commissions to a broker) from the issuance of common stock and warrants in a private placement offering, and completed the second closing of its Series A Debenture and Series D Warrant financing.  Gross proceeds from the second closing were $2,575,000, with net proceeds of $2,217,747 (after payment of sales commissions to a broker and related transaction costs).  In addition, the Company made: (i) $100,000 in principal repayment to Mr. Trudnak, the Company’s Chief Executive Officer, towards his outstanding noninterest-bearing loans, with the remaining net outstanding being $202,000 at December 31, 2007, and (ii) $800,000 in principal rep ayment to a bridge note holder.

Management believes that the cash balance of $101,136 at December 31, 2007, and subsequently $29,079 of collections on outstanding trade receivables, $15,000 received from the exercise of stock options, $4,850,000 received from the sale of securities, and outstanding subscriptions receivable of $1,650,000 due on or about May 30, 2008, to be sufficient to fund the Company’s operations, absent any cash flow from operations, until approximately the end of February 2009.  The Company is currently spending approximately $480,000 per month on operations and the continued research and development of our 3i technologies and products.  Although there can be no assurance, management believes that with the cash balance and other sources of funds received to-date, the Company may not require additional financing to fund the Company’s existing operations through December 31, 2008. This assumes that the Company will be unable to generate sufficient operating cash flow to fund its operations during this period.  Also, this assumes that holders of our outstanding debentures convert such

debentures into shares of our common stock prior to November 7, 2008, the date we are required to pay the principal amount of such debentures.  We may be required to raise additional capital through an equity or debt financing or though bank borrowing, in the event the debenture holders do not convert such debentures, partially convert such debentures, or effect the buy-in provision of the warrants related to the debentures.  We are also seeking research grant funding from sources in connection with the development of our Medical CAD product. There can be no assurances that the Company will be successful in its efforts to secure such additional financing, any bank borrowing or any grant funding.

During fiscal 2007, the Company’s total stockholders’ deficit increased by $4,344,347 to $7,343,647.  Notwithstanding the foregoing discussion of management’s expectations regarding future cash flows, the Company’s deepening insolvency continues to increase the uncertainties related to its continued existence.  Both management and the Board of Directors are carefully monitoring the Company’s cash flows and financial position in consideration of these increasing uncertainties and the needs of both creditors and stockholders.

In view of the foregoing, from time-to-time, management is required to seek additional capital through one or more equity or debt financings in the event that the cash on hand, collections from customers, and sales of our products do not provide sufficient cash to fund operations.    If adequate funds are not available to us, we may be required to curtail operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies or products.  If we raise additional capital through the sale of equity or equity-related securities, the issuance of such securities could result in dilution to our current stockholders.  No assurance can be given that we will have access to the capital markets in the future, or that financing will be available on terms acceptable to satisfy our cash requirements or to implement our business strategies.  If we are unable to access the capital markets or obtain acceptable financing, our results of operations and financial condition could be materially and adversely affected. We may be required to raise substantial additional funds through other means.   We have not begun to receive material revenues from our commercial operations associated with the software products.  Moreover, under the terms of the 2006 and 2007 convertible debentures and warrant financing, we may not be able to issue additional shares of our common stock or common stock equivalents (except for certain  issuances exempt from this requirement) for up to three years following the April 2007 second closing of the convertible debenture and warrant financing, engage in certain financings in which the conversion, exercise, exchange rate or other price of the securities is based upon the trading price of our securities after the date of issuance of such securities.  These provisions may limit our ability to raise additional financing through the issuance of common stock or common stock equivalents during the period such restrictions are effective.

Guardian does not anticipate it will need to increase the current workforce significantly to achieve commercially viable sales levels.  There can be no guarantee that these needs will be met or that sufficient cash will be raised to permit operations to continue.  If Guardian is unable to raise sufficient cash to continue operations at a level necessary to achieve commercially viable sales levels, the liquidation value of Guardian’s noncurrent assets may be substantially less than the balances reflected in the financial statements and we may be unable to pay our creditors.

The Company did not make timely payment of the interest due under our Series A 10% Senior Convertible Debentures on January 1, 2008.  However, the Company has paid all of the interest and late fees due to debenture holders as of April 8, 2008.  The debentures provide that any default in the payment of interest, which default is not cured within five trading days of the receipt of notice of such default or ten trading days after the Company becomes aware of such default, will be deemed an event of default.  If an event of default occurs under the debentures, the debenture holders may elect to require the Company to make immediate repayment of the mandatory default amount, which equals the sum of (i) the greater of either (a) 120% of the outstanding principal amount of the debentures, plus accrued but unpaid interest, or (b) the outstanding principal amount plus accrued but unpaid interest divided by the conversion price on the date the mand atory default amount is either (1) demanded or otherwise due or (2) paid in full, whichever has the lower conversion price, multiplied by the variable weighted average price of the common stock on the date the mandatory default amount is either demanded or otherwise due, whichever has the higher variable weighted average price, and (ii) all other amounts, costs, expenses, and liquidated damages due under the debentures. Also, interest under the debentures accrues at a rate of 18% per annum or the maximum amount allowed under the law and the Company may be subject to a late fee equal to the lesser of 18% per annum or the maximum rate permitted by law.  As of the date of this report, the debenture holders have not made an election requiring immediate repayment of the mandatory amount, although there can be no assurance they will not do so. In anticipation of such an election and measured as of December 31, 2007, the additional amount due is approximately $645,641, and is recorded as an increase to the car rying value of the debentures.

NOTE 2.   SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation – The accompanying consolidated financial statements include the accounts of Guardian Technologies International, Inc. and its subsidiaries, RJL Marketing Services, Inc., UK Guardian Healthcare Systems Ltd., and Wise Systems Ltd., in which it has the controlling interest.  Subsidiaries acquired are consolidated from the date of acquisition.  All significant intercompany balances and transactions have been eliminated.

Fair Value of Financial Instruments - The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and embedded conversion features and detachable warrants approximates fair value based on the liquidity of these financial instruments and their short-term nature.

Cash Equivalents - Cash and cash equivalents are stated at cost, which approximates fair value, and consists of interest and noninterest bearing accounts at a bank.  Balances may periodically exceed federal insurance limits.  The Company does not consider this to be a significant risk.  The Company considers all highly liquid debt instruments with initial maturities of 90 days or less to be cash equivalents.

Accounts Receivable – Accounts receivable are customer obligations due under normal trade terms and is stated net of the allowance for doubtful accounts.  The Company records an allowance for doubtful accounts based on specifically identified amounts that the Company believes to be uncollectible.  The outstanding allowances for doubtful accounts as of December 31, 2007 and 2006, was $68,000 and $82,000, respectively.

Property and Equipment - Property and equipment are carried at cost less accumulated depreciation and amortization.  For financial statement purposes, depreciation and amortization is provided on the straight-line method over the estimated useful live of the asset ranging from 3 to 5 years.

	December 31
Asset (Useful Life)	2007	2006
Computer equipment (3 years)	$ 337,593	$ 316,006
Software (3 years)	83,076	81,999
Furniture and fixtures (5 years)	488,239	488,239
Equipment (5 years)	34,265	34,265
	943,173	920,509
Less accumulated depreciation and amortization	425,506	308,961
	$ 517,667	$ 611,548

Depreciation and amortization for property and equipment was $143,785, $140,073, and $93,520 in fiscal 2007, 2006 and 2005, respectively, and is reflected in selling, general and administrative expenses in the accompanying consolidated statements of operations.

Intangible Assets – Intangible assets consist of acquired software and patents.  The acquired software is being amortized using the straight-line method over 5 years.  Patent acquisition costs pertaining to PinPoint have been capitalized and are being amortized over the 20-year legal life of the patents.  The Company evaluates the periods of amortization continually to determine whether later events or circumstances require revised estimates of useful lives.            

Excess of Purchase Price over Net Assets Acquired (Goodwill) – The Company follows the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” These statements establish financial accounting and reporting standards for acquired goodwill.  Specifically, the standards address how acquired intangible assets should be accounted for both at the time of acquisition and after they have been recognized in the financial statements.  Effective January 1, 2002, with the adoption of SFAS No. 142, goodwill must be evaluated for impairment and is no longer amortized.  Excess of purchase price over net assets acquired (“goodwill”) represents the excess of acquisition purchase price over the fair value of the net assets acquired.  To the extent possible, a portion of the excess purchase price is ass igned to identifiable intangible assets.  Based on a net realizable value analysis as of June 30, 2007, goodwill from the acquisition of Wise Systems Ltd. was determined to be fully impaired.  Therefore, the balance of goodwill at December 31, 2007 and 2006 were $0 and $128,633, respectively.

Impairment of Excess Purchase Price over Net Assets Acquired – The Company follows the provisions of SFAS No. 142 “Goodwill and Other Intangible Assets” for the impairment of goodwill.  The Company determines impairment by comparing the fair value of the goodwill, using the undiscounted cash flow method, with the carrying amount of that goodwill.  Impairment is tested annually or whenever indicators of impairment arise.  Based on a net realizable value analysis as of June 30, 2007, it was determined that the asset was fully impaired and the Company took a $126,875 write-off for the impairment of goodwill.

Impairment of Long-Lived Assets – The Company evaluates the carrying value of long-lived assets for impairment, whenever events or changes in circumstances indicate that the carrying value of an asset within the scope of SFAS No. 144, “Accounting of the Impairment or Disposal of Long-Lived Assets,” may not be recoverable.  The Company’s assessment for impairment of assets involves estimating the undiscounted cash flows expected to result from use of the asset and its eventual disposition.  An impairment loss recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset, and considers year-end the date for its annual impairment testing.

On July 27, 2004, the Company completed the acquisition of Wise Systems Ltd.  This transaction has been accounted for as a business combination.  The purchase price for these assets and liabilities assumed were allocated to acquired intangible assets (FlowPoint software) and goodwill. In conjunction with its net realizable value analysis required by SFAS No. 86 “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed” during June 2007, the Company determined that its entire investment in Wise Systems was impaired.  This was based on the Company’s determination that the carrying amount of these assets, as reflected on the Company’s consolidated balance sheet, exceeded its projected net realizable value; accordingly, the Company wrote-off the remaining unamortized acquired intangible assets (FlowPoint software) totaling $998,247.   

Foreign Currency Translation – The accounts of the Company’s foreign subsidiary are maintained using the local currency as the functional currency.  For the subsidiary, assets and liabilities are translated into U.S. dollars at the period end exchange rates, and income and expense accounts are translated at average monthly exchange rates.  Net gains or losses from foreign currency translation are excluded from operating results and are accumulated as a separate component of stockholders’ equity.

Comprehensive Loss – Comprehensive loss reflects the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.  Comprehensive loss is comprised of net loss and foreign currency translation adjustments.

Issuance of Stock for Noncash Consideration – Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), and No. 123(R), “Share-Based Payment” define a fair value-based method of accounting for stock options and other equity instruments.  The Company has adopted this method, which measures compensation costs based on the estimated fair value of the award and recognizes that cost over the service period.  Emerging Issues Task Force Issue 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods, or Services” (“EITF 96-18”), establishes the measurement principles for transactions in which equity instruments are issued in exchange for the receipt of goods or services.  The Company has relied upon the guidance provided under Issue 1 of EITF 96-18 to dete rmine the measurement date and the fair value re-measurement principles to be applied.  The Company considered the following facts in its determination of the measurement date of each transaction: the equity awards were non-forfeitable and contained no vesting requirements. Based on these findings, the Company determined that the unamortized portion of the stock compensation should be re-measured on each interim reporting date and proportionately amortized to stock-based compensation expense for the succeeding interim reporting period until goods are received or services are performed.

Revenue Recognition - Revenues are derived primarily from the sublicensing and licensing of computer software, installations, training, consulting, software maintenance and sales of PACS, RIS and RIS/PACS solutions.  Inherent in the revenue recognition process are significant management estimates and judgments, which influence the timing and amount of revenue recognized.

For software arrangements, the Company recognizes revenue according to AICPA SOP 97-2, “Software Revenue Recognition,” and related amendments.  SOP No. 97-2, as amended, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of those elements.  Revenue from multiple-element software arrangements is recognized using the residual method, pursuant to SOP No. 98-9, Modification of SOP 97-2, “Software Revenue Recognition, With Respect to Certain Transactions.”  Under the residual

method, revenue is recognized in a multiple element arrangement when vendor-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement.  The Company allocated revenue to each undelivered element in a multiple element arrangement based on its respective fair value, with the fair value determined by the price charged when that element is sold separately.  Specifically, the Company determines the fair value of the maintenance portion of the arrangement based on the renewal price of the maintenance offered to customers, which is stated in the contract, and fair value of the installation based upon the price charged when those services are sold separately.  If evidence of the fair value cannot be established for undelivered elements of a software sale, the entire amount of revenue under the arra ngement is deferred until these elements have been delivered or vendor-specific objective evidence of fair value can be established.

Revenue from sublicenses sold on an individual basis and computer software licenses are recognized upon shipment, provided that evidence of an arrangement exists, delivery has occurred and risk of loss has passed to the customer, fees are fixed or determinable and collection of the related receivable is reasonably assured.  Revenue from software usage sublicenses sold through annual contracts and software maintenance is deferred and recognized ratably over the contract period.  Revenue from installation, training, and consulting services is recognized as services are performed.

Cost of goods sold incorporates direct costs of raw materials, consumables, staff costs associated with installation and training services, and the amortization of the intangible assets (developed software) related to products sold.    

Research and Development – The Company accounts for its software and solutions research and development costs in accordance with Statement of Financial Accounting Standards (SFAS) No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed.”  During the years ended December 31, 2007, 2006 and 2005, the Company expensed $901,524, $994,569, and $858,218, respectively for such costs.  No amounts were capitalized in these years.

Loss per Common Share - Basic net loss per share is calculated using the weighted-average number of shares of common stock outstanding, including restricted shares of common stock.  The effect of common stock equivalents is not considered as it would be anti-dilutive.

Use of Estimates - The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements.  Changes in these estimates and assumptions may have a material impact on the consolidated financial statements.  Certain estimates and assumptions are particularly sensitive to change in the near term, and include estimates of net realizable value for intangible assets, the valuation allowance for deferred tax assets and the assumptions used for measuring stock-based payments and derivative liabilities

Income Taxes - The Company accounts for income taxes under the liability method.  Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse.  Valuation allowances are established, when necessary, to reduce tax assets to the amounts more likely than not to be realized.

Segment Information - SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements.  It also establishes standards for related disclosures about products and services, geographic areas, and major customers.  The method for determining what information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance.  The Company’s chief operating decision-maker is considered to be the Company’s chief executive officer (“CEO”).  The CEO reviews financial information presented on an entity level basis accompanied by disaggregated information about revenues by product type and certain information about geographic regions for purposes of maki ng operating decisions and assessing financial performance.  The entity level financial information is identical to the information presented in the accompanying consolidated statements of operations.  For 2007, the Company only had two groups of products and services.  The Company has determined that it operates in a single operating unit as the two products make up a slight revenue stream to the Company as of the balance sheet date.

Fiscal 2007 revenue for our nSight bomb detection product was $120,000 and $169,591 for the FlowPoint Radiology Information System (“RIS”) and Picture Archiving & Communication System (“PACS”) products. Revenue for Fiscal 2006 and 2005 were from the sale of our FlowPoint RIS and PACS products.

The Company operates in North and South America, and Europe.  In general, revenues are attributed to the country in which the contract originates.

Geographic and Segment Information	Year Ended December 31
	2007	2006	2005
Revenues:
The Americas:
Software licenses	$ 120,000	$ 204,799	$ -
Maintenance and support fees	21,663	64,936	4,000
Hardware and related	-	16,785	131,943
Total North and South America	141,663	286,520	135,943
United Kingdom:
Software licenses	-	-	123,047
Maintenance and support fees	147,928	201,591	173,196
Total United Kingdom	147,928	201,591	296,243
Total	$ 289,591	$ 488,111	$ 432,186
Long-lived assets, net:
Corporate	$ -	$ 1,272,602	$ 1,536,594
North America	904,414	1,345,156	831,938
United Kingdom	15,612	144,500	153,770
Total	$ 920,026	$ 2,762,258	$ 2,522,302
Long-lived assets consist primarily of goodwill, software, patents, property and equipment, and other noncurrent assets.  Corporate assets includes those assets generating software license revenue in the Americas and the United Kingdom.  Corporate assest for year ended 2006 and 2005 represented costs for the FlowPoint software obtained with the purchase of Wise Systems Limited in 2004, which was being amortized over a five year period, but was consider fully impaired in June 2007.  Therefore, a full write-down of the remaining asset value of $998,247.

Stock-Based Compensation – Prior to the Company’s adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R), the Company measured compensation expense for its employee stock based compensation plans using the intrinsic value method for 2005 and 2004, as described by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.”  Under APB No. 25, when the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.  The Company applies the disclosure provisions of SFAS No. 123, “Accounting for Stock-based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-based Compensation – Transition and Disclosure,” as if the fair value-based method had been applied in measuring compensation expense for those years.  SFAS No. 12 3 required that the Company provide pro forma information regarding net earnings and net earnings per common share as if compensation expense for its employee stock-based awards had been determined in accordance with the fair value method prescribed therein.

As required under SFAS No. 123 and 148, the pro forma effects of stock-based compensation on net income and earnings per common share for employee stock options granted have been estimated at the date of grant, using a Black-Scholes option pricing model.  For purposes of pro forma disclosures, the estimated fair value of the options is amortized to pro forma net loss over the vesting period of the options.  The following table illustrates the effect on net income and earnings per share as if the fair value method had been applied to all outstanding awards for fiscal 2005.  Disclosures for fiscal year 2006 and 2007 are not presented because stock-based compensation payments were accounted for under SFAS 123R’s fair value method.

	Year Ended December 31, 2005
Net loss - as reported	$ (13,147,446)
Add: stock-based employee compensation expense included in reported net loss	1,540,025
Deduct: stock-based employee compensation expense determined under fair value method for all awards	(7,110,816)
Pro forma net loss	$ (18,718,237)
Net loss per common share:
As reported - Basic and Diluted	$ (0.43)
Pro forma - Basic and Diluted	$ (0.61)

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are not transferable.  The following weighted-average assumptions were used for the years ended December 31, 2007, 2006 and 2005:

Black-Scholes Model Assumptions		2007	2006	2005
Risk-free interest rate (1)		5.0%	5.0%	4.3%
Expected volatility (2)		104.6%	108.7%	82.0%
Dividend yield (3)		0.0%	0.0%	0.0%
Expected life (4)		6.5 years	6.5 years	9.0 years
(1)	The risk-free interest rate is based on US Treasury debt securities with maturities similar to the expected term of the option.
(2)	Expected volatility is based on historical volatility of the Company*s stock factoring in daily share price observations.
(3)	No cash dividends have been declared on the Company*s common stock since the Company*s inception, and the Company currently does not anticipate paying cash dividends over the expected term of the option.
(4)	The expected term of stock option awards granted is derived from historical exercise experience under the Company*s stock option plan and represents the period of time that stock option awards granted are expected to be outstanding.  The expected term assumption incorporates the contractual term of an option grant, which is usually ten years, as well as the vesting period of an award, which is generally pro rata vesting over two years.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51” (“SFAS No. 160”) to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  Among other requirements, SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is to be reported as a separate component of equity in the consolidated financial statements.  SFAS No. 160 also requires consolidated net income to include the amounts attributable to both the parent and the noncontrolling interest and to disclose those amounts on the face of the consolidated statement of income.  SFAS No. 160 is effective for fiscal years, and interim periods withi n those fiscal years, beginning on or after December 15, 2008 (that is, beginning in the Company’s fiscal 2009). Earlier adoption is prohibited.  This Statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. As the Company does not have noncontrolling interests in its subsidiary, SFAS 160 is not expected to have a material impact on consolidated financial condition or results of operations for the foreseeable future.

In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”).  SFAS No. 141(R) replaces SFAS No. 141, “Business Combinations,” however, it retains the fundamental requirements of the former Statement that the acquisition method of accounting (previously referred to as the purchase method) be used for all business combinations and for an acquirer to be identified for each transaction.  SFAS No. 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control.  Among other requirements, SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the identifiable assets acquired,

liabilities assumed and any noncontrolling interest in the acquiree at their acquisition-date fair values, with limited exceptions; acquisition-related costs generally will be expensed as incurred.  SFAS No. 141(R) requires certain financial statement disclosures to enable users to evaluate and understand the nature and financial effects of the business combination.  This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (that is, beginning in the Company’s fiscal 2009).  An entity may not apply it before that date. Currently, SFAS 141(R) is not expected to have a material impact on the Company’s financial condition or results of operations. However, if the Company engages in business combination after January 1, 2009, SFAS 141(R) could have a material impact on acco unting for the transaction.

On December 21, 2007, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 110 (“SAB 110”), expressing the views of the staff regarding the use of a “simplified” method, as discussed in SAB No. 107 (“SAB 107”), in developing an estimate of expected term of “plain vanilla” share options in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), ‘Shared-Based Payment’.  In particular, the staff indicated in SAB 107 that it will accept a company’s election to use the simplified method, regardless of whether the company has sufficient information to make more refined estimates of expected term.  At the time SAB 107 was issued, the staff believed that more detailed external information about employee exercise behavior (e.g., employee exercise pattern by industry and/or other categories of companies) would, over time, become readily available to co mpanies.  Therefore, the staff stated in SAB 107 that it would not expect a company to use the simplified method for share option grants after December 31, 2007.  The staff understands that such detailed information about employee exercise behavior may not be widely available by December 31, 2007.  Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method for the year ended December 31, 2007.  Should that be disclosed in the table above? If the Company is using the simplified method, then consider the following disclosure.) The Company previously adopted the simplified method, and continues to apply that method. The Company is currently assessing the availability of employee exercise behavior information for future years and, thereby, the effect of using that information for estimating fair value of stock-based payments (versus applying the simplified method) on financial condition and results of operations.

In September 2006, the SEC staff issued Staff Accounting Bulleting No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.”  SAB 108 was issued to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. Traditionally, there have been two widely-recognized methods for quantifying the effects of financial statement misstatements: the “roll-over” method and the “iron curtain” method. The roll-over methods focuses primarily on the impact of a misstatement on the income statement-including the reversing effect of prior year misstatements-but its use can lead to the accumulation of misstatements in the balance sheet. The iron-curtain method, on the other hand, focuses primarily on the effect of correcting the period-end balance sheet with less emphasis on the reversing effects of prior year error s on the income statement. Previously, the Company used the roll-over method for quantifying identified financial statement misstatements.

In SAB 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each financial statement and the related financial statement disclosures. This model is commonly referred to as the “dual approach,” because it requires quantification of errors under both the iron curtain and the roll-over methods.  SAB 108 also permits existing public companies to initially apply its provisions either by (i) restating prior financial statements as if the “dual approach” had always been used or (ii) recording the cumulative effect of initially applying the “dual approach” as adjustments to the carrying values of assets and liabilities as of January 1, 2006, with an offsetting adjustment recorded to the opening balance of retained earnings. Use of the “cumulative effect” transition method requires detailed di sclosure of the nature and amount of each individual error corrected through the cumulative adjustment and how and when it arose.  The Company adopted the provisions of SAB 108 in connection with the preparation of its annual financial statements for the year ended December 31, 2006.  The adoption of SAB 108 did not have a significant impact on our financial position or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 157, "Fair Value Measurements" ("SFAS No. 157") to clarify the definition of fair value, establish a framework for measuring fair value and expand the disclosures on fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). SFAS No. 157 also stipulates that, as a market-based measurement, fair value measurement should be

determined based on the assumptions that market participants would use in pricing the asset or liability, and establishes a fair value hierarchy that distinguishes between (a) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (b) the reporting entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). SFAS No. 157 becomes effective for financial statements issued for fiscal years beginning after November 15, 2007 (that is, beginning in the Company’s fiscal 2008). Currently, the Company is evaluating the impact of the provisions of SFAS No. 157 on its consolidated financial statements for the year ending December 31, 2008.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation Number (“FIN”) 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”).  FIN 48 establishes a recognition threshold and measurement for income tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 also prescribes a two-step evaluation process for tax positions.  The first step is recognition and the second step is measurement.  For recognition, an enterprise judgmentally determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position.  If the tax position meets the more-likely-than-not recognition threshold, it is measured a nd recognized in the financial statements as the largest amount of tax benefit that is greater than 50% likely of being realized.  If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of the position is not recognized in the financial statements.

Tax positions that meet the more-likely-than-not recognition threshold, at the effective date of FIN 48, may be recognized or, continued to be recognized, upon adoption of FIN 48.  The cumulative effect of applying the provision of FIN 48 shall be reported as an adjustment to the opening balance of retained earnings for that fiscal year.  FIN 48 will apply to fiscal years beginning after December 15, 2006 with earlier adoption permitted.  The effect of adopting FIN 48 was not material to the Company’s financial condition and results of operations.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115,” which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value, and also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities.  SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007.  Currently, the Company is evaluating the impact of the provisions of SFAS No. 159 on its consolidated financial statements for the year ending December 31, 2008.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155 “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.”  This Statement shall be effective for all financial instruments acquired, issued, or subject to a remeasurement (new basis) event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006 (that is, beginning in the Company’s fiscal 2007). The fair value election provided for in paragraph 4(c) of this Statement may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of Statement 133 “Accounting for Derivative Instruments and Hedging Activities” prior to the adoption of this Statement. However, to adopt the provisions of paragraph 4(c), the Company must also have adopted SFAS 157 and 159 as described above. In other words, the requirement for fair value accounting for all financial instruments must also have been early adopted.   The adoption of SFAS 155 did not have a material affect on the Company’s financial condition and results of operations.

NOTE 3.   OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:

	December 31
Classification	2007	2006
Accrued salaries and related	$ 116,544	$ 135,739
Deferred salaries	570,452	659,020
Deferred rent	52,030	62,954
Accrued interest	583	62,458
	$ 739,609	$ 920,171

NOTE 4.   FINANCING ARRANGEMENTS

On December 11, 2007, the Company issued a promissory note in the principal amount of $100,000 and warrants to purchase 10,000 shares of our common stock. The warrants are exercisable during the sixty (60) month period commencing on the date of issuance at a price of $0.70 per share.  The proceeds of the sale of the note were used by the Company for working capital purposes. Because the Company cannot ascertain whether sufficient authorized shares exist to settle the contract, the warrants are classified as a liability. The initial fair value of the warrants on the date of issuance was $4,580. The fair value of the warrants decreased $980 from the date of issuance to the balance sheet date, resulting in the fair value as of December 31, 2007 of $3,600.  The note bears interest at 10% per annum and is repayable in full upon receipt of proceeds from a future financing.  In addition, the noteholder has the right, up to and through January 15, 2008, or any extension that may be granted, to convert the principal portion of the repayment into a unit on the same terms as provided other investors in a pending financing transaction. The pending financing is expected to include units, with a minimum investment of $100,000, with each unit including: (1) 142,857 common shares priced at $0.70 per common share and (2) 214,285 Class H Common Stock Purchase Warrants. Each warrant is convertible into one common share. The Company closed on the pending financing during the periods of December 21, 2007 through April 4, 2008 for total gross proceeds of $6.8 million, including the conversion of the $100,000 promissory note on April 4, 2008.  The securities will be “restricted securities” within the meaning of Rule 144 under the Securities Act.  The warrants expire 60 months following the issue date, and have a conditional redemption price of $.001, when the stock price equals or exceeds $5.00 per share.

Under a Securities Purchase Agreement, dated November 3, 2006, between the Company and certain institutional accredited investors, the Company sold an aggregate of $5,150,000 in principal amount of our Series A Debentures and Series D Common Stock Purchase Warrants to purchase an aggregate of 4,453,709 shares of our common stock.  The Company issued an aggregate of $2,575,000 in principal amount of Series A Debentures and 4,453,709 Series D Warrants at a first closing held on November 8, 2006, and, due to the conversion feature embedded in the debentures and the warrants, the transaction was recognized as a liability under generally accepted accounting principles.  Due to milestone-related adjustments, the exercise price and the maximum number of shares to be issued under the debentures are indeterminable as of December 31, 2007. The Company issued an additional $2,575,000 in principal amount of the Series A Debentures at a second closing held April 12, 2007, following the effectiveness of a registration statement registering the shares of our common stock underlying the Series A Debenture and Series D Warrants.  The proceeds from the second closing were allocable to the embedded conversion features of the Series A Debentures and Series D Warrants, and are recognizable as a liability under generally accepted accounting principles.  The debentures mature on November 8, 2008.  One-half of the Series D Warrants became exercisable on November 8, 2006 (2,226,854 warrants), and the remaining one-half became exercisable on April 12, 2007 (2,226,855 warrants).  The Series D Warrants and the Placement Agent’s Warrants issued as compensation in the offering to Midtown Partners & Co., LLC, may be exercised via a cashless exercise if certain conditions are met.  The Company considered Emerging Issues Task Force Issue 00-19 (EITF 00-19), “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” and concluded that there were insufficient shares to share settle the contracts.  The Series D Warrants that became exercisable at the first closing will expire on November 8, 2011, and those related to the second closing will expire in April 12, 2012.

The Company did not make timely payment of the interest due under our Series A 10% Senior Convertible Debentures on January 1, 2008.  However, the Company has paid all of the interest and late fees due to debenture holders as of April 8, 2008.  The debentures provide that any default in the payment of interest, which default is not cured within five trading days of the receipt of notice of such default or ten trading days after the Company becomes aware of such default, will be deemed an event of default.  If an event of default occurs under the debentures, the debenture holders may elect to require the Company to make immediate repayment of the mandatory default amount, which equals the sum of (i) the greater of either (a) 120% of the outstanding principal amount of the debentures, plus accrued but unpaid interest, or (b) the outstanding principal amount plus accrued but unpaid interest divided by the conversion price on the date the mand atory default amount

is either (1) demanded or otherwise due or (2) paid in full, whichever has the lower conversion price, multiplied by the variable weighted average price of the common stock on the date the mandatory default amount is either demanded or otherwise due, whichever has the higher variable weighted average price, and (ii) all other amounts, costs, expenses, and liquidated damages due under the debentures. Also, interest under the debentures accrues at a rate of 18% per annum or the maximum amount allowed under the law and the Company may be subject to a late fee equal to the lesser of 18% per annum or the maximum rate permitted by law.  As of the date of this report, the debenture holders have not made an election requiring immediate repayment of the mandatory amount, although there can be no assurance they will not do so. In anticipation of such an election and measured as of December 31, 2007, the additional amount due is appro ximately $645,641, and is recorded as an increase to the carrying value of the debentures.

The debentures also include a negative covenant prohibiting the Company from incurring any indebtedness except, as permitted under the debenture, to include debt that is expressly subordinate to the debentures pursuant to a written subordination agreement acceptable to the holders of the debentures. In December 2007, Guardian issued a promissory note to an investor that did not include an agreement subordinating the note to the debentures.  The debentures provide that, if the Company fails to materially observe or perform any covenant, the holders of the debentures may send us a notice of default.  If Guardian does not cure the default within five trading days of the receipt of such notice, the Company could be deemed to be in default under the debentures.  The Company believes it has materially observed the covenants under the debentures. However, if Guardian is in default under this provision, the same events of default remedies apply.

The initial conversion price of the Series A 10% Senior Convertible Debentures was $1.15634 subject to certain adjustments.  On May 18, 2007, the conversion price of the Series A Debentures and the exercise price of the Series D Warrants held by investors and Placement Agent’s Warrants issued as compensation to Midtown Partners & Co., LLC, were reset to a price of $0.6948 per share effective November 12, 2007, and may be further reset in the event the Company does not meet certain milestones set forth in the debentures and warrants.  The final reset is for the fiscal quarter ending March 31, 2008, with the calculation taking place for the five (5) days prior to the filing date for the Company’s Form 10-Q for the quarter ended March 31, 2008.    The Company may be required to further re-set the conversion or exercise price of such debentures and warrants and to issue additional shares in the event the price re-set pr ovisions of the Series A Debentures and Series D Warrants are triggered.  As of December 31, 2007, holders of Series A Debentures have converted an aggregate of $1,921,795 in principal amount of the Series A Debentures and $3,228,205 in principal amount remains unconverted. On July 10, 2007, a holder of the Series D Warrants exercised an aggregate of 864,798 of such warrants and the Company issued an aggregate of 864,798 Class E Warrants as an inducement for such exercise, which is exercisable for a period of 5 years and at an exercise price of $1.17 per share. As a result of this inducement, the Company recognized approximately $839,000 of additional interest expense in 2007. Furthermore, as of the filing of this report, approximately 792,742 warrants (including the currently exercisable placement agent warrants issued to Midtown Partners and Co. LLC, in connection with our debenture and warrant financing and the Class F Warrants) may be exercised pursuant to the cashless exercise provisions of such wa rrants, which may be subsequently resold as “restricted securities” under the provisions of Rule 144 of the SEC.  Increased sales volume of our common stock could cause the market price of our common stock to drop.

During August and September 2006, the Company entered into a series of purchase agreements with four previous investors of the Company, under which convertible promissory notes in the aggregate amount of $1,100,000 and warrants to purchase 1,100,000 shares of our common stock were issued.  The warrants are exercisable during the twelve (12) month period commencing on the date of issuance at a price of $1.60 per share.  The proceeds of the sale of the notes were used by the Company for working capital purposes.  The notes bear interest at 15% per annum and were repayable 180 days after the date of issuance of the notes (maturity date).  The warrants contain certain anti-dilution provisions in the event of a stock dividend, capital reorganization, consolidation or merger of Guardian.   The bridge notes matured during February and March 2007.  The four noteholders agreed to extend the maturity date for an additional six mo nths and the interest rate continues at 15% per annum.  The Company analyzed the provisions of the convertible note host contracts and concluded that the convertible note contracts should be analyzed under the provisions of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and embedded derivative features should be bifurcated and separately measured at fair value.  The relative fair value allocated to the warrants in consideration of the convertible note is $631,734 and, after considering the relevant provisions of EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock,” accordingly increased paid-in capital.  Fair value of the embedded conversion option in the notes was determined using the Black-Scholes method for valuing options at approximately $468,266 and was recorded as a derivative liability.  Changes in the fair valu e of the embedded conversion option are recorded as interest expense. The resulting discount on the convertible notes of $1,100,000 is being amortized to interest expense over the six month term of the notes.  During 2007, $800,000 was paid to the noteholders, and $300,000 was converted to common stock in June 2007.

NOTE 5.   STOCKHOLDERS’ EQUITY

Unless otherwise indicated, fair value is determined by reference to the closing price of the Company’s common stock on the measurement date.  Prior to January 1, 2006, stock options included in stockholders’ equity reflect only those granted at an exercise price that was less than fair value (the intrinsic value). Subsequently, stock options for employees are recognized and disclosed pursuant to SFAS 123(R), “Stock-based Payment.”  Generally, the measurement date for employee stock compensation is the grant date. However, in the case of non-employees, the initial measurement date is the date of binding commitment to perform services for the Company.  This initial-measurement cost is first reflected as deferred compensation in stockholders’ equity (deficit) and then amortized to compensation expense on a straight-line basis over the period over which the services are performed.  For non-employee grants, the to tal cost is re-measured at the end of each reporting period based on the fair value on that date, and the amortization is adjusted in accordance with EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

Preferred Stock

The Company has the authority to issue 1,000,000 shares of $0.20 par value preferred stock.  The Board of Directors has the authority to issue such preferred shares in series and determine the rights and preferences of such shares.  The Company has not had any preferred shares outstanding for any of the three years in the period ended December 31, 2007.

Common Stock

The Company has the authority to issue up to 200,000,000 shares of $0.001 par value common stock.  The Board of Directors has the authority to issue such common shares in series and determine the rights and preferences of such shares.

During 2007, Company employees exercised 368,000 stock options that resulted in the issuance of 368,000 shares of common stock for cash proceeds to the Company of $169,300.  Common stock was increased by $368 for the par value of the shares and $168,932 to paid-in capital.

During 2007, in accordance with the terms of the Company’s outstanding Series A Debentures, certain debenture holders converted approximately $1,921,795 in principal amount of such debentures into an aggregate of 2,585,582 shares of common stock.  Common stock was increased by approximately $2,586 for the par value of the shares and paid-in capital was increased by approximately $1,919,209.  In connection with this conversion, the fair value of the derivative instrument related to the embedded conversion feature was decreased by $406,595, and the related unamortized discounts for the debenture and deferred financing costs were reduced by $707,053, resulting in a net interest expense charge of $300,458.

During December 2007, the Company accepted direct investment from existing accredited investors of $200,000 and issued 285,714 shares of common stock.   In addition, we issued an aggregate of 428,570 common stock purchase warrants exercisable at a price of $0.70 per share that contain a conditional call provision if the market price of each share exceeds $5.00. The warrants expire in December 2012. Because of the reset provision of the Series A 10% Senior Convertible Debenture, the Company cannot ascertain whether sufficient authorized shares exist to settle the contract, the warrants are classified as a liability. The initial fair value of the 428,750 warrants on the date of issuance was $167,143. The fair value of the warrants decreased $12,857 from the date of issuance to the balance sheet date, resulting in the fair value as of December 31, 2007 of $154,286.

On November 29 2007, an investor exercised 60,075 warrants to purchase common stock that resulted in the issuance of 60,075 shares of common stock for cash proceeds to the Company of $45,056.  Common stock was increased by $60 for the par value of the shares and $44,996 to paid-in capital.  Upon the exercise of the warrants, the related warrant liability was reduced and paid-in capital increased by $22,829.

On October 21 2007, an investor exercised 60,000 warrants to purchase common stock that resulted in the issuance of 60,000 shares of common stock for cash proceeds to the Company of $45,000.  Common stock was increased by $60 for the par value of the shares and $44,940 to paid-in capital.  Upon the exercise of the warrants, the related warrant liability was reduced and paid-in capital increased by $22,800.

On September 12, 2007, the Company issued 48,163 shares of common stock as compensation for legal services previously rendered and recorded as an expense in prior periods of approximately $55,573.  The fair value of the stock on the date of issuance was approximately $36,122.  Common stock was increased by approximately $48 for the par value of the shares, $36,074 was recorded to paid-in capital, and the difference of $19,451 was credited to legal expense in the month.

On August 6, 2007, the Company closed on an equity financing transaction for gross proceeds to the Company of approximately $2,950,000, of which $600,000is due within 10 days upon execution of an agreement by Guardian with an investment bank related to a financing.  As a result of the contingency, that has not yet been satisfied, no subscription receivable was recorded as of the balance sheet date.  Under the terms of the financing, the Company received aggregate proceeds of $2,350,000 ($2,340,000 net of broker commissions) from six investors and issued an aggregate of: (i) 2,937,500 shares of common stock; (ii) 2,937,500 Class F Common Stock Purchase Warrants exercisable at a price of $0.80 per share, expiring thirty-six months from the date of issuance, and containing a cashless exercise provision and other customary provisions; and (iii) 2,937,500 Class G Common Stock Purchase Warrants exe rcisable at a price of $1.75 per share, expiring sixty months from the date of issuance, redeemable when the Company’s closing bid or sale price of its common stock exceeds $5.00 per share for ten (10) consecutive trading days, and containing other customary provisions. Because of the reset provision of the Series A 10% Senior Convertible Debentures previously described, the Company cannot ascertain whether sufficient authorized shares exist to settle the contract, the warrants are classified as a liability. As the $3,642,500 fair value of the warrants on the date of issuance exceeded the net proceeds from the financing transaction, the entire amount of the net proceeds was allocated to the warrants. The excess fair value of the warrants over the net proceeds, representing approximately $1,302,500, was charged to earnings immediately as interest expense. The fair value of the warrants decreased $1,938,750 from the date of issuance to December 31, 2007.  The change in fair value was recorded as a de crease in interest expense for the fiscal year. The fair value of the warrants, as measured at December 31, 2007 is $1,703,750.

On July 27, 2007, as previously disclosed, under the purchase agreement related to the Company’s acquisition of Wise Systems, the 35,579 shares held in escrow for the third and final performance period were forfeited due to Wise System’s not achieving specific performance objectives.

Effective July 19, 2007, the Company entered into a consulting agreement with Medical Imaging Informatics pursuant to which it agreed to issue an aggregate of 39,604 shares of common stock to Dr. H.K. Huang.  The shares were issued following the effectiveness of a registration statement on Form S-8 that registered the shares under the Securities Act of 1933, as amended.  The Form S-8 was filed with the Securities and Exchange Commission on September 14, 2007.  The shares were issued as compensation for services to be rendered under the agreement.  The initial fair value of the shares on the date of issuance was $44,357. The Company will record consulting expense over the six-month service period in accordance with EITF 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”  As a result, consulting expense of $33,334 was r ecorded during fiscal year 2007.

On July 10, 2007, an investor exercised 864,798 Series D Common Stock Purchase Warrants to purchase an aggregate of 864,798 shares of common stock for gross proceeds to the Company of $644,534.  After payment of $38,949 for bank fees and commissions to Midtown Partners & Co., LLC, the Company realized net proceeds of approximately $605,585.  In connection with the warrant exercise and as an inducement for such exercise, the Company issued to the investor 864,798 Class E Common Stock Purchase Warrants to purchase an aggregate of 864,798 shares of common stock, exercisable at a price of $1.17 per share during a term of five years from the date of issuance, and containing certain piggy-back registration rights and other customary provisions.  Also, the Company issued to Midtown Partners & Co., LLC as compensation, 47,564 Class E Common Purchase Warrants to purchase an aggregate of 47,564 shares of common stock, upon the same terms as issued to the investor.  Because of the reset provision of the Series A 10% Senior Convertible Debenture, the Company cannot ascertain whether sufficient authorized shares exist to settle the contract, the warrants are classified as a liability. The initial fair value of the 914,362 warrants on the date of issuance was $839,373. The fair value of the warrants decreased $538,294 from the date of issuance to the balance sheet date, resulting in the fair value as of December 31, 2007 of $301,079.

During June of 2007, in accordance with the original terms of the Company’s outstanding convertible notes, certain bridge note holders converted notes to 300,000 shares of common stock.  Common stock was increased by $300 for the par value of the shares and paid-in capital was increased by $327,750.  In connection with the conversion of these notes and payment of $600,000 on another convertible note, the fair value of the derivative instrument related to the embedded conversion feature was decreased by approximately by $383,135, and resulted in a corresponding decrease in interest expense.

During May of 2007, investors exercised certain warrants to purchase common stock that resulted in the issuance of 160,000 shares of common stock for cash proceeds to the Company of $120,000.  Common stock was increased by $160 for the par value of the shares and $119,840 to paid-in capital.

On January 10, 2007, the Company issued 54,694 shares of common stock as compensation for public relations services previously rendered and recorded an expense in full during the first quarter of 2007 of $38,067 for the fair value of the stock.  Common stock was increased by $55 for the par value of the shares and $38,012 to paid-in capital.

During September 2006, the Company agreed to convert warrants from the April 2005 private placement for certain investors into shares of common stock due to the more favorable terms established with the July 2005 Private Placement.  One investor converted 30,000 warrants to 30,000 shares of common stock.  

On September 8, 2006, the estate of a deceased stockholder of 15 shares of common stock returned the shares to the Company.

In August 2006, the Company issued 77,778 shares of common stock to reflect the impact of additional investment for excess proceeds over the stated exercise price.  The Company accordingly adjusted common stock for stated par value of approximately $78, additional paid-in capital for approximately $279,922, and expensed the fair value of the shares for stock based compensation of $280,000.

During July 2006, the Company accepted direct investment from existing accredited investors of $439,000 and issued 274,374 shares of common stock.  Common stock was increased by approximately $274 for the par value of the stock, and $ 438,726 to paid-in capital.  In addition, the Company issued an aggregate of 146,719 warrants to purchase common stock, exercisable at a price of $3.00 per share that contains a cashless exercise provision.  The warrants expire in July 2008.

On July 28, 2006, 35,580 shares of common stock were returned to the Company under the July 27, 2004 Wise acquisition stock purchase agreement.  This was the result of the revenue performance threshold not being achieved in the second performance year of a three year agreement.  The Company adjusted common stock and additional paid-in capital accounts accordingly for approximately $36.  The cumulative forfeiture is 71,160 shares of 206,739 shares initially deposited in escrow.  

On July 27, 2006, the Company issued to its investor relations consultant 100,000 shares of common stock in exchange of commissions for shares.  The Company adjusted common stock and additional paid-in capital accounts accordingly for $100.

On June 12, 2006, the Company issued 51,000 shares of common stock as compensation for equity research services rendered under a consulting services agreement and recorded an expense of $40,051.  The fair value of the stock is $91,800, and is being amortized over the one year consulting period beginning June 19, 2006.  Common stock was increased by $51 for the par value of the shares and $91,749 to paid-in capital.

During May 2006, the Company accepted direct investment from accredited investors of $382,208 and issued 238,880 shares of common stock.  In addition, the Company issued an aggregate of 59,720 warrants to purchase common stock, exercisable at a price of $3.00 per share that contains a cashless exercise provision.  The warrants expire in May 2008.

During 2006, Company employees exercised 600,000 incentive stock options that resulted in the issuance of 600,000 shares of common stock for cash proceeds to the Company of $300,000.  Common stock was increased by $600 for the par value of the shares and $299,400 to paid-in capital.  

During 2005, the Company also accepted direct investment from various accredited investors of $475,000 and issued 250,000 shares of common stock, at an average price per share of $1.90.  

During 2005, the Company’s employees exercised a total of 400,000 incentive stock options that resulted in the issuance of 400,000 shares of common stock for total cash proceeds to the Company of $200,000. Common stock was increased by $400 for the par value of the shares and $199,600 to paid-in capital.  

During September 2005, a group of investors in the 2004 Private Placement exercised 906,797 stock purchase warrants that resulted in the issuance of 906,797 shares of common stock for cash proceeds to the Company of $2,125,971 in September 2005, and net proceeds of $ 277,179 in October 2005.  

During September 2005, the placement agent for the 2004 Private Placement used the cashless exercise provision of their stock purchase warrants to exchange 23,940 stock purchase warrants for 14,646 shares of common stock.

During September 2005, the Company accepted direct investment in lieu of commission from two accredited investors of $52,124 and issued 26,062 shares of common stock.

During August 2005, the placement agent for the 2004 Private Placement exercised 1,000 stock purchase warrants that resulted in the issuance of 1,000 shares of common stock for cash proceeds to the Company of $1,920.

During July and August 2005, the Company closed on a private placement of its common stock for aggregate proceeds of approximately $4,650,000 (before deductions of $129,500 for certain investment banking fees and expenses).  The Company issued to the investors 2,325,000 shares of common stock.  As part of this private placement, the placement agent received 92,500 stock purchase warrants with an exercise price of $3.00 per share for a period of five years from the date of issuance, containing certain anti-dilution provisions, a piggy-back registration right, a cashless exercise provision, and other customary provisions.  The Company also issued 38,000 warrants to placement agents as compensation for the transaction.

During July and August 2005, the Company agreed to convert warrants from the April 2005 private placement for certain investors into shares of common stock due to the more favorable terms established with the July 2005 Private Placement.  Two investors converted 45,000 warrants to 45,000 shares of common stock.

During July 2005, a group of investors in the 2004 Private Placement exercised 3,125 stock purchase warrants that resulted in the issuance of 3,125 shares of common stock for cash proceeds to the Company of $8,281.

On July 27, 2005, 35,580 shares of common stock held in escrow were returned to the Company under the July 27, 2004 Wise acquisition stock purchase agreement. This was the result of the revenue performance threshold not being achieved in the first performance year of a three year agreement.  The Company adjusted common stock and additional paid-in capital account accordingly by $36.

On July 11, 2005, the Company extended the consulting agreement with its financial consulting services firm for a period of six months.  The consultant received 50,000 shares of the Company’s common stock, and recorded an expense of $152,675.  

On June 29, 2005, the Company extended the consulting agreement with its primary investor relations firm for a period of six months.  Under the terms of the extension, the consultant received 30,000 shares of the Company’s common stock, and recorded an expense of $99,300.  

On June 24, 2005, the Company entered into a six-month consulting agreement for public relations services under which the consultant received compensation in the form of 25,000 shares of common stock, and recorded an expense of $86,000.

On May 16, 2005, under the incentive compensation terms of a consulting agreement with its primary investor relations consultant, the Company issued 24,000 shares of common stock in exchange of commissions for shares.  The Company adjusted common stock and additional paid-in capital accounts accordingly by $24.  

On April 15, 2005, pursuant to the terms of a units purchase agreement, the Company closed on a private placement of our securities for gross proceeds of $1,200,000 (before deductions of $117,561 for certain fees and expenses).   The Company issued 120,000 units of securities, each unit consisting of four shares of its common stock and one Class B Common Stock Purchase Warrant (“Class B Warrant”) to purchase one share of common stock.  The Class B Warrants are exercisable commencing on the date of issuance and ending August 15, 2006, at a price of $3.00 per share.  In addition, the placement agent for the transaction received the following compensation: (i) 48,000 warrants to purchase shares of common stock equal to 10% of the shares issued in the offering, exercisable at a price of $3.00 per share for a period of five years from the date of issuance, (ii) commissions and non-accountable expense reimbursement in the aggregat e amount of approximately $96,000, and (iii) contain anti-dilution provisions,  piggy-back registration rights, cashless exercise provision, and other customary provisions.

During March 2005, an investor in the 2004 Private Placement exercised 2,342 stock purchase warrants that resulted in the issuance of 2,342 shares of common stock for cash proceeds to the Company of $6,206.  

During January 2005, the Company issued to certain accredited investors, under the Stock Subscription Agreement, an aggregate of 500,000 shares of common stock for proceeds of $1,000,000.  The proceeds were from a December 2004,

Stock Subscription Agreement. This transaction was recorded in December 2004, in the equity section of the balance sheet as a stock subscription receivable and unissued common stock.

Stock Warrants

The Company has issued warrants as compensation to its placement agent and other consultants, as well as to incentivize investors in each of the Company’s private placement financings.  

Warrant Issued

During December 2007, (as outlined in further detail above in the common stock section), the Company accepted direct investment from existing accredited investors of $200,000 and issued 285,714 shares of common stock.   In addition, we issued an aggregate of 428,570 common stock purchase warrants exercisable at a price of $0.70 per share that contain a conditional call provision if the market price of each share exceeds $5.00. The warrants expire in December 2012. Because of the reset provision of the Series A 10% Senior Convertible Debenture, the Company cannot ascertain whether sufficient authorized shares exist to settle the contract, the warrants are classified as a liability. The initial fair value of the 428,750 warrants on the date of issuance was $167,143. The fair value of the warrants decreased $12,857 from the date of issuance to the balance sheet date, resulting in the fair value as of December 31, 2007 of $154,286.

On December 11, 2007, (as outlined in further detail above in the financing section) the Company issued a promissory note in the principal amount of $100,000 and warrants to purchase 10,000 shares of our common stock. The warrants are exercisable during the sixty (60) month period commencing on the date of issuance at a price of $0.70 per share.  The proceeds of the sale of the note were used by the Company for working capital purposes. Because the Company cannot ascertain whether sufficient authorized shares exist to settle the contract, the warrants are classified as a liability. The initial fair value of the warrants on the date of issuance was $4,580. The fair value of the warrants decreased $980 from the date of issuance to the balance sheet date, resulting in the fair value as of December 31, 2007 of $3,600.

On August 6, 2007, (as outlined in further detail above in the common stock section) the Company closed on an equity financing transaction for gross proceeds to the Company of approximately $2,950,000, of which $600,000 is due within 10 days upon execution of an agreement by Guardian with an investment bank related to a financing that did not take place.  Therefore, the outstanding subscription was cancelled in December 2007. The Company issued an aggregate of: (i) 2,937,500 Class F Common Stock Purchase Warrants exercisable at a price of $0.80 per share, expiring thirty-six months from the date of issuance, and containing a cashless exercise provision and other customary provisions, and (ii) 2,937,500 Class G Common Stock Purchase Warrants exercisable at a price of $1.75 per share, expiring sixty months from the date of issuance, redeemable when the Company’s closing bid or sale price of its common stock exceeds $5.0 0 per share for ten (10) consecutive trading days, and containing other customary provisions. Because of the reset provision of the Series A 10% Senior Convertible Debentures previously described, the Company cannot ascertain whether sufficient authorized shares exist to settle the contract, the warrants are classified as a liability. As the $3,642,500 fair value of the warrants on the date of issuance exceeded the net proceeds from the financing transaction, the entire amount of the net proceeds was allocated to the warrants. The excess fair value of the warrants over the net proceeds, representing approximately $1,302,500, was charged to earnings immediately as interest expense. The fair value of the warrants decreased $1,938,750 from the date of issuance to December 31, 2007.  The change in fair value was recorded as a decrease in interest expense for the fiscal year. The fair value of the warrants, as measured at December 31, 2007 is $1,703,750.

On July 10, 2007, (as outlined in further detail above in the common stock section) an investor exercised 864,798 Series D Common Stock Purchase Warrants to purchase an aggregate of 864,798 shares of common stock for gross proceeds to the Company of $644,534, and as an inducement for such exercise, the Company issued to the investor 864,798 Class E Common Stock Purchase Warrants to purchase an aggregate of 864,798 shares of common stock, exercisable at a price of $1.17 per share during a term of five years from the date of issuance, and containing certain piggy-back registration rights and other customary provisions.  Also, the Company issued to Midtown Partners & Co., LLC as compensation, 47,564 Class E Common Purchase Warrants to purchase an aggregate of 47,564 shares of common stock, upon the same terms as issued to the investor.  Because of the reset provision of the Series A 10% Senior Convertible Debenture, the Company cannot ascertai n whether sufficient authorized shares exist to settle the contract, the warrants are classified as a liability. The initial fair value of the 914,362 warrants on the date of issuance was $839,373. The fair value of the warrants decreased $538,294 from the date of issuance to the balance sheet date, resulting in the fair value as of December 31, 2007 of $301,079.

During May 2007, the Company issued an aggregate of 324,061 warrants to two (2) accredited investors to purchase our common stock at an exercise price of $0.75.  Because the Company cannot ascertain whether sufficient authorized shares exist to settle the contract, the warrants are classified as a liability. One investor exercised 120,075 warrants during October and November 2007.  The fair value of the warrants decreased $155,303 from the date of issuance to the balance sheet date. The remaining 203,986 warrants have a fair value, as measured on December 31, 2007 of $40,797.

On May 8, 2007, the Company issued to its public relations consultant 750,000 warrants to purchase our common stock at an exercise price of $0.80 for consulting services.  Because the Company cannot ascertain whether sufficient authorized shares exist to settle the contract, the warrants are classified as a liability. The initial fair value of the warrants on the date of issuance was $570,000. The fair value of the warrants decreased $405,000 from the date of issuance to the balance sheet date, resulting in the fair value as of December 31, 2007 of $165,000.

On April 20, 2007, the Company issued an aggregate of 243,666 warrants to purchase the Company’s common stock to a bridge note holder upon repayment of the bridge note and interest.  The warrants are at an exercise price of $1.60 per share and expire in April 2009. Because the Company cannot ascertain whether sufficient authorized shares exist to settle the contract, the warrants are classified as a liability. The initial fair value of the warrants on the date of issuance was $116,960. The fair value of the warrants decreased $82,847 from the date of issuance to the balance sheet date, resulting in the fair value as of December 31, 2007 of $34,113.

On November 3, 2006, the Company entered into a securities purchase agreement with certain selling stockholders.  Under that agreement, the Company sold an aggregate of $5,150,000 in principal amount of our Series A 10% Senior Convertible Notes and Series D Common Stock Purchase Warrants to purchase an aggregate of 4,453,707 shares of our common stock.  The Company issued an aggregate of $2,575,000 in principal amount of debentures and 4,453,707 Series D Warrants at a first closing held on November 8, 2006, and due to conversion feature embedded in the notes and the warrants, the transaction was recognized as a liability under generally accepted accounting principles.  Due to milestone-related adjustments, the exercise price and the maximum number of shares to be issued under the warrants are indeterminable at year end 2006. The Company contemplates issuing an additional $2,575,000 in principal amount of debentures at a second closing to b e held following the effectiveness of a registration statement registering the shares of our common stock underlying the Debenture and Series D Warrants.  However, the Company can provide no assurances that the conditions for the second closing will be met.  Also, the Company expects that any proceeds from the contemplated second closing allocable to the embedded conversion features of the Debentures and Series D Warrants to be recognizable as a liability under generally accepted accounting principles.  One-half of the Series D Warrants became exercisable on November 8, 2006, and the remaining one-half will become exercisable by the holder following the contemplated second closing.   The warrants may be exercised via a cashless exercise if certain conditions are met.  The Company considered Emerging Issues Task Force Issue 00-19 (EITF 00-19), “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” and conclu ded that there were insufficient shares to share settle the contracts.   Therefore, the relative fair value allocated to the warrants in consideration of financing is $1,515,142 for warrants issued to the debenture holders and $112,421 for the warrants issued to the broker, and was recorded as an increase to derivative liabilities. The classification of the warrants is reconsidered at each balance sheet date and, as long as the warrants are considered derivative liabilities under EITF 00-19, changes in the fair value of the warrants are recorded as interest expense.  Cancellation of the warrants can occur at the election of the Company upon certain conditions.  The warrants related to the first closing expire on November 8, 2011.

During September 2006, the Company agreed to convert warrants from the April 2005 private placement for certain investors into shares of common stock due to the more favorable terms established with the July 2005 Private Placement.  One investor converted 30,000 warrants to 30,000 shares of common stock.  

During August and September 2006, the Company entered into a series of purchase agreements with four previous investors of the Company, under which convertible promissory notes in the aggregate amount of $1,100,000 and warrants to purchase 1,100,000 shares of our common stock were issued.  The warrants are exercisable during the twelve (12) month period commencing on the date of issuance at a price of $1.60 per share.  The proceeds of the sale of the notes were used by the Company for working capital purposes.  The notes bear interest at 15% per annum and were repayable 180 days after the date of issuance of the notes (maturity date).  The warrants contain certain anti-dilution provisions in the event of a stock dividend, capital reorganization, consolidation or merger of Guardian.  The bridge notes matured during February and March 2007.  The four noteholders agreed to the extension of the maturity date and interest at 15% per annum to continue beyond the original maturity date.  The Company analyzed the provisions of the convertible note host contracts and concluded that the convertible note contracts should be analyzed under the provisions of SFAS 133, “Accounting for Derivative Instruments

and Hedging Activities,” and embedded derivative features should be bifurcated and separately measured at fair value.  The relative fair value allocated to the warrants in consideration of the convertible note is $631,734 and accordingly increased paid-in capital.  This discount was amortized to interest expense over the six month term of the notes.   The fair value of the embedded conversion option was determined using the Black-Scholes method for valuing options.  Therefore, the fair value of the embedded conversion option was approximately $468,266 and was recorded as a derivative liability.

During July 2006, the Company accepted direct investment from existing accredited investors of $439,000 and issued 274,374 shares of common stock.  Common stock was increased by approximately $274 for the par value of the stock, and $ 438,726 to paid-in capital.  In addition, the Company issued an aggregate of 146,719 warrants to purchase common stock, exercisable at a price of $3.00 per share that contains a cashless exercise provision.  The warrants expire in July 2008.

During May 2006, the Company accepted direct investment from accredited investors of $382,208 and issued 238,880 shares of common stock.  In addition, the Company issued an aggregate of 59,720 warrants to purchase common stock, exercisable at a price of $3.00 per share that contains a cashless exercise provision.  The warrants expire in May 2008.

On February 15, 2006, the Company issued to its investor relations consultant 125,000 warrants to purchase our common stock, at varying exercise prices ($3.00 to $9.00) for consulting services.  The fair value of the warrants is $112,750, and is being amortized over the consulting period of January through December 2006.

During July and August 2005, the Company closed on a private placement of its common stock for aggregate proceeds of approximately $4,650,000 (before deductions of $129,500 for certain investment banking fees and expenses).  The Company issued to the investors 2,325,000 shares of common stock.  As part of this private placement, the placement agent received 92,500 stock purchase warrants with an exercise price of $3.00 per share for a period of five years from the date of issuance, containing certain anti-dilution provisions, a piggy-back registration right, a cashless exercise provision, and other customary provisions.  The Company also issued 38,000 warrants to placement agents as compensation for the transaction.

On April 15, 2005, pursuant to the terms of a units purchase agreement, the Company closed on a private placement of its securities for gross proceeds of $1,200,000 (before deductions of  approximately $117,561 for certain fees and expenses).   The Company issued 120,000 units of securities, each unit consisting of four shares of our common stock and one Class B Common Stock Purchase Warrant (“Class B Warrant”) to purchase one share of common stock.  The Class B Warrants are exercisable commencing on the date of issuance and ending August 15, 2006, at a price of $3.00 per share.  In addition, the placement agent for the transaction received the following compensation: (i) 48,000 warrants to purchase shares of common stock equal to 10% of the shares issued in the offering, exercisable at a price of $3.00 per share for a period of five years from the date of issuance, (ii) commissions and non-accountable expense reimburse ment in the aggregate amount of approximately $96,000, and (iii) contain anti-dilution provisions,  piggy-back registration rights, cashless exercise provision, and other customary provisions.

Warrant Exercised

On November 29 2007, an investor exercised 60,075 warrants to purchase common stock that resulted in the issuance of 60,075 shares of common stock for cash proceeds to the Company of $45,056.  Common stock was increased by $60 for the par value of the shares and $44,996 to paid-in capital.  Upon exercise of the warrants, the fair value of the warrant liability was reduced and paid-in capital increased by $22,829.

On October 21 2007, an investor exercised 60,000 warrants to purchase common stock that resulted in the issuance of 60,000 shares of common stock for cash proceeds to the Company of $45,000.  Common stock was increased by $60 for the par value of the shares and $44,940 to paid-in capital.  Upon exercise of the warrants, the fair value of the warrant liability was reduced and paid-in capital increased by $22,800.

On July 10, 2007, an investor exercised 864,798 Series D Common Stock Purchase Warrants to purchase an aggregate of 864,798 shares of common stock for gross proceeds to the Company of $644,534.  After payment of $38,949 for bank fees and commissions to Midtown Partners & Co., LLC, the Company realized net proceeds of approximately $605,585.  In connection with the warrant exercise and as an inducement for such exercise, the Company issued to the investor 864,798 Class E Common Stock Purchase Warrants to purchase an aggregate of 864,798 shares of common stock, exercisable at a price of $1.17 per share during a term of five years from the date of issuance, and containing certain piggy-back registration rights and other customary provisions.  Also, the Company issued to Midtown Partners & Co., LLC as compensation, 47,564 Class E Common Purchase Warrants to purchase an aggregate of 47,564 shares of common stock, upon the same terms as issued to the investor.  Because of the reset provision of the Series A 10% Senior Convertible Debenture, the Company

cannot ascertain whether sufficient authorized shares exist to settle the contract, the warrants are classified as a liability. The initial fair value of the 914,362 warrants on the date of issuance was $839,373. The fair value of the warrants decreased $538,294 from the date of issuance to the balance sheet date, resulting in the fair value as of December 31, 2007 of $301,079.

During May of 2007, investors exercised certain warrants to purchase common stock that resulted in the issuance of 160,000 shares of common stock for cash proceeds to the Company of $120,000.  Common stock was increased by $160 for the par value of the shares and $119,840 to paid-in capital.

During September 2006, the Company agreed to convert warrants from the April 2005 private placement for certain investors into shares of common stock due to the more favorable terms established with the July 2005 Private Placement.  One investor converted 30,000 warrants to 30,000 shares of common stock.  

During March 2006, an investor used the cashless exercise provision of their stock purchase warrants to exchange 80,000 stock purchase warrants for 5.926 shares of common stock.

During September 2005, a group of investors in the 2004 Private Placement exercised 906,797 stock purchase warrants that resulted in the issuance of 906,797 shares of common stock for cash proceeds to the Company of $2,161,335 in September 2005, and net proceeds of $241,815 in October 2005.

During September 2005, the placement agent for the 2004 Private Placement used the cashless exercise provision of their stock purchase warrants to exchange 23,940 stock purchase warrants for 14,646 shares of common stock.

During August 2005, the placement agent for the 2004 Private Placement exercised 1,000 stock purchase warrants that resulted in the issuance of 1,000 shares of common stock for cash proceeds to the Company of $1,920.

During July and August 2005, the Company agreed to convert warrants from the April 2005 investment for certain investors into shares of common stock due to the more favorable terms established with the July/August 2006 private placement.  Investors converted 45,000 warrants to 45,000 shares of common stock

During July 2005, a group of investors in the 2004 Private Placement exercised 3,125 stock purchase warrants that resulted in the issuance of 3,125 shares of common stock for cash proceeds to the Company of $8,281.

During March 2005, an investor in the 2004 Private Placement exercised 2,342 stock purchase warrants that resulted in the issuance of 2,342 shares of common stock for cash proceeds to the Company of $6,206.

The Company has issued warrants as compensation to its bridge noteholders, placement agent and other consultants, as well as to incentivize investors in each of the Company’s private placement financings.  The table below shows by category, the warrants issued and outstanding at December 31, 2007.

Common Stock Purchase Warrants	Number of Warrants Granted and Outstanding	Date Warrants are Exercisable	Exercise Price	Date Warrants Expire
Placement agent	6,540	November 24, 2003	$ 1.95	November 24, 2008
	15,260	November 24, 2003	1.95	December 31, 2010
	234,817	May 14, 2004	1.92	May 13, 2009
	239,745	May 14, 2004	1.95	December 31, 2010
	24,000	July 13, 2005	2.00	December 31, 2008
	92,500	July 13, 2005	2.60	July 12, 2010
	48,000	April 15, 2005	3.00	August 15, 2010
	311,760	November 8, 2006 (1)	0.69	November 8, 2011
	47,564	July 10, 2007	1.17	July 9, 2012
	1,020,186
Bridge noteholders	142,652	December 19, 2003	0.75	December 31, 2008
	53,334	April 28, 2004	0.75	December 31, 2008
	600,000	August 14, 2006	1.60	August 13, 2008
	200,000	September 7, 2006	1.60	September 6, 2008
	3,588,911	November 8, 2006 (1)	0.69	November 8, 2011
	243,666	April 20, 2007	1.60	April 19, 2009
	10,000	December 12, 2007	0.70	December 12, 2012
	4,838,563
Private placement investors	65,000	February 26, 2004	2.65	February 25, 2009
	10,000	July 13, 2005	2.00	December 31, 2010
	11,720	May 20, 2006	3.00	May 20, 2008
	8,000	May 24, 2006	0.75	December 31, 2008
	35,000	May 25, 2006	3.00	May 25, 2008
	5,000	May 31, 2006	3.00	May 31, 2008
	7,813	July 3, 2006	3.00	July 3, 2008
	10,000	July 7, 2006	3.00	July 7, 2008
	7,031	July 14, 2006	3.00	July 14, 2008
	864,798	July 10, 2007	1.10	July 9, 2012
	2,937,500	August 6, 2007	0.80	August 5, 2010
	2,937,500	August 6, 2007	1.75	August 5, 2010
	214,285	December 21, 2007	0.70	December 21, 2012
	214,285	December 26, 2007	0.70	December 26, 2012
	7,327,932
Consultants	217,500	May 19, 2004	5.00	May 19, 2008
	50,000	February 15, 2006	3.00	February 15, 2009
	40,000	February 15, 2006	6.00	February 15, 2009
	35,000	February 15, 2006	9.00	February 15, 2009
	750,000	May 8, 2007	0.80	May 8, 2009
	1,092,500
Total Warrants Issued and Outstanding	14,279,181
(1) On November 12, 2007, the warrant exercise price of the outstanding Series D Warrants was reset to $0.6948 per common share.

2003 Stock Incentive Plan

On August 29, 2003, the Board of Directors adopted the 2003 Stock Incentive Plan and amended and restated the plan on December 2, 2003 (“Plan”).  On February 13, 2004, the stockholders approved the Plan and an increase in the authorized number of shares of common stock to 200,000,000.  Under the Plan, Guardian may issue options which will result in the

issuance of up to an aggregate of 30,000,000 shares of Guardian common stock.  The board of directors recommended that the Company submit the Plan to the stockholders for their approval. The amended and restated Plan was approved by the stockholders on February 13, 2004.  

Pursuant to the terms of the Plan, Guardian may grant Non-Qualified Options to directors or consultants of Guardian and its subsidiaries at any time, and from time to time, as shall be determined by the board of directors or a committee appointed by the board. The Plan also provides for the Incentive Options available to any officer or other employee of Guardian or its subsidi­aries as selected by the Board of Directors or a committee appointed by the Board.

Options granted under the Plan must be evidenced by a stock option agreement in a form consistent with the provisions of the Plan.   Each option shall expire on the earliest of (a) ten (10) years from the date it is granted, (b) sixty (60) days after the optionee dies or becomes disabled, (c) immediately upon the optionee's termination of employment or service or cessation of Board service, whichever is applicable, or (d) such date as the Board of Directors or a committee appointed by the Board shall determine, as set forth in the relevant option agreement; provided, however, that no ISO which is granted to an optionee who, at the time such option is granted, owns stock possessing more than ten (10) percent of the total combined voting power of all classes of stock of Guardian or any of its subsidiaries, shall be exercisable after the expiration of five (5) years from the date such option is granted.

The price at which shares of common stock covered by the option can be purchased is determined by Guardian’s Board of Directors or a committee appointed by the Board.    In the case of an Incentive Option, the  exercise price shall not be less than the fair value of Guardian’s common stock on the date the option was granted or in the case of any optionee who, at the time such incentive stock option is granted, owns stock possess­ing more than ten percent (10%) of the total combined voting power of all classes of stock of his employer corporation or of its parent or subsidiary corporation, not less than one hundred ten percent (110%) of the fair value of such stock on the date the incentive stock option is granted.

To the extent that an Incentive Option or Non-Qualified Option is not exercised within the period in which it may be exercised in accordance with the terms and provisions of the Plan described above, the Incentive Option or Non-Qualified Option will expire as to any then unexercised portion. To exercise an option, the Plan participant must tender an amount equal to the total option exercise price of the underlying shares and provide written notice of the exercise to Guardian. The right to purchase shares is cumulative so that once the right to purchase any shares has vested; those shares or any portion of those shares may be purchased at any time thereafter until the expiration or termination of the option.

During 2007, Company employees exercised 368,000 stock options that resulted in the issuance of 368,000 shares of common stock for cash proceeds to the Company of $169,300.  Common stock was increased by $368 for the par value of the shares and $168,932 to paid-in capital.

During 2006, Company employees exercised 600,000 incentive stock options which resulted in the issuance of 600,000 shares of common stock for cash proceeds to the Company of $300,000.  Common stock was increased by $600 for the par value of the shares and $299,400 to paid-in capital.

During 2005, the Company’s employees exercised a total of 400,000 incentive stock options which resulted in the issuance of 400,000 shares of common stock for total cash proceeds to the Company of $200,000. Common stock was increased by $400 for the par value of the shares and $199,600 to paid-in capital.

Summary of stock option activity for the three fiscal years ended December 31, 2007 is as follows:

Fiscal Year and Activity	Weighted- Average Exercise Price	Number of Options
Outstanding December 31, 2004	$ 1.24	4,432,800
Fiscal 2005 activity
Granted ($2.67 - $5.27)	3.44	695,000
Exercised ($0.50)	0.50	(400,000)
Cancelled ($2.80 - $4.99)	3.44	(40,000)
Outstanding December 31, 2005	1.61	4,687,800
Fiscal 2006 activity
Granted ($1.80 - $2.60)	2.35	295,000
Exercised ($0.50)	0.50	(600,000)
Cancelled ($1.80 - $5.05)	3.66	(231,700)
Outstanding December 31, 2006	$ 1.71	4,151,100
Fiscal 2007 activity
Granted ($0.01 - $0.90)	0.80	4,035,471
Exercised ($0.01 - $0.50)	0.46	(368,000)
Cancelled ($0.78 - $3.65)	1.17	(577,917)
Outstanding December 31, 2007	$ 1.31	7,240,654

The following table summarizes additional information about stock options outstanding at December 31, 2007:

Issued and Outstanding				Exercisable
Type of Option and Range of Exercise Prices	Number of Options	Weighted-Average Remaining Contractual Life (Yrs)	Weighted-Average Exercise Price	Number of Options	Weighted-Average Price
Nonqualified Stock Options   $0.01 - $0.50  (1)	1,972,000	6.0	$ 0.47	1,972,000	$ 0.47
Nonqualified Stock Options   $0.73 - $3.60  (2)	1,022,092	9.4	1.00	803,030	1.05
Incentive Stock Options         $0.73 - $5.27  (3)	4,246,562	8.4	1.77	2,194,312	2.58
Total	7,240,654	7.9	$ 1.31	4,969,342	$ 1.49
(1) Issued to employees below fair value and during the period of May 2003 through February 2004.
(2) Issued to directors at or below fair value, and issued above fair value for individuals with 10% or greater beneficial ownership.
(3) Issued to employees at fair value.

Common Shares Reserved – At December 31, 2007, the activity to date for shares of common stock reserved for future issuance were as follows:

Stock options outstanding	7,240,654
Stock options available for grant	21,121,346
Warrants to purchase common stock	14,279,181

Consulting Stock Compensation

On September 12, 2007, the Company issued 48,163 shares of common stock as compensation for legal services previously rendered and recorded as an expense in prior periods of approximately $55,573.  The fair value of the stock on the date of issuance was approximately $36,122.  Common stock was increased by approximately $48 for the par value of the shares, $36,074 was recorded to paid-in capital, and the difference of $19,451 was credited to legal expense in the month.

Effective July 19, 2007, the Company entered into a consulting agreement with Medical Imaging Informatics (“MI2”) pursuant to which it agreed to issue an aggregate of 39,604 shares of common stock to Dr. H.K. Huang.  The shares were issued following the effectiveness of a registration statement on Form S-8 that registered the shares under the Securities Act of 1933, as amended.  The Form S-8 was filed with the Securities and Exchange Commission on September 14, 2007.  The shares were issued as compensation for services to be rendered under the agreement.  The initial fair value of the shares on the date of issuance was $44,356. The Company will record consulting expense over the six-month service period in accordance with EITF 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”  As a result, consulting expens e of $33,334 was recorded during fiscal year 2007.

On January 10, 2007, the Company issued 54,694 shares of common stock as compensation for public relations services previously rendered and recorded an expense in full during the first quarter of 2007 of $38,067 for the fair value of the stock.  Common stock was increased by $55 for the par value of the shares and $38,012 to paid-in capital.

On July 27, 2006, the Company issued to its investor relations consultant 100,000 shares of common stock in exchange of commissions for shares.  The Company adjusted common stock and additional paid-in capital accounts accordingly for $100.  

On June 12, 2006, the Company issued 51,000 shares of common stock as compensation for equity research services rendered under a consulting services agreement and recorded an expense of $40,051. The fair value of the stock is $91,800, and is being amortized over the one year consulting period beginning June 19, 2006.  Common stock was increased by $51 for the par value of the shares and $91,749 to paid-in capital.

On April 18, 2006, the Company granted to a software engineer/research consultant 200,000 options for the purchase of common stock, for consulting services to be performed.  The options are exercisable at a price of $1.90 per share which is the market price of the shares on the date of grant.  The fair value of the options is $290,000, and is being amortized over the one-year vesting period beginning April 18, 2006.

On February 15, 2006, the Company issued to its investor relations consultant 125,000 warrants to purchase our common stock, at varying exercise prices ($3.00 to $9.00) for consulting services.  The fair value of the warrants is $112,750, and is being amortized over the consulting period of January through December 2006.

On July 11, 2005, the Company extended the consulting agreement with its financial consulting services firm for a period of six months.  The consultant received 50,000 shares of the Company’s common stock, and recorded an expense of $152,675.  

On June 29, 2005, the Company extended the consulting agreement with its primary investor relations firm for a period of six months.  Under the terms of the extension, the consultant received 30,000 shares of the Company’s common stock, and recorded an expense of $99,300.  

On June 24, 2005, the Company entered into a six-month consulting agreement for public relations services under which the consultant received compensation in the form of 25,000 shares of common stock, and recorded an expense of $86,000.

On May 16, 2005, under the incentive compensation terms of a consulting agreement with its primary investor relations consultant, the Company issued 24,000 shares of common stock in exchange of commissions for shares.  The Company adjusted common stock and additional paid-in capital accounts accordingly by $24.  

Additional Stockholder’s Equity Activity

During 2007, the Company remeasured the fair value of equity instruments (outstanding common shares, options and warrants) issued pursuant to consulting agreements, which had been previously issued.  During the fiscal year 2007, the Company accordingly recorded a net adjustment for the remeasurement of the equity instruments of approximately $14,815

by increasing additional paid-in capital account and decreased additional paid-in capital contra account deferred stock compensation.

During 2007, the Company remeasured the redemption value of outstanding common shares subject to repurchase, which were previously issued in the December 19, 2003 Difference Engine asset purchase.  The Company recorded a net adjustment for the current year of $88,466 by decreasing temporary equity and increasing permanent equity.

During 2007, the Company reclassified from temporary equity to permanent equity, the redemption value of $78,556, due to the sale of Guardian stock held by the shareholders of Difference Engines Corporation.

During 2006, the Company remeasured the redemption value of outstanding common shares issued pursuant to consulting agreements, which were previously issued.  The Company accordingly recorded a net adjustment for the current year of $47,671 by decreasing paid-in capital and decreasing stock-based compensation expense.

During 2006, the Company remeasured the redemption value of outstanding common shares subject to repurchase, which were previously issued in the December 19, 2003 Difference Engine asset purchase.  The Company recorded a net adjustment for the current year of $784,032 by reducing temporary equity and increasing permanent equity.

During 2006, the Company reclassified from temporary equity to permanent equity, the redemption value of $177,055, due to the sale of Guardian stock held by the shareholders of Difference Engines Corporation.

During 2005, the Company remeasured the redemption value of outstanding common shares subject to repurchase, which were previously issued in the December 19, 2003 Difference Engine asset purchase.  The Company recorded a net adjustment for the current year of $360,366 by reducing temporary equity and increasing permanent equity.

During 2005, the Company reclassified from temporary equity to permanent equity, the redemption value of $377,442, due to the sale of Guardian stock held by the shareholders of Difference Engines Corporation.

NOTE 6.   ACQUISITIONS

Acquisition of Certain Assets of Difference Engines

On October 23, 2003, the Company entered into an agreement with Difference Engines Corporation (Difference Engines), a Maryland corporation, pursuant to which Guardian agreed to purchase certain intellectual property (IP) owned by Difference Engines, including but not limited to certain compression software technology described as Difference Engine’s Visual Internet Applications or DEVision, as well as title and interest in the use of the name and the copyright of Difference Engines. This transaction has been accounted for as an asset acquisition.  The purchase price for these assets was allocated to acquired intangible assets (software) and amortization was expected on a straight-line basis over 3 years.  During 2004, based on a net realizable value calculation, it was determined that this acquired intangible asset was fully impaired and the Company recognized a write off of $1,498,731.

Under the terms of an Asset Purchase Agreement, Guardian issued 587,000 shares of its common stock as consideration for the purchase of the IP from Difference Engines Corporation, and cancelled a convertible promissory note that Difference Engines issued to Guardian in the amount of approximately $25,000 representing advances Guardian made to Difference Engines.  The founders of Difference Engines provided certain releases to Guardian related to their contribution of the technology to Difference Engines.  The 587,000 shares of common stock were subject to a two (2) year lock up.  Upon expiration of the two (2) year lock up period, in the event that the shares are not eligible for resale under “Rule 144” and have not been registered under the Securities Act, the holder of the shares may demand redemption of the shares.  The redemption price is to be calculated on the basis of the average of the closing bid and asked prices of Guardian’s common stock for the twenty (20) consecutive business days ending on the day prior to the date of the exercise of the holder’s right of redemption.  Under SEC Accounting Series Release (“ASR”) 268, “Presentation in Financial Statements of ‘Preferred Redeemable Stock’,” such freestanding financial instruments are to be classified as temporary equity and measured at the value of the redemption right.  The Company calculated the redemption value of the common stock issued in the Difference Engines asset purchase and reclassified from permanent equity to temporary equity the redemption value of $2,044,228.  

As shares of common stock are sold by the holders and/or the Company registers its outstanding shares of common stock, the then current fair value of those shares, based on the redemption value, shall be reclassified from temporary equity to

permanent equity.  During the fiscal periods ended December 31, 2007, 2006 and 2005, the temporary equity account was reduced and the permanent equity account increased by $78,556, $177,055 and $377,442, respectively, for the change in the estimated redemption value of the outstanding shares and the sale of Guardian stock held by the shareholders of Difference Engines Corporation.  Also, during the fiscal periods ended December 31, 2007, 2006 and 2005, the temporary equity account was reduced and the permanent equity account increased by $88,466, $784,032 and $360,366, respectively, for the gain on the remeasurement of the estimated redemption value of the outstanding shares held by the shareholders of Difference Engines Corporation.

Acquisition of Wise Systems, Ltd.

On July 27, 2004, the Company completed the acquisition of Wise Systems Ltd.   Wise is a developer of advanced radiology information systems (RIS) with principal offices located in Corsham, Wiltshire, UK.  Through this acquisition, Guardian augmented its healthcare informatics offering of image compression technologies while increasing its global market potential.  Guardian gained a number of important assets from the transaction, including Wise Systems’ RIS and the recently introduced picture archiving and communication system (PACS), which capture images and integrates them with other radiology information, making available to the healthcare enterprise a complete radiology patient record ready for distribution to caregivers where and when critical information is needed for optimal patient care. This seamless RIS/PACS software package keeps all of the critical information related to digital studies, such as MRI and CT scans, tog ether in an electronic patient record package, allowing healthcare providers to share patient information under electronically secure methodologies and to comply with the Health Insurance Portability and Accountability Act (HIPAA) requirements.

Under the terms of a stock purchase agreement, Guardian acquired all of Wise’s stock from Wise’s two shareholders, Martin Richards and Susan Richards.  Guardian paid to Wise’s two stockholders an aggregate of U.S. $1,929,500 in cash and issued to them shares of Guardian Technologies’ common stock in the amount of $500,000.  $929,500 of the cash purchase price was paid at closing and the remaining $1,000,000 of the cash purchase price was paid by means of the issuance of an interest bearing promissory note due 90 days after closing.  The deferred portion of the cash purchase price was paid upon maturity of the promissory note.  Guardian issued an aggregate of 106,739 shares of its common stock as the stock portion of the purchase price. The shares were valued on the basis of the average high and low sales prices of the stock for the 30 business day period which ended two days prior to the closing of the transaction.  At closing, the shares were deposited in escrow and are subject to forfeiture in the event Guardian Healthcare Systems Division does not achieve certain revenue thresholds over the three years following closing.  In the two annual performance periods ending July 28, 2006, Guardian’s Healthcare Division did not achieve the revenue threshold.  Therefore, a total of 71,160 shares were forfeited and returned to the Company out of escrow and such shares were cancelled.  The shares of stock are subject to a three year lock-up.  In addition, Guardian repaid an outstanding loan of one of the directors of Wise in the amount of $79,500.  At closing, the co-founder of Wise, Mr. Martin Richards, entered into an employment agreement with Guardian as Vice President of European Operations at a base salary of $210,250 per annum for a period of two years following closing which, expired on July 28, 2006.  Also, Mr. Martin Richards and Ms. Susan Richards resigned their positions as of ficers of Wise and as members of Wise’s Board of Directors, and entered into non-compete agreements with Guardian Technologies for a period of three years following closing.  Furthermore, effective as of the closing, Mr. Martin Richards was released from personal guarantees for certain of Wise’s bank debt obligations and of Wise’s real property lease obligations.

The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition:

SUMMARY OF NET ASSETS ACQUIRED AND LIABILITIES ASSUMED
Cash	$                609
Accounts receivable	89,513
Other current assets	725
Equipment, net	55,225
Goodwill	119,191
Intangible assets, net	2,264,630

Total assets acquired	$      2,529,893
Accounts payable	$         299,501
Total liabilities assumed	299,501
Net assets acquired	$      2,230,392

NOTE 7.   GOODWILL AND INTANGIBLE ASSETS

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").  SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142.  Statement 142 also requires that intangible assets with finite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 144").

On July 27, 2004, the Company completed the acquisition of Wise Systems Ltd.  This transaction has been accounted for as a business combination.  The purchase price for these assets and liabilities assumed has been allocated to acquired intangible assets (FlowPoint software) and goodwill. As explained more fully below, in conjunction with its net realizable value analysis required by SFAS No. 86 “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed” during June 2007, the Company determined that its entire investment in the Wise Systems FlowPoint software was impaired.  This was based on the Company’s determination that the carrying amount of these assets, as reflected on the Company’s consolidated balance sheet, exceeded its projected net realizable value; accordingly, the Company wrote-off the remaining unamortized acquired intangible assets (FlowPoint software) and goodwill totaling $1,125,122.   

The Company acquired intangible assets consisting of software technology from Wise on July 27, 2004 and other software valued at $2,648,366 and goodwill of $128,633.  Under SFAS No. 142, the software technology is considered to have a finite life, which management has estimated to be 5 years.  The value of the asset will be amortized on a straight-line basis over this period.  The Company continues to develop and market the software technology acquired, and has concluded that no additional impairment existed as of December 31, 2007, as its net realizable value exceeds its carrying value.  Goodwill is a non-amortizing intangible asset subject to ongoing evaluation for impairment.

	December 31, 2007
	Gross Cost	Accumulated Amortization	Impairment	Net Book Value
Intangibles with indefinite lives:
Goodwill	$ 126,875	$ -	$ 126,875	$ -
Intangibles with finite lives:
Software technology	$ 2,643,874	$ 1,642,958	$ 998,247	$ 2,669
Patent acquisition costs	345,468	34,754	-	310,714
	$ 2,989,342	$ 1,677,712	$ 998,247	$ 313,383

The Company’s estimated amortization expense is $19,613 for 2008, $16,944 for 2009, $16,944 for 2010, $16,944 for 2011 and $242,938 for 2012 and thereafter.  In accordance with SFAS No. 142, the Company reassessed the useful lives of all finite intangibles, and it was determined that no changes to such lives should be made and that there were no residual values associated with any of the intangible assets.

NOTE 8.   INCOME TAXES

There is no benefit or provision for income taxes reflected in the accompanying financial statements.  Reconciliation between the provision for income taxes computed by applying the statutory Federal income tax rate and the provision for income taxes is as follows:

YEAR ENDED DECEMBER 31	2007	2006	2005
Federal benefit at statutory rate	$ (3,573,314)	$ (3,431,919)	$ (4,470,131)
Increase (decrease) due to:
State benefits, net of federal benefits	(416,186)	(399,718)	(520,639)
Stock based compensation	601,505	(134,704)	1,243,079
Effect of foreign operations	518,179	266,949	469,594
Other, net	8,131	3,440	14,385
Valuation allowance	2,861,685	3,695,952	3,263,712
Provision for income taxes	$ -	$ -	$ -

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  Significant components of the Company’s net deferred tax assets as of December 31, 2007 and 2006 were as follows:

YEAR ENDED DECEMBER 31	2007	2006
Deferred tax assets:
Accrued salaries	$ 216,544	$ 197,613
Accrued leave	24,705	24,720
Depreciation and amortization	307,099	161,165
Net operating loss carryforwards, not yet utilized	13,262,741	10,675,644
Total deferred tax assets	13,811,089	11,059,142
Valuation allowance for deferred tax assets	(13,811,089)	(11,059,142)
Net deferred tax assets	$ -	$ -

For income tax purposes, the Company has a cumulative net operating loss carryforwards at December 31, 2007 of approximately $34,938,728 that, subject to applicable limitations, may be applied against future taxable income.  If not utilized, the net US operating loss carryforward will begin to expire in 2023.

NOTE 9.   COMMITMENTS AND CONTINGENCIES

Contractual Obligations.

The following table summarizes scheduled maturities of the Company’s contractual obligations extending beyond one year for which cash flows are fixed and determinable as of December 31, 2007.

Category	Payments Due in Fiscal
	Total	2008	2009	2010	2011	2012	Thereafter
Short-term convertible debentures and notes (1)	$ 3,957,476	$ 3,957,476	$ -	$ -	$ -	$ -	$ -
Long-term debt	-	-	-	-	-	-	-
Interest payments (2)	282,286	282,286	-	-	-	-	-
Operating lease commitments (3)	633,779	278,391	267,291	88,097	-	-	-
Unconditional purchase obligations (4)	-	-	-	-	-	-	-
Total contractual obligations	$ 4,873,541	$ 4,518,153	$ 267,291	$ 88,097	$ -	$ -	$ -
(1) Includes amounts accrued for debenture default provisions of $645,641.
(2) Projected interest on debt, with the assumption of no further conversion of the short-term debentures that mature on November 8, 2008.
(3) Total rental expense included in the accompanying consolidated statements of earnings was $285,833 in fiscal 2007, $291,091 in fiscal 2006, and $335,006 in fiscal 2005.
(4) The company currently does not have any outstanding unconditional purchase obligations.  They would though include inventory commitments, future royalty, consulting agreements, other than month-to-month arrangements, or commitments pursuant to executive compensation arrangements.

Default under Series A Debentures and Series D Common Stock Purchase Warrants

The Company did not make timely payment of the interest due under our Series A 10% Senior Convertible Debentures on January 1, 2008.  However, the Company has paid all of the interest and late fees due to debenture holders as of April 8, 2008.  The debentures provide that any default in the payment of interest, which default is not cured within five trading days of the receipt of notice of such default or ten trading days after the Company becomes aware of such default, will be deemed an event of default.  If an event of default occurs under the debentures, the debenture holders may elect to require the Company to make immediate repayment of the mandatory default amount, which equals the sum of (i) the greater of either (a) 120% of the outstanding principal amount of the debentures, plus accrued but unpaid interest, or (b) the outstanding principal amount plus accrued but unpaid interest divided by the conversion price on the date the mand atory default amount is either (1) demanded or otherwise due or (2) paid in full, whichever has the lower conversion price, multiplied by the variable weighted average price of the common stock on the date the mandatory default amount is either demanded or otherwise due, whichever has the higher variable weighted average price, and (ii) all other amounts, costs, expenses, and liquidated damages due under the debentures. Also, interest under the debentures accrues at a rate of 18% per annum or the maximum amount allowed under the law and the Company may be subject to a late fee equal to the lesser of 18% per annum or the maximum rate permitted by law.  As of the date of this report, the debenture holders have not made an election requiring immediate repayment of the mandatory amount, although there can be no assurance they will not do so. In anticipation of such an election and measured as of December 31, 2007, the additional amount due is approximately $645,641, and is recorded as an increase to the car rying value of the debentures.

NOTE 10. EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS

The employment agreements for each named executive officer are multiple years in duration. Each of the named executive officers employment agreement provides for an annual base salary and a discretionary annual incentive cash bonus and/or equity awards.  In subsequent years, the amount of annual incentive cash and/or equity award bonus is subject to determination by our board of directors without limitation on the amount of the award. Each of the agreements provides for a severance payment over a prescribed term in the event the named executive is terminated without cause, including for Mr. Donovan and Mr. Hare, if their duties are materially changed in connection with a change in control. Each agreement also provides that no severance payment is due in the event of termination for cause, which includes termination for willful misconduct, conviction of a felony, dishonesty or fraud. Each agreement further contains an agreement by the named executive officer not to compete with us for a defined term equal in length to the applicable severance payment in the respective employment agreement, which the Company feels is reasonable and consistent with industry guidelines.

Michael W. Trudnak.   Mr. Trudnak serves as Chairman of the Board, Secretary, and Chief Executive Officer and a Class III director.The Company entered into an employment agreement with Mr. Trudnak, which commenced on January 1, 2003.  The Company amended his agreement effective December 10, 2004. The amended agreement is for a three year term commencing June 26, 2003, and is renewable for one year terms.  The employment agreement provides for annual compensation to Mr. Trudnak of $275,000 and a monthly automobile allowance of $500.  The agreement provides for incentive compensation and/or bonuses as determined by Guardian, participation in Guardian’s stock option plan, and participation in any Guardian employee benefit policies or plans.  The employment agreement may be terminated upon the death or disability of the employee or for cause, in which eve nt Guardian’s obligation to pay compensation shall terminate immediately.  In the event the agreement is terminated by us other than by reason of the death or disability of the employee

or for cause, the employee is entitled to payment of his base salary for one year following termination.  The employee may terminate the agreement on 30 days’ prior notice to Guardian. The employee has entered into an employee proprietary information, invention assignment and non-competition agreement, pursuant to which the employee agrees not to disclose confidential information regarding Guardian, agrees that inventions conceived during his employment become the property of Guardian, agrees not to compete with the business of Guardian for a period of one year following termination of employment, and agrees not to  solicit employees or customers of Guardian following termination of employment.

William J. Donovan.   Mr. Donovan serves as President and Chief Operating Officer of Guardian, and previously served as Chief Financial Officer.  The Company entered into a new employment agreement with Mr. Donovan on November 21, 2005, which superseded his previous employment agreement with Guardian, dated effective August 18, 2003.  The new employment agreement is for a term of three (3) years unless earlier terminated, and is automatically renewable for one (1) year terms.  The employment agreement provides for an annual salary of $265,000.  The agreement provides for annual performance bonuses based on goals established by Guardian and agreed to by Mr. Donovan, a monthly automobile allowance of $500, participation in our stock option and other award plans (which options or awards shall immediately vest upon a “change in control”), and participation in any benefit policies or plans adopted by us on the sa me basis as other employees at Mr. Donovan’s level.

The employment agreement may be terminated by Mr. Donovan on 30 days’ prior written notice.  The employment agreement may be terminated by us by reason of death, disability or for cause.  In the event the agreement is terminated for death or disability of the employee, our obligation to pay compensation to the employee shall terminate immediately; provided that if the Company does not maintain disability insurance for the employee, he is entitled to be paid his base salary for one year following his disability.  In the event the he is terminated other than by reason of his death, disability, for cause, or change in control, Mr. Donovan is entitled to payment of his base salary for one year following termination.  Further if Mr. Donovan terminates his employment for the following material reasons (each a “material reason”): written demand by us to change the principal workplace of the employee to a location outside of a 50-mile radius from the current principal address of Guardian; a material reduction in the number or seniority of personnel reporting to employee or a material reduction in the frequency  or in nature of matters with respect to which such personnel are to report to employee, other than as part of a company-wide reduction in staff; an adverse change in employee’s title; a material decrease in employee’s responsibilities; or a material demotion, Mr. Donovan is entitled to be paid the greater of the base salary remaining under the employment agreement or twelve months base salary.

In the event of a “change in control” of Guardian and, within 12 months of such change of control, employee’s employment is terminated or one of the events in the immediately preceding sentence occurs, Mr. Donovan is entitled to be paid his base salary for 18 months following such termination or event.  A “change in control” would include the occurrence of one of the following events:

·

the approval of the stockholders for a complete liquidation or dissolution of Guardian;

·

the acquisition of 20% or more of the outstanding common stock of Guardian or of voting power by any person, except for purchases directly from Guardian, any acquisition by Guardian, any acquisition by a Guardian employee benefit plan, or a permitted business combination;

·

if two-thirds of the incumbent board members as of the date of the agreement cease to be board members, unless the nomination of any such additional board member was approved by three-quarters of the incumbent board members;

·

upon the consummation of a reorganization, merger, consolidation, or sale or other disposition of all or substantially all of the assets of Guardian, except if (i) all of the beneficial owners of Guardian’s outstanding common stock or voting securities who were beneficial owners before such transaction own more than 50% of the outstanding common stock or voting power entitled to vote in the election of directors resulting from such transaction in substantially the same proportions, (ii) no person owns more than 20% of the outstanding common stock of Guardian or the combined voting power of voting securities except to the extent it existed before such transaction, and (iii) at least a majority of the members of the board before such transaction were members of the board at the time the employment agreement was executed or the action providing for the transaction.

Also, Mr. Donovan has entered into a proprietary information, invention assignment and non-competition agreement (“non-competition agreement”), pursuant to which he has agreed not to disclose confidential information regarding us, agrees that inventions conceived during his employment become our property, agrees not to compete with our business for a period of one year following termination or expiration of his employment, and agrees not to solicit our employees or customers following termination of his employment.  The employment agreement provides for arbitration in the event of any dispute arising out of the agreement or his employment, other than disputes arising under the non-competition agreement.

Gregory E. Hare.  Mr. Hare serves as our Chief Financial Officer. The Company entered into an employment agreement with Mr. Hare commencing on January 30, 2006. The employment agreement is essentially the same as the agreement the Company entered into with Mr. Donovan, except that the agreement is for a term of two (2) years unless earlier terminated and is automatically renewable for one (1) year terms.  The employment agreement provides for a base salary of $200,000 per annum and no automobile allowances. The agreement provides for annual performance bonuses based on goals established by the Company and agreed to by Mr. Hare, participation in the Company’s stock option and other award plans, and participation in any company benefit policies or plans adopted by us on the same basis as other employees at Mr. Hare’s level.  The Company agreed to grant to Mr. Hare, subject to approval of our Compensation Committee, stock opt ions to purchase 200,000 shares of our common stock pursuant to our 2003 Stock Incentive Plan, one-half of which options will vest on the one year anniversary of the commencement of his employment and the remaining options vesting on the two year anniversary of the commencement of his employment.

Also, Mr. Hare has entered into a proprietary information, invention assignment and non-competition agreement (“non-competition agreement”), pursuant to which he has agreed not to disclose confidential information regarding us, agrees that inventions conceived during his employment become our property, agrees not to compete with our business for a period of one year following termination or expiration of his employment, and agrees not to  solicit our employees or customers following termination of his employment.  The employment agreement provides for arbitration in the event of any dispute arising out of the agreement or his employment, other than disputes arising under the non-competition agreement.

Steven V. Lancaster and Darrell E. Hill.  The Company entered into employment agreements with Mr. Hill, Vice President, Program Management, and Mr. Lancaster, Vice President, Business Development which the Company amended on December 10, 2004.  The amended agreements are essentially the same as the agreements with Mr. Trudnak, except that the agreements provide for base salaries of $125,000 per annum and no automobile allowances. Each of Messrs. Lancaster’s and Hill’s employment agreements automatically renewed for a further one year term on May 19, 2006.  Messrs. Lancaster and Hill resigned from their positions with the Company on August 25, 2007 and September 8, 2007, respectively.

Each of the foregoing agreements provides that the employee shall be entitled to participate in any stock option plan that the Company subsequently adopt, including the 2003 Stock Incentive Plan. Mr. Trudnak’s original employment agreement provided for the grant of an aggregate of 400,000 shares of our restricted stock. However, effective June 21 2004, Mr. Trudnak agreed to accept in lieu of the issuance of such shares, ten year nonqualified options to purchase an aggregate of 400,000 shares of common stock at an exercise price of $.36 per share. Also, each of Messrs. Hill’s and Lancaster’s original employment agreements provided for the grant of 200,000 shares of our restricted stock. However, effective June 21 2004, each of Messrs. Hill and Lancaster agreed to accept in lieu of the issuance of such shares, ten year nonqualified options to purchase an aggregate of 200,000 shares of common stock at an exercise price of $.50 per share.

Carl C. Smith, Jr. and Richard F. Borrelli. Messrs. Smith and Borrelli’s employment, as Vice Presidents and Officers for the Company, are at-will, and thus have not entered into employment agreements.  Therefore, there is no employment, severance or change of control arrangements.

NOTE 11. RELATED PARTY TRANSACTIONS

Note Payable to Stockholder and Executive Officer

On April 21, 2006, the Company entered into a Loan Agreement with Mr. Michael W. Trudnak, the Chairman and Chief Executive Officer pursuant to which Mr. Trudnak loaned us $200,000.  The Company issued a non-negotiable promissory note, dated effective April 21, 2006, to Mr. Trudnak in the principal amount of $200,000.  The note is unsecured, non-negotiable and non-interest bearing.  The note is repayable on the earlier of (i) six months after the date of issuance, (ii) the date the Company receives aggregate proceeds from the sale of its securities after the date of the issuance of the Note in an amount exceeding $2,000,000, or (iii) the occurrence of an event of default.  The following constitute an event of default under the note: (a) the failure to pay when due any principal or interest or other liability under the loan agreement or under the note; (b) the material violation by us of any representation, warranty, covenant or agreeme nt contained in the loan

agreement, the note or any other loan document or any other document or agreement to which the Company is a party to or by which the Company or any of our properties, assets or outstanding securities are bound; (c) any event or circumstance shall occur that, in the reasonable opinion of the lender, has had or could reasonably be expected to have a material adverse effect; (d) an assignment for the benefit of our creditors; (e) the application for the appointment of a receiver or liquidator for us or our property; (f) the issuance of an attachment or the entry of a judgment against us in excess of $100,000; (g) a default with respect to any other obligation due to the lender; or (h) any voluntary or involuntary petition in bankruptcy or any petition for relief under the federal bankruptcy code or any other state or federal law for the relief of debtors by or with respect to us, provided however with respect to an involuntary peti tion in bankruptcy, such petition has not been dismissed within 30 days of the date of such petition.  In the event of the occurrence of an event of default, the loan agreement and note shall be in default immediately and without notice, and the unpaid principal amount of the loan shall, at the option of the lender, become immediately due and payable in full.  The Company agreed to pay the reasonable costs of collection and enforcement, including reasonable attorneys’ fees and interest from the date of default at the rate of 18% per annum.  The note is not assignable by Mr. Trudnak without our prior consent.  The Company may prepay the note in whole or in part upon ten days notice.  On October 21, 2006, Mr. Trudnak extended the due date of the loan to December 31, 2006. Subsequently, on October 3 and October 18, 2006, Mr. Trudnak loaned to us $102,000 and $100,000, respectively, on substantially the same terms as the April 21, 2006 loan, except that each loan is due six months a fter the date thereof.  Accordingly, following such additional loans, the Company owed an aggregate of approximately $402,000 to Mr. Trudnak.  On November 10, 2006, Mr. Trudnak extended the due dates of such loans to May 31, 2007, except that $100,000 of the April 21, 2006, loan becomes due upon our raising $2,500,000 in financing after November 6, 2006, and the remaining amount of such loans become due upon our raising an aggregate of $5,000,000 in financing after November 6, 2006, and prior to May 31, 2007.  Following the first closing of our Debenture and Series D Warrant financing on November 8, 2006, the Company repaid $100,000 in principal amount of the April 1, 2006, and paid an additional $100,000 to Mr. Trudnak on April 17, 2007 upon the second closing of our Debenture and Series D Warrant financing.  As of December 31, 2007 and the date of this report, the Company owed Mr. Trudnak an aggregate of approximately $202,000.   The terms of the above transaction were reviewe d and approved by our audit committee and by our board of directors.

On August 4, 2003, the Company entered into an employment agreement with Ruth Taylor, pursuant to which Mrs. Taylor is employed as an accountant.  Mrs. Taylor is the daughter of the late Mr. Robert A. Dishaw, whose estate is a major shareholder of Guardian.  At the time of the agreement, Mr. Robert A. Dishaw was the President, Chief Operating Officer, director and a principal stockholder of Guardian.  The employment agreement provided for an annual base salary of $60,000 per annum.  The agreement is for a term of one year and is automatically renewed for one year terms unless earlier terminated.  The agreement provides for an annual performance bonus as determined by Guardian, participation in Guardian’s stock option plan, and participation in Guardian’s benefit policies and plans.  The agreement provides for the issuance pursuant to Guardian’s stock option plan o f 100,000 non-qualified stock options vesting immediately and exercisable at a price of $.50 per share, and 100,000 non-qualified stock options vesting one year from the anniversary date of employee’s employment and exercisable at a price of $.50 per share.  The agreement may be terminated upon the death or disability of employee or for cause.  If the employee is terminated by reason of death, disability (except as noted below) or for cause, no further compensation is payable to employee.  If employee is terminated other than by reason of death, disability or cause, or if no disability insurance is provided and employee becomes disabled, employee is entitled to be paid her base salary for six months.  Employee may terminate her employment agreement on 30 days’ prior written notice.  The Company have also entered into a non-competition, confidentiality, proprietary rights and non-solicitation agreement (proprietary information agreement) with Mrs. Taylor, pursuant to which e mployee has agreed not to disclose confidential information regarding Guardian, agreed that proprietary rights conceived during her employment are the property of Guardian, and agreed not to solicit Guardian’s customers or attempt to hire our employees for twelve months following termination of her employment.  The employment agreement provides for arbitration in the event of any dispute arising out of the employment agreement or employee’s employment, other than disputes under the proprietary information agreement.During 2004, Guardian granted to Mrs. Taylor 10,000 incentive stock options at an exercise price of $3.60, on October 4, 2005, granted to Mrs. Taylor 15,000 options at an exercise price of $3.00 per share, and on January 14, 2007 granted Mrs. Taylor 80,000 options at an exercise price of $0.82 per share. Also during 2007, Mrs. Taylor’s base salary was increased to $70,000, based on increased responsibilities, and performance.

Effective November 21, 2005, Mr. Robert A Dishaw resigned as President and Chief Operating Officer of Guardian and Guardian and we agreed with him to terminate his employment agreement, dated December 10, 2004.  However, Mr. Dishaw remained a director and provided consulting services to Guardian under a consulting services agreement, dated effective November 21, 2005.  Mr. Dishaw resigned as a director on August 14, 2006, and remained a principal stockholder until his death on December 24, 2007. The Estate of Mr. Dishaw continues to be major shareholder of the Company.

The consulting services agreement provided for Mr. Dishaw to perform services with regard to the distribution of the Company’s products through EGC International, Inc., and to be the primary intermediary with EGC. The agreement was for a term of three (3) years unless earlier terminated.  We agreed to pay him a consulting fee of $180,000 during year one, $130,000 during year two, and $80,000 during year three.  Mr. Dishaw was also entitled to be paid a sales override commission of 3% of gross revenues from sales of Guardian products to EGC or its resellers and 3% of gross revenues from sales of our products to certain approved clients.  Mr. Dishaw was entitled to continue to participate in our benefit policies and plans and to receive reimbursement of reasonable expenses.  The agreement terminated on August 2, 2007 by mutual agreement between the Company and Mr. Dishaw, as well as the C ompany made a payment to Mr. Dishaw in the amount of $150,000 for outstanding deferred and accrued salaries.  The Company had accrued $187,511 in anticipation of the outstanding deferred and accrued salary.

NOTE 12. OPERATING LEASES

During 2005, the Company entered into a lease for its headquarters building in Herndon, Virginia.  The office is comprised of 15,253 square feet of office and laboratory space.  The lease commenced on February 1, 2005, and is for a term of sixty-three (63) months at an annual base rental rate of $266,928, subject to annual rental escalation of 2.5%.  The Company believes that the facilities will be adequate for its needs for the next 60 months.  The lease terms include a security deposit of $88,976, which amount constitutes four months of rent.  Upon the occurrence of a "Material Financial Event" (defined as Guardian receiving an equity investment of $8 million dollars or greater whereby the net proceeds from the investment divided by the current cash burn rate is greater than 12; or achieving $2.5 million in annual revenue) and provided no default has occurred under the lease beyond the expiration of any applicable gra ce period, the security deposit shall be reduced by $22,244 and will be returned to Guardian within twenty (20) days after Guardian provides confirmation to the landlord of the foregoing Material Financial Event.  In addition, if the Material Financial Event has occurred and provided no default has occurred under the lease beyond the expiration of any applicable grace period for the twelve month period after the Material Financial Event, then the security deposit shall be further reduced by $22,244.  Moreover, if the Material Financial Event has occurred and provided no default has occurred under the lease beyond the expiration of any applicable grace period for the twenty-four month period after the Material Financial Event, then the security deposit shall be further reduced by $22,244, leaving a security deposit balance of $22,244, one month’s rent.

We also previously leased approximately 2,000 square feet of office space at Portman House, 7a High Street, Corsham, Wiltshire. The Company exercised the review date provision of the Corsham office lease, thereby terminating the lease on September 29, 2006.

Total rental expense included in the accompanying consolidated statements of operations was $285,833 in 2007, $291,091 in 2006, and $335,006.

EX-31

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002, AS AMENDED

I, Michael W. Trudnak, certify that:

1.

I have reviewed this Annual Report on Form 10-K of Guardian Technologies International, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 15, 2008

Signed:

/s/ Michael W. Trudnak

Name: Michael W. Trudnak

Title: Chairman and Chief Executive Officer

EX-31

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002, AS AMENDED

I, Gregory E. Hare, certify that:

1.

I have reviewed this Annual Report on Form 10-K of Guardian Technologies International, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 15, 2008

Signed:

/s/ Gregory E. Hare

Name: Gregory E. Hare

Title: Chief Financial Officer

EX-32

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, AS AMENDED

In connection with the Annual Report of Guardian Technologies International, Inc. (the "Company") on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael W. Trudnak, Chief Executive Officer of the Company, does hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended, that, to the best of his knowledge:

(1)

The Report fully complies with the reporting requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: April 15, 2008

Signed: /s/ Michael W. Trudnak

Name:

Michael W. Trudnak

Title:

Chairman and Chief Executive Officer

EX-32

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, AS AMENDED

In connection with the Annual Report of Guardian Technologies International, Inc. (the "Company") on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gregory E. Hare, Chief Financial Officer of the Company, does hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended, that, to the best of his knowledge:

(1)

The Report fully complies with the reporting requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: April 15, 2008

Signed: /s/ Gregory E. Hare

Name:

Gregory E. Hare

Title:

Chief Financial Officer

EX-10

STRATEGIC ALLIANCE AND JOINT DEVELOPMENT AGREEMENT

This STRATEGIC ALLIANCE AND JOINT DEVELOPMENT AGREEMENT (the “Agreement”) is entered into as of October 16, 2007, by and between Guardian Technologies International, Inc., a Delaware corporation with offices located at 516 Herndon Parkway, Herndon, Virginia 20170 (“Guardian”), and Control Screening, LLC (d.b.a. AUTOCLEAR), a limited liability corporation located at 2 Gardner Road, Fairfield, New Jersey 07004 (“Control Screening”).

RECITALS

WHEREAS, Guardian owns rights to certain know-how, trade secrets, proprietary intellectual property, and patent applications relating to image clarification, visualization, and computer-aided-detection (“CAD”) in image processing, based on its Signature Mapping™ algorithmic technology for clarification, visualization and detection including, but not limited to, automated explosives, weapons, illegal drugs and other contraband detection.

WHEREAS, Control Screening owns rights to certain know-how, trade secrets, proprietary intellectual property, patents and patent applications relating to high quality, advanced X-ray scanners ranging from portable and compact systems that can fit through doorways designed for screening small and large parcels, mail and carry-on bags at airports, courthouses, public buildings and mailrooms to heavy-duty, conveyorized x-ray scanners for screening checked luggage, cargo, pallets and containers at airports, seaports and storage facilities.

WHEREAS, Control Screening and Guardian (the “Parties”) wish to enter into a strategic development, integration and joint marketing agreement to deliver fully integrated, automated threat detection hardware/software solutions for the homeland security marketplace, on the terms and subject to the conditions of this Agreement.

AGREEMENT

NOW, THEREFORE, in consideration of the terms and conditions contained herein, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows.

1

DEFINITIONS

“Affiliate” means any person, directly or indirectly, controlling, controlled by or under common control with any other person. “Control” shall mean the direct or indirect ownership of 50% or more of the voting interest in, or 50% or more of the interest in the income of, such other person, or the ability to appoint, elect or direct at least 50% of the governing body of any such person.

“PinPoint” means an interconnected set of digital image and data processing methodologies, including but not limited to methodologies that encompass three domains common to imaging informatics: image processing, data mining, and rules generation through machine learning that enables automatic detection and decision-making. In the image processing domain, a component called Signature Mapping is used, which is a dynamic and iterative

1

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process, in which specifically designed algorithms impact image pixels that represent the target material in a way that causes these groups of related pixels to react in a unique collective way. This response-based reaction generates new groups of self classifying pixel features that result in a unique set of signatures for each material.

“Control Screening Products” means any products, supplies or other goods which are designed, developed, manufactured or marketed by Control Screening independent of Guardian and this Collaboration Agreement, whether existing on the date of this Agreement or subsequently developed, acquired or otherwise obtained by Control Screening.

“Party” or “Parties” means Control Screening or Guardian, or Control Screening and Guardian, collectively, as appropriate.

2

GENERAL AGREEMENT

2.1

This Agreement contemplates certain joint development activities between Guardian and Control Screening that are intended to facilitate and promote the delivery of fully integrated, automated threat detection solutions (hardware & software) by, among other things, integrating Guardian’s PinPoint technology with Control Screening’s advanced x-ray scanners, including on a priority basis the AutoClear 6040 baggage scanner and the multi-view AT prototype scanner.

2.2

The identification of product/products and the specific terms regarding the scope and type of the collaborative efforts (including, without limitation, the economic terms with respect to the parties), shall be determined from time-to-time.

2.3

Project Plans. Notwithstanding the provisions of Sections 2.1 and 2.2 above, the Parties understand that the technical and commercial feasibility of the Projects has not been established. Accordingly, while it is the present intent of the parties to undertake the Projects, either party may at its sole discretion decline to agree to undertake any or all of the Projects without obligation or penalty. It is further understood and agreed that each Project undertaken pursuant to this Agreement will be subject to the execution and delivery by the Parties of a separate Project plan for each Project undertaken (each, a "Project Plan"). When executed, each Project Plan will be attached to and incorporated by reference into this Agreement, and the terms and conditions of the Project Plan shall control to the extent inconsistent with the terms contained herein. The Pa rties agree that each Project Plan will set forth, among other things as the parties shall deem appropriate, the following:

2.3.1

a detailed description of the Project;

2.3.2

any design documents or specifications (unless the Project contemplates creation or development of the same);

2.3.3

Project deliverables, if any, that either or both Parties will be responsible for creating and developing;

2.3.4

tasks, responsibilities, covenants and agreements of each Party relating to the Project;

2.3.5

deadlines, interim milestones, and other matters relating to timing and delivery or performance under the Project;

2.3.6

Intellectual Property rights or licenses to the extent different from the terms of

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this Agreement;

2.3.7

exclusivity rights or other restrictions on use with or marketing of competing technologies, if any;

2.3.8

termination rights of the Parties relating to the Project;

2.3.9

obligations of the Parties to manufacture, market or sell implementations of the Project; and

2.3.10

any other terms or conditions that vary from the terms and conditions set forth in this Agreement.

3

THE PROJECTS

3.1

PinPoint integration with AutoClear 6040.  As a result of international market interest in a total solution, hardware and automated threat detection software, the Parties will jointly, and as rapidly as possible, evaluate the interface of PinPoint into the Control Screening operating system, collect images of live explosives, and validate the performance of the combined solution.

3.1.1

Engineering teams from both parties agree to work jointly and negotiate in good faith to agree upon a final Interface Design Document.

3.1.2

The parties will establish by mutual agreement target dates for the development of an interface protocol to facilitate the capture, analysis and detection results from PinPoint.

3.1.3

If available, the delivery of an AutoClear 6040 scanner to Guardian’s laboratory in Herndon for the collection of images of non-threats and bags with guns and ammunition.

3.1.4

If available, live explosive images will be captured and the ground truth established on an AutoClear 6040 scanner at the TSL facility in Atlantic City.  If unavailable at the TSL facility, the parties agree to locate an additional facility for the collection of explosive images.

3.1.5

Collect sensor-level data on all images collected.  While access to and use of sensor data is contemplated through an additional Project, information captured during this Project will mitigate the need to duplicate image collection efforts on the future project.

3.1.6

Guardian shall designate Carl Smith (carl.smith@guardiantechintl.com) as its Project Manager for this project, and Control Screening shall designate Scott Kravis (skravis@controlscreening.com) as its Project Manager.  Either party may change its Project Manager and appoint a substitute Project Manager for this Project.

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3.2

PinPoint integration with AutoClear AT Scanner.  Control Screening’s current Middle East opportunity presents an opportunity to extend the automated detection capabilities of PinPoint to an advanced multi-view x-ray platform.  The Parties will jointly, and as rapidly as possible, evaluate the interface of PinPoint into the Control Screening AT multi-view operating system, collect images of live explosives, and validate the performance of the combined solution.

3.2.1

Engineering teams from both parties agree to work jointly and negotiate in good faith to agree upon a final Interface Design Document.

3.2.2

The parties will establish by mutual agreement target dates for the development of an interface protocol to facilitate the capture, analysis and detection results from PinPoint.

3.2.3

If available, live explosive images will be captured and the ground truth established on an AutoClear AT multi-view scanner.  If unavailable at the TSL facility, the parties agree to locate an additional facility for the collection of images.  Absent a facility for the collection of live explosives images, the Parties agree to the development of a limited demonstration PinPoint solution developed on images of explosive simulants.

3.2.4

Collect sensor-level data on all images collected.  While access to and use of sensor data is contemplated through an additional Project, information captured during this Project will mitigate the need to duplicate image collection efforts on the future project.

3.2.5

Guardian shall designate Carl Smith (carl.smith@guardiantechintl.com) as its Project Manager for this project, and Control Screening shall designate Scott Kravis (skravis@controlscreening.com) as its Project Manager.  Either party may change its Project Manager and appoint a substitute Project Manager for this Project.

3.3

PinPoint development using raw sensor data output and grayscale images.  The Parties wish to explore the effects of raw sensor data output and grayscale images on the detection performance of PinPoint.  In addition, knowledge of how PinPoint processes image data could be used to modify how the sensors capture data to maximize automated detection capabilities.

3.3.1

As stated in the previous two Projects, raw sensor data output and grayscale images should be collected as part of the image collection process.

3.3.2

The engineering teams at both companies will work closely to establish baseline performance metrics.  Tests will be established to determine the performance of updated versions of PinPoint developed with the new data.  Adjusts to PinPoint will be determined and implemented.

3.3.3

If necessary and valuable, adjustments to the sensors, energy levels, configurations, and data collected will be evaluated to potentially enhance the performance of the scanner, and ultimately the detection software.

3.3.4

Guardian shall designate Carl Smith (carl.smith@guardiantechintl.com) as its Project Manager for this project, and Control Screening shall designate Scott Kravis (skravis@controlscreening.com) as its Project Manager.  Either party may change its Project Manager and appoint a substitute Project Manager for this Project.

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3.4

Additional development and integration opportunities. During the term of this Agreement, the Parties may explore and assess other possible joint development or integration opportunities consistent with the intent and purpose of this Agreement.

4

ADDITIONAL AGREEMENTS OF THE PARTIES

4.1

Logo Usage. Guardian hereby grants Control Screening the right to use Guardian's logo, subject to logo usage guidelines to be provided by Guardian to Control Screening. Control Screening hereby grants Guardian the right to use Control Screening's logo, subject to logo usage guidelines to be provided by Control Screening to Guardian. During the term of this Agreement, each party also agrees that it will whenever commercially feasible promote to its customers the use of the other party's products and services. Control Screening will also notify Guardian from time-to-time of upcoming product needs so that Guardian will have the opportunity to develop a technology solution to meet Control Screening's requirements.

4.2

Publicity; Press Releases. The parties may by mutual consent agree to issue a joint press release describing the collaboration of the parties. In addition, each of Guardian and Control Screening may, at such party's discretion: (a) identify the other as a strategic partner; (b) hyperlink from an appropriate area within its web site to the other's home page; and (c) display the other party's logo on its web site (in accordance with such party's guidelines for the use of such mark). The parties shall also consult regularly during the term of the Agreement and issue, as and when appropriate, such further press releases and/or other publicity materials as may be appropriate. The contents of the any press releases issued by the parties shall be subject to the approval of each party, which approval shall not be unreasonably withheld or delayed.

4.3

Use of Name in Promotional Materials. Each party shall, with prior approval of the other party (which will not be unreasonably withheld or delayed), be permitted to identify the other party as a strategic partner, to use the other party's name in connection with proposals to prospective customers, and to refer to the other party in print or electronic form for marketing or reference purposes, provided however that such proposals and marketing and reference materials shall not promote any third party or the products of any third party.

4.4

Marketing, Distribution and Support Efforts; Promotional Activities. To the extent agreed upon by the Parties pursuant to the applicable Project Plan or otherwise, each of Guardian and Control Screening agree to undertake commercially reasonable steps to actively and aggressively promote, any products and services (including Guardian Products and Control Screening Products) that result from the efforts undertaken pursuant to this Agreement. Each party agrees to serve as a reference in the other party’s proposals for a reasonable number of contacts by prospective customers of the other party and for industry analysts. Each party will undertake all reasonable and diligent efforts to cause its customers, resellers and/or licensees to install and/or deploy enhancements or upgrades to existing products if such enhancements or upgrades result from the efforts of the p arties under this Agreement. Under the direction of the Project Managers or the Project Leaders identified in Sections 5.1 and 7.2 below, the parties may by mutual agreement or plan

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undertake joint-marketing or co-marketing programs or activities as appropriate to further the intent of this Agreement and the alliance created hereby.

4.5

Freedom of Action. Except as specifically provided herein or in any Project Plan, either Party may market and offer its own or third party products or services (through any means) which are the same as or similar to and which are competitive with the other party's products and services. Neither Party makes any assurances or representations to the other in connection with any financial gain or other benefit that may result from the activities contemplated in this Agreement.

5

PROJECT MANAGEMENT

5.1

Project Managers; Project Leaders.  Each of the parties agrees to appoint and keep in place during the term of this Agreement one or more project managers (individually, a "Project Manager") who will allocate such portion of his or her working time as may be reasonably necessary to facilitate the performance, on a timely basis and in accordance with any particular project plan, of such party's obligations under this Agreement or any particular project plan, design or development specification or other document contemplated hereby. In addition, each party will name a Project Leader who will: (i) be the central point of contact for all matters arising under this Agreement; (ii) oversee project management and the resource allocations hereunder; and (iii) have overall responsibility for the facilitation of the performance of the obligations of the parties contemplated hereby. The Project Leaders for each respective party shall be the following individuals or their respective designated successors; provided, however, that it is the intent of the parties that the Project Leaders named below shall remain assigned to the alliance for the entire term of this Agreement:

                  CONTROL SCREENING:         Scott Kravis, Chief Scientist

                  GUARDIAN:           

         Carl Smith, Vice President of Operations

5.2

Meetings. The Project Leaders agree to meet at least monthly to review the overall progress of the projects contemplated hereunder and to provide overall supervision and oversight. At least one-half of the meetings will be held at Guardian, one-half at Control Screening, or some alternative location, as the parties shall determine.

6

DEVELOPMENT EFFORTS; RESOURCE COMMITMENT; EXPENSES

6.1

Cost Sharing and Reimbursement. Except as may be provided in any specific Project Plan or as may be otherwise agreed by the parties, each of Control Screening and Guardian agrees that it shall be responsible for its own expenses incurred in conjunction with this Agreement and any attachments hereto, and with any undertakings and obligations contemplated hereby. Notwithstanding the foregoing, in the event development efforts are undertaken at either Guardian or Control Screening, then the host party agrees to provide the necessary office space at no cost to the other party.

6.2

Independent Contractors. Either party shall have the option to utilize contractors in

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order to satisfy its obligation to supply personnel resources to the projects contemplated hereunder, but only to the extent and insofar as reasonably required in connection with the performance of the obligations of the party retaining the Contractor under this Agreement, and subject to the further requirements and limitations set forth herein.

7

DISPUTE RESOLUTION PROCESS

7.1

Initial Consultation and Negotiation. In the event a dispute between Control Screening and Guardian arises under the Agreement or a party's performance thereunder, the matter shall first be escalated to Control Screening's Project Leader and Guardian's Project Leader in an attempt to settle such dispute through consultation and negotiation in good faith and a spirit of mutual cooperation.

7.2

Escalation. If the Project Leaders are unable to resolve the dispute, it shall be referred to a conflict resolution committee comprised of one representative designated by each party. The initial members of the conflict resolution committee shall be:

For Control Screening:­­­

Todd Conway, VP

For Guardian:         

Bill Donovan, President & COO

7.3

Continued Performance. Except where prevented from doing so by the matter in dispute, the parties agree to continue performing their obligations under this Agreement while any good faith dispute is being resolved unless and until such obligations are terminated by the termination or expiration of any project or this Agreement.

8

OWNERSHIP; LICENSES

8.1

Ownership By Control Screening. As between Guardian and Control Screening, Control Screening shall own all right, title, and interest in any Intellectual Property provided by Control Screening to Guardian under this Agreement and owned by Control Screening as of the Effective Date or independently developed by Control Screening during the term of this Agreement (the "Control Screening Property"), including any derivatives, improvements or modifications of the Control Screening Property created by either party under this Agreement, and Guardian shall have no ownership interest therein. Guardian hereby irrevocably transfers, conveys and assigns to Control Screening all of its right, title, and interest therein and in any property owned or to be owned by Control Screening under this Agreement. Guardian shall execute such documents, render such assistance, and take such other action as Control Screening may reasonably request, at Control Screening's expense, to apply for, register, perfect, confirm, and protect Control Screening's ownership rights set forth in this Section 8.1 and in Section 3, and Control Screening shall have the exclusive right to apply for or register any patents, mask work rights, copyrights, and such other proprietary protections with respect thereto.

8.2

Ownership By Guardian. As between Guardian and Control Screening, Guardian shall own all right, title, and interest in any Intellectual Property provided by Guardian to Control Screening under this Agreement and owned by Guardian as of the

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Effective Date or independently developed by Guardian during the term of this Agreement (the "Guardian Property"), including any derivatives, improvements or modifications of the Guardian Property created by either party under this Agreement, and Control Screening shall have no ownership interest therein. Control Screening hereby irrevocably transfers, conveys and assigns to Guardian all of its right, title, and interest therein and in any property owned or to be owned by Guardian under this Agreement. Control Screening shall execute such documents, render such assistance, and take such other action as Guardian may reasonably request, at Guardian's expense, to apply for, register, perfect, confirm, and protect Guardian's ownership rights set forth in this Section 8.2 and in Section 3, and Guardian shall have the exclusive right to app ly for or register any patents, mask work rights, copyrights, and such other proprietary protections with respect thereto.

8.3

Waiver Of Moral Rights. Control Screening hereby waives any and all moral rights, including without limitation any right to identification of authorship or limitation on subsequent modification that Control Screening (or its employees, agents or consultants) has or may have in the Guardian Property or any part thereof. Guardian hereby waives any and all moral rights, including without limitation any right to identification of authorship or limitation on subsequent modification that Guardian (or its employees, agents or consultants) has or may have in the Control Screening Property or any part thereof.

8.4

Party As Attorney In Fact. Control Screening agrees that if Guardian is unable because of Control Screening's dissolution or incapacity, , to secure Control Screening's signature to apply for or to pursue any application for any United States or foreign patents or mask work or copyright registrations covering the inventions assigned to Guardian above, then Control Screening hereby irrevocably designates and appoints Guardian and its duly authorized officers and agents as Control Screening's agent and attorney in fact, to act for and in Control Screening's behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyright and mask work registrations thereon with the same legal force and effect as if executed by Control Screening. Guardian agrees that if Control Screening is unable because of Guardian's dissolution or incapacity, , to secure Guardian's signature to apply for or to pursue any application for any United States or foreign patents or mask work or copyright registrations covering the inventions assigned to Control Screening above, then Guardian hereby irrevocably designates and appoints Control Screening and its duly authorized officers and agents as Guardian 's agent and attorney in fact, to act for and in Guardian 's behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyright and mask work registrations thereon with the same legal force and effect as if executed by Guardian.

8.5

Licenses. In addition to any licenses granted elsewhere in this Agreement, Control Screening hereby grants to Guardian during the term of this Agreement a paid up, royalty-free, nontransferable and nonexclusive license to use such of the Control Screening Property and all Intellectual Property rights with respect thereto solely in connection with Guardian's performance hereunder and as may be reasonably necessary for Guardian to perform its obligations under this Agreement. Guardian hereby grants to Control Screening only during the term of this Agreement a paid up, royalty-free, nontransferable and nonexclusive license to use such of the Guardian

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Property and all Intellectual Property Rights with respect thereto solely in connection with Control Screening's performance hereunder and as may be reasonably necessary for Control Screening to perform its obligations under this Agreement. For purposes of this Agreement, "Intellectual Property" shall mean all works protectible by copyright, trademark, patent and trade secret laws or by any other statutory protection obtained or obtainable, and any Confidential Information (as defined below) of a party that meets one of the foregoing criteria, including without limitation, any literary works, pictorial, graphic and sculptural works, architectural works, works of visual art, and any other work that may be the subject matter of copyright protection; advertising and marketing concepts; information; data; formulae; designs; models; drawin gs; computer programs, including all documentation, related listings, design specifications, and flowcharts, trade secrets, and any inventions including all methods, processes, business or otherwise; machines, manufactures and compositions of matter and any other invention that may be the subject matter of patent protection; and all statutory protection obtained or obtainable thereon.

8.6

No Reverse Engineering. Each of Guardian and Control Screening agrees that it shall not (i) copy, modify, create any derivative work of, or include in any other products any Control Screening Property (in the case of Guardian) or Guardian Property (in the case of Control Screening) or any portion thereof, or (ii) reverse assemble, decompile, reverse engineer or otherwise attempt to derive source code (or the underlying ideas, algorithms, structure or organization) from any such property,  except as specifically authorized in writing by the party owning the same or as specifically provided under this Agreement.

8.7

Copyright Notices. Each party shall ensure that all copies of any software or other property in its possession or control incorporates all copyright and other proprietary notices in the same manner that the party owning the same incorporates such notices, or in any other manner reasonably requested by the owner. Each party shall promptly notify the other party in writing upon its discovery of any unauthorized use of a party's property or the infringement of such party's proprietary rights therein. Neither party shall license to any third party the property of the other party.

9

TRADEMARKS, TRADE NAMES AND BRANDING

9.1

Usage Guidelines. Control Screening shall comply with Guardian's logo, trademark and branding usage guidelines, which Guardian shall provide to Control Screening, and as the same may be updated by Guardian from time to time. Guardian shall comply with Control Screening's logo, trademark and branding usage guidelines, which Control Screening shall provide to Guardian, and as the same may be updated by Control Screening from time to time. Neither party shall alter the other party's Marks.

9.2

Ownership. All Guardian Marks are and shall remain, as between Control Screening and Guardian, the exclusive property of Guardian or its providers. All Control Screening Marks are and shall remain, as between Control Screening and Guardian, the exclusive property of Control Screening or its suppliers. Neither party grants any rights in the Marks or in any other trademark, trade name, service mark, business name or goodwill of the other except as expressly permitted hereunder or by separate written agreement of the parties and all use of a party's Marks shall inure to the benefit of the owner of such Mark. Each party agrees that it shall not challenge or

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assist others to challenge the rights of the other party or its suppliers or licensors in the Marks or the registration of the Marks, or attempt to register any trademarks, trade names or other proprietary indicia confusingly similar to the Marks.

10

CONFIDENTIALITY

10.1

Agreement as Confidential Information. The parties shall treat the terms and conditions and the existence of this Agreement as Confidential Information. Each party shall obtain the other's consent prior to any publication, presentation, public announcement or press release concerning the existence or terms and conditions of this Agreement.

10.2

Definition of Confidential Information. "Confidential Information" means the terms and conditions of this Agreement, the existence of the discussions between the parties, any information disclosed in connection with the development and integration projects being undertaken as described in Section 3 above, and any proprietary information a party considers to be proprietary, including but not limited to, information regarding each party's product plans, product designs, product costs, product prices, finances, marketing plans, business opportunities, personnel, research and development activities, know-how and pre-release products; provided that information disclosed by the disclosing party ("Disclosing Party") in written or other tangible form will be considered Confidential Information by the receiving party ("Receiving Party") only if s uch information is conspicuously designated as "Confidential," "Proprietary" or a similar legend. Information disclosed orally shall only be considered Confidential Information if: (i) identified as confidential, proprietary or the like at the time of disclosure, and (ii) confirmed in writing within thirty (30) days of disclosure. Confidential Information disclosed to the Receiving Party by any affiliate or agent of the Disclosing Party is subject to this Agreement.

10.3

Nondisclosure. The Receiving Party shall not disclose or use, except as permitted under this Agreement, the Confidential Information to any third party other than employees and contractors of the Receiving Party who have a need to have access to and knowledge of the Confidential Information solely for the Purpose authorized above. The Receiving Party shall have entered into non-disclosure agreements with such employees and contractors having obligations of confidentiality as strict as those herein prior to disclosure to such employees and contractors to assure against unauthorized use or disclosure.

10.4

Exceptions to Confidential Information. The Receiving Party shall have no obligation with respect to information which (i) was rightfully in possession of or known to the Receiving Party without any obligation of confidentiality prior to receiving it from the Disclosing Party; (ii) is, or subsequently becomes, legally and publicly available without breach of this Agreement; (iii) is rightfully obtained by the Receiving Party from a source other than the Disclosing Party without any obligation of confidentiality; (iv) is developed by or for the Receiving Party without use of the Confidential Information and such independent development can be shown by documentary evidence; and (v) becomes available to the Receiving Party by wholly lawful inspection or analysis of products offered for sale. Further, the Receiving Party may disclose Confidential Information pursuant to a valid order issued by a court or government agency, provided that the Receiving Party provides the Disclosing Party: (a) prior written notice of such obligation; and (b) the opportunity to oppose such

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disclosure or obtain a protective order.

10.5

Return or Destruction of Confidential Information. Upon written demand by the Disclosing Party, and in any event upon termination of this Agreement, the Receiving Party shall: (i) cease using the Confidential Information, (ii) return the Confidential Information and all copies, notes or extracts thereof to the Disclosing Party within seven (7) days of receipt of demand; and (iii) upon request of the Disclosing Party, certify in writing that the Receiving Party has complied with the obligations set forth in this paragraph.

10.6

Independent Development and Residuals. The terms of confidentiality under this Agreement shall not be construed to limit either party's right to develop independently or acquire products without use of the other party's Confidential Information. The Disclosing Party acknowledges that the Receiving Party may currently or in the future be developing information internally, or receiving information from other parties, that is similar to the Confidential Information. Accordingly, except as provided in this Agreement, neither party shall be prohibited from developing or having developed for it products, concepts, systems or techniques that are similar to or compete with the products, concepts, systems or techniques contemplated by or embodied in the Confidential Information provided that the Receiving Party does not violate any of its obligations under this Agreement in c onnection with such development. Further, subject to the other restrictions and limitations contained in this Agreement, the residuals resulting from access to or work with such Confidential Information shall not be subject to the confidentiality obligations contained in this Agreement. The term "residuals" means non-specific information in non-tangible form, which may be retained by persons who have had access to the Confidential Information, including general ideas, concepts, know-how or techniques contained therein. Neither party shall have any obligation to limit or restrict the assignment of such persons or to pay royalties for any work resulting from the use of residuals.

11

REPRESENTATIONS AND WARRANTIES

11.1

Control Screening represents and warrants to Guardian as follows:

11.1.1

Control Screening is a limited liability company, duly organized and validly existing and in good standing under the laws of its jurisdiction of incorporation, is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of its business or the ownership of its property makes such qualification necessary, except where the failure to so qualify or be in good standing would not have a material adverse effect on Control Screening or its ability to perform hereunder.

11.1.2

Control Screening has the full power and authority to execute and deliver this Agreement and to consummate the transactions contemplated herein. The execution, delivery and performance of this Agreement have been duly and validly authorized and approved by all necessary corporate action on the part of Control Screening. This Agreement has been duly executed and the provisions hereof constitute the valid and legally binding obligations of Control Screening and do not require the consent, approval or authorization of, or registration, qualification, designation, declaration or filing with, any person, public or governmental authority or other entity, except for any of the foregoing

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which have been received or obtained or, either individually or in the aggregate, do not and would not have a material adverse effect upon Control Screening or its ability to perform its obligations hereunder.

11.1.3

The execution and delivery of this Agreement by Control Screening, and the performance of its obligations hereunder, are not in violation or breach of, and will not conflict with or constitute a default under, the Certificate of Incorporation or Bylaws of Control Screening, or any material agreement, contract, commitment or obligation to which Control Screening is a Party or by which it is bound, and will not; conflict with or violate any applicable Law or any order or decree of any governmental agency or court having jurisdiction over Control Screening or its assets or properties.

EXCEPT AS SPECIFICALLY PROVIDED IN THIS SECTION 11.1, CONTROL SCREENING EXPRESSLY DISCLAIMS ALL WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, TO THE FULLEST EXTENT PERMITTED BY LAW, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT.

Guardian represents and warrants to Control Screening as follows:

11.1.4

Guardian is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of its business or the ownership of its property makes such qualification necessary, except where the failure to so qualify or be in good standing would not have a material adverse effect on Guardian or its ability to perform hereunder.

11.1.5

Guardian has full power and authority to execute and deliver this Agreement and to consummate the transactions contemplated herein. The execution, delivery and performance of this Agreement have been duly and validly authorized and approved by all necessary corporate action on the part of Guardian. This Agreement has been duly executed and the provisions hereof constitute the valid and legally binding obligations of Guardian and do not require the consent, approval or authorization of, or registration, qualification, designation, declaration or filing with, any person, public or governmental authority or other entity, except for any of the foregoing which have been received or obtained or, either individually or in the aggregate, do not and would not have a material adverse effect upon Guardian or its ability to perform its obligations hereunder.

11.1.6

The execution and delivery of this Agreement by Guardian, and the performance of its obligations hereunder, are not in violation or breach of, and will not conflict with or constitute a default under, the Articles or Certificate of Incorporation or Bylaws of Guardian, or any material agreement, contract, commitment or obligation to which Guardian is a Party or by which it is bound, and will not conflict with or violate any applicable Law or any order or decree of any governmental agency or court having jurisdiction over Guardian or its assets or properties.

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EXCEPT AS SPECIFICALLY PROVIDED IN THIS SECTION 11.2, GUARDIAN EXPRESSLY DISCLAIMS ALL WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, TO THE FULLEST EXTENT PERMITTED BY LAW, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT.

12

INDEMNITY

12.1

Indemnification by Guardian. Guardian shall defend, indemnify and hold harmless Control Screening and its officers, directors, employees, shareholders, agents, successors and assigns from and against any and all loss, damage, settlement, costs or expense (including legal expenses), as incurred, resulting from, or arising out of (i) any claim against Control Screening which alleges that any Guardian Property or Guardian deliverable infringes upon, misappropriates or violates any patents, copyrights, trademarks or trade secret rights or other proprietary rights of persons, firms or entities who are not parties to this Agreement; (ii) any claim relating to negligence, misrepresentation, error or omission by Guardian, its representatives, distributors, OEMs, VARs or other resellers; and (iii) any warranties made by Guardian inconsistent with or beyond the scope of any wa rranties made by Control Screening under this Agreement.

12.2

Guardian Exclusions. Guardian shall have no obligation under Section 12.1 above to the extent any claim of infringement or misappropriation results from: (i) use by Control Screening of the Guardian Property in combination with any other product, end item, or subassembly if the infringement would not have occurred but for such combination; (ii) use or incorporation in the Guardian Property of any design, technique or specification furnished by Control Screening, if the infringement would not have occurred but for such incorporation or use; or (iii) any claim based on Control Screening's use of the Guardian Property as shipped after Guardian has informed Control Screening of modifications or changes in the Product required to avoid such claims and offered to implement those modifications or changes, if such claim would have been avoided by implementation of Guardian's suggestions; (iv) use of the deliverables other than as permitted under this Agreement, if the infringement would not have occurred but for such use; or (v) compliance by Guardian with specifications or instructions supplied by Control Screening.

12.3

Indemnification by Control Screening. Control Screening shall defend, indemnify and hold harmless Guardian and its officers, directors, employees, shareholders, agents, successors and assigns from and against any and all loss, damage, settlement, costs or expense (including legal expenses), as incurred, resulting from, or arising out of (i) any claim against Guardian which alleges that any Control Screening Property or Control Screening deliverable infringes upon, misappropriates or violates any patents, copyrights, trademarks or trade secret rights or other proprietary rights of persons, firms or entities who are not parties to this Agreement; (ii) any claim relating to negligence, misrepresentation, error or omission by Control Screening, its representatives, distributors, OEMs, VARs or other resellers; and (iii) any warranties made by Control Screening inconsisten t with or beyond the scope of any warranties made by Control Screening under this Agreement.

12.4

Control Screening Exclusions. Control Screening shall have no obligation under

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Section 12.3 above to the extent any claim of infringement or misappropriation results from: (i) use by Guardian of the Control Screening Property in combination with any other product, end item, or subassembly if the infringement would not have occurred but for such combination; (ii) use or incorporation in the Control Screening Property of any design, technique or specification furnished by Guardian, if the infringement would not have occurred but for such incorporation or use; or (iii) any claim based on Guardian's use of the Control Screening Property as shipped after Control Screening has informed Guardian of modifications or changes in the Product required to avoid such claims and offered to implement those modifications or changes, if such claim would have been avoided by implementation of Control Screening's suggestions; (iv) use of the deliverable other than as permitted under this Agreement, if the infringement would not have occurred but for such use; or (v) compliance by Control Screening with specifications or instructions supplied by Guardian.

12.5

Control of Defense. As a condition to such defense and indemnification, the party seeking indemnification will provide the other party with prompt written notice of the claim and permit such other party to control the defense, settlement, adjustment or compromise of any such claim. The party seeking indemnification may employ counsel at its own expense to assist it with respect to any such claim.

12.6

DISCLAIMER. THE FOREGOING PROVISIONS OF THIS SECTION 12 STATE THE ENTIRE LIABILITY AND OBLIGATIONS OF THE PARTIES AND THE EXCLUSIVE REMEDY WITH RESPECT TO ANY VIOLATION OR INFRINGEMENT OF PROPRIETARY RIGHTS, INCLUDING BUT NOT LIMITED TO ANY PATENT, COPYRIGHT, TRADEMARK, BY THE PRODUCTS OR SERVICES OF GUARDIAN AND CONTROL SCREENING, RESPECTIVELY, OR ANY PART THEREOF. EACH PARTY'S OBLIGATIONS UNDER THIS SECTION 12 ARE SUBJECT TO THE LIMITATIONS SET FORTH IN SECTION 13.

13

LIMITATION OF LIABILITY

13.1

LIMITATION OF DAMAGES. EXCEPT FOR BREACH OF THE OBLIGATIONS OF CONFIDENTIALITY UNDER SECTION 10, NEITHER PARTY SHALL BE LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, STRICT LIABILITY, NEGLIGENCE OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OR LOST PROFITS, OR COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES.

13.2

LIMITATION OF LIABILITY. EXCEPT FOR BREACH OF THE OBLIGATIONS OF CONFIDENTIALITY UNDER SECTION 10 AND THE INDEMNIFICATION OBLIGATIONS UNDER SECTION 12, THE TOTAL DOLLAR LIABILITY OF EITHER PARTY UNDER THIS AGREEMENT OR OTHERWISE SHALL BE LIMITED TO ONE MILLION DOLLARS ($1,000,000.00).

14

TERM AND TERMINATION

14.1

Term of Agreement. This Agreement shall be effective upon the Effective Date and shall remain in force for a period of three (3) years, unless otherwise terminated as provided herein. However, this Agreement shall continue to remain in effect with

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respect to any project already agreed to hereunder at the time of such termination, until such projects are themselves terminated or performance thereunder is completed.

14.2

Termination for Cause. This Agreement may be terminated by a party for cause immediately upon the occurrence of and in accordance with the following: (a) Insolvency Event. Either may terminate this Agreement by delivering written notice to the other party upon the occurrence of any of the following events: (i) a receiver is appointed for either party or its property; (ii) either makes a general assignment for the benefit of its creditors; (iii) either party commences, or has commenced against it, proceedings under any bankruptcy, insolvency or debtor's relief law, which proceedings are not dismissed within sixty (60) days; or (iv) either party is liquidated or dissolved. (b) Default. Either party may terminate this Agreement effective upon written notice to the other if the other party violates any covenant, agreement, representation or warranty contained herein in a ny material respect or defaults or fails to perform any of its obligations or agreements hereunder in any material respect, which violation, default or failure is not cured within thirty (30) days after notice thereof from the non-defaulting party stating its intention to terminate this Agreement by reason thereof.

14.3

Termination for Convenience. This Agreement, or any Project except as may be provided in such Project's Project Plan, may be terminated by either party without penalty, for any or no reason, by providing thirty (30) days prior written notice of such termination.

14.4

Survival of Rights and Obligations upon Termination. Sections 6, 8, 10, 11, 12, 13, 15 and this Section 14.4 shall survive any expiration or termination of this Agreement or any project hereunder. Furthermore, in the event of any termination or expiration of this Agreement or such project: (i) all licenses expressly granted herein shall survive; and (ii) except as otherwise expressly provided herein, any ownership provisions (including but not limited to Section 8) shall survive.

15

MISCELLANEOUS

15.1

Force Majeure. Neither party shall be liable to the other for delays or failures in performance resulting from causes beyond the reasonable control of that party, including, but not limited to, acts of God, labor disputes or disturbances, material shortages or rationing, riots, acts of war, governmental regulations, communication or utility failures, or casualties.

15.2

Export. Each party hereby acknowledges that one or more deliverables supplied under the Agreement are or may be subject to export or import controls under the laws and regulations of the United States (U.S.). Each shall comply with such laws and regulations, and, agrees not to knowingly export, re-export, import or re-import, or transfer products without first obtaining all required U.S. Government authorizations or licenses. Guardian and Control Screening each agree to provide the other such information and assistance as may reasonably be required by the other in connection with securing such authorizations or licenses, and to take timely action to obtain all required support documents. Each party agrees to maintain a record of exports, re-exports, and transfers of any such deliverables for five (5) years and to forward within that time period any required records t o the party needing the same or, at such

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party's request, the U.S. Government. Each party agrees to permit audits as required under the regulations to ensure compliance with this Agreement.

15.3

Relationship of Parties. The parties are independent contractors under this Agreement and no other relationship is intended, including a partnership, franchise, joint venture, agency, employer/employee, fiduciary, master/servant relationship, or other special relationship. Neither party shall act in a manner which expresses or implies a relationship other than that of independent contractor, nor bind the other party.

15.4

No Third Party Beneficiaries. Unless otherwise expressly provided, no provisions of this Agreement are intended or shall be construed to confer upon or give to any person or entity other than Guardian and Control Screening any rights, remedies or other benefits under or by reason of this Agreement.

15.5

Equitable Relief. Each party acknowledges that a breach by the other party of any confidentiality or proprietary rights provision of this Agreement may cause the non-breaching party irreparable damage, for which the award of damages would not be adequate compensation. Consequently, the non-breaching party may institute an action to enjoin the breaching party from any and all acts in violation of those provisions, which remedy shall be cumulative and not exclusive, and a party may seek the entry of an injunction enjoining any breach or threatened breach of those provisions, in addition to any other relief to which the non-breaching party may be entitled at law or in equity.

15.6

Attorneys' Fees. In addition to any other relief awarded, the prevailing party in any action arising out of this Agreement shall be entitled to its reasonable attorneys' fees and costs.

15.7

Notices. Any notice required or permitted to be given by either party under this Agreement shall be in writing and shall be personally delivered or sent by a reputable overnight mail service (e.g., Federal Express), or by first class mail (certified or registered), or by facsimile confirmed by first class mail (registered or certified), to the Project Manager of other party. Notices will be deemed effective (i) three (3) working days after deposit, postage prepaid, if mailed, (ii) the next day if sent by overnight mail, or (iii) the same day if sent by facsimile and confirmed as set forth above. A copy of any notice shall be sent to the following:

Guardian Technologies International, Inc.	Control Screening, LLC
516 Herndon Parkway, Suite A	2 Gardner Road
Herndon, VA 20170	Fairfield, NJ 07004-2206
Attn: Bill Donovan	Attn: Todd Conway
Fax:  (703) 464-8530	Fax: (973) 276-6166

15.8

Assignment. Neither party may assign its rights or delegate its obligations hereunder, either in whole or in part, whether by operation of law or otherwise, without the prior written consent of the other party. Any attempted assignment or delegation without consent will be void. The rights and liabilities of the parties under this Agreement will bind and inure to the benefit of the parties' respective successors and permitted

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assigns.

15.9

Waiver and Modification. Failure by either party to enforce any provision of this Agreement will not be deemed a waiver of future enforcement of that or any other provision. Any waiver, amendment or other modification of any provision of this Agreement will be effective only if in writing and signed by the parties.

15.10

Severability. If for any reason a court of competent jurisdiction finds any provision of this Agreement to be unenforceable, that provision of the Agreement will be enforced to the maximum extent permissible so as to affect the intent of the parties, and the remainder of this Agreement will continue in full force and effect.

15.11

Controlling Law. This Agreement and any action related thereto shall be governed, controlled, interpreted and defined by and under the laws of the State of Delaware and the United States, without regard to the conflicts of laws provisions thereof. The parties specifically disclaim the UN Convention on Contracts for the International Sale of Goods.

15.12

Headings. Headings used in this Agreement are for ease of reference only and shall not be used to interpret any aspect of this Agreement.

15.13

Entire Agreement. This Agreement, including all exhibits which are incorporated herein by reference, constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes and replaces all prior and contemporaneous understandings or agreements, written or oral, regarding such subject matter.

15.14

Counterparts. This Agreement may be executed in two counterparts, each of which shall be an original and together which shall constitute one and the same instrument.

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement by persons duly authorized as of the date and year first above written.

Guardian Technologies International, Inc.	Control Screening, LLC
/s/ William J. Donovan	/s/ Todd Conway
Name:  William J. Donovan	Name: Todd Conway
Title:  President & COO	Title:  Vice President

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EX-10

MARKETING LICENSE AGREEMENT

THIS MARKETING LICENSE AGREEMENT (this “Agreement”) is entered into by and between GUARDIAN TECHNOLOGIES INTERNATIONAL, INC., a Delaware corporation (hereinafter “GUARDIAN”), and EGC INFOMATICS, Inc. (d.b.a. International Threat Detection Systems [ITDS]), a Florida corporation, for itself and its affiliate companies (hereinafter collectively referred to as “EGC”), and shall be effective as of the 1st day of November, 2007 (the “Effective Date”).

WITNESSETH:

WHEREAS, GUARDIAN is the owner of certain computer programs defined herein as the “Products”; and

WHEREAS, EGC is in the business of distributing and supporting computer software applications to its customers and prospects; and

WHEREAS, EGC has special knowledge concerning the business needs of its customers and prospects; and

WHEREAS, GUARDIAN wishes to appoint EGC as its non-exclusive marketing representative for the Products and authorize EGC to provide certain services relating to such marketing efforts; and

WHEREAS, EGC is willing to accept such appointment and to undertake to provide such services under the terms of this Agreement;

NOW, THEREFORE, the parties agree as follows:

1.

 Scope

The Products covered by this Agreement are listed on Exhibit “A” hereto and consist of computer programs and associated end-user documentation offered generally to end-users by GUARDIAN under the terms and conditions of its standard license agreement. Additional software and/or hardware applications may be added to the list of Products with the mutual consent of the parties. The current form of license agreement is attached hereto as Exhibit “B”. GUARDIAN also offers enhancement and error-correction services with respect to the Products under the terms and conditions of said agreement. GUARDIAN reserves the right to change such agreement at any time.

2.

 Appointment of EGC

Subject to the terms and conditions hereof, GUARDIAN hereby designates and appoints EGC for the term of this Agreement, as a non-exclusive representative for the solicitation of license agreements relating to the Products from prospective end-users identified by EGC. EGC hereby accepts such designation and appointment. For purposes of this Agreement the term “affiliate” shall mean any entity that directly or

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indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with such other entity. In the case of a corporation, control shall mean, among other things, the direct or indirect ownership of more than fifty percent (50%) of its outstanding voting stock. The foregoing notwithstanding, however, for the purpose of this Agreement, GUARDIAN shall not be deemed to be an affiliate of EGC, and EGC shall not be deemed an affiliate of GUARDIAN.

3.

Duties of EGC

3.1.

EGC agrees, for the term of this Agreement, that it shall promote and market the Products to prospective end-users by:

3.1.1.

Identifying prospects that may benefit from use of the Products.

3.1.2.

Contacting such prospects and conducting presentations of the Products.

3.1.3.

Performing demonstrations of the Products to prospective end-users either on the premises of such end-users or at EGC’s facilities.

3.1.4.

Negotiating and obtaining the prospects’ execution of license agreements and service agreements.

3.1.5.

Forwarding executed license agreements and service agreements to GUARDIAN for GUARDIAN’s evaluation and acceptance.

3.1.6.

Serving as a point of contact for necessary communications between end-users and GUARDIAN with respect to the Products.

3.2.

EGC shall prepare and submit to GUARDIAN monthly a complete and accurate written report of its activities hereunder, including, without limitation, the following:

3.2.1.

A description of all promotional and marketing activities undertaken during the preceding month setting forth the identity and addresses of prospective end-users.

3.2.2.

A summary of the nature of contacts made with such end-users and EGC’s assessment of the results of such contacts.

3.2.3.

A listing by identity and date of all license agreements executed by prospective end-users and forwarded to GUARDIAN as a result of EGC’s activities.

4.

Demonstration Rights 

GUARDIAN hereby grants to EGC a non-exclusive, non-transferable license to use during the term of this Agreement a reasonable number of “Demonstration Copies” of each Product for purposes of demonstrating the Product to prospective end-users in connection with the marketing activities. EGC shall use the Demonstration Copies for making demonstrations to prospective end-users (i) on computer systems owned or leased by EGC or (ii) on the computer system of a prospective end-user. In each case,

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EGC shall (i) control and limit the use of Products for the specific purpose authorized; (ii) accompany the prospective end-user at all times that the Product is installed at the site of such prospective end-user; and (iii) upon completion of the demonstration, remove the Product from such end-user’s computer and cause the deletion of all portions of the Product from computer files in which it resided. EGC acknowledges that the Products, including any intellectual property rights pertaining thereto, are owned by GUARDIAN and represent or contain valuable copyrights and trade secrets of GUARDIAN. EGC shall not attempt to reverse-engineer or decompile the machine-readable code in which the programs are delivered. EGC shall protect the Products from unauthorized copying, dissemination, or disclosure and from other unauthorized use.

5.

License Agreements

5.1.

EGC shall have the authority to solicit the signature of end-users on GUARDIAN’s standard form of license agreement, as such agreement may be revised from time to time by GUARDIAN and furnished to EGC, and such other license agreements as EGC and GUARDIAN may mutually agree. Additionally, upon request by an end-user, EGC may solicit the signature of such end-user on EGC’s standard form of license agreement as such agreement may be revised from time to time by EGC, provided however, such license agreement if accepted by GUARDIAN, shall be promptly assigned by EGC to GUARDIAN. Notwithstanding anything to the contrary in this Agreement, EGC shall not execute or accept on behalf of GUARDIAN any agreement solicited from an end-user under this Section 5.1, and EGC shall inform all end-users that any license agreement solicited under this Section 5.1 must be forwarded to GUARDIAN for consideration , acceptance, and execution by GUARDIAN in order for such agreement to be binding on GUARDIAN.

5.2.

Notwithstanding anything to the contrary contained in this Agreement, EGC has and shall exercise no authority to (i) make any alterations in GUARDIAN’s standard form of license agreement; (ii) make statements or representations concerning the Products that exceed or are inconsistent with the marketing materials and technical specifications provided to EGC by GUARDIAN; or (iii) bind GUARDIAN to any undertaking or performance with respect to the Products.

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6.

Ancillary Services

6.1.

EGC may also provide to end-users appropriate ancillary services in support of the Products. Such services include, without limitation, the following:

6.1.1.

Assistance with installation of the Products on end-users’ computers.

6.1.2.

Technical training of end-users’ personnel.

6.1.3.

Implementation and consulting support services to end-users with respect to the functions and operation of the Products.

6.2.

The terms, conditions, and charges for such ancillary services shall be established by EGC directly with end-users. EGC shall inform each end-user (i) that GUARDIAN’s obligations are limited to those contained in the license agreement, (ii) that any services of EGC are offered on EGC’s own accounts, and (iii) that EGC is solely responsible for such ancillary services.

6.3.

 Upon the request by EGC, and subject to Section 6.2, GUARDIAN may provide to EGC (or to an end-user on behalf of EGC) the ancillary services described in Section 6.1 in support of the Products. All such ancillary services shall be provided to EGC (or to an end-user on behalf of EGC) at rates agreed upon from time to time by EGC and GUARDIAN, provided such rates shall in no event exceed GUARDIAN’s published rate schedule, as in effect at the time such services are rendered by GUARDIAN. The parties acknowledge and agree that EGC, and not the end-user shall be responsible for payment to GUARDIAN for services provided under this Section 6.3, provided that GUARDIAN shall not be entitled to payment from EGC unless and until (and only to the extent that) EGC receives payment for such services from an end-user.

7.

Undertaking of GUARDIAN

GUARDIAN shall:

7.1.

Promote the Products as it deems appropriate with international and local advertising.

7.2.

Provide to EGC’s employees technical training with respect to the Products. GUARDIAN shall provide such training at its own cost, but EGC shall be responsible for travel and living expenses incurred by its employees.

7.3.

Provide reasonable quantities of marketing materials, including descriptive brochures and promotional materials suitable for unrestricted distribution.

7.4.

Evaluate the qualifications of prospective end-users who have executed license agreements and service agreements forwarded to GUARDIAN by EGC. GUARDIAN reserves the right, in its discretion, to reject license agreements and service agreements executed by prospective end-users.

7.5.

Perform all obligations of GUARDIAN under accepted license agreements, including shipment or delivery to end-users of copies of the computer programs,

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documentation, error-correction materials, and updates that constitute the Products.

7.6.

Invoice and collect amounts payable under each license agreement accepted by GUARDIAN.

8.

Compensation

8.1.

EGC shall receive a commission equal to eighteen percent (18%) of the net license fee revenue actually collected by GUARDIAN under license agreements for Products which are secured and forwarded to GUARDIAN by EGC and accepted by GUARDIAN.

The term “net license fee revenue” means the actual license fee revenue received by GUARDIAN less royalties, commissions, hardware fees or similar payments due third parties in connection with the licensing of Products. Payment of compensation to EGC shall be made by GUARDIAN within ten (10) days after receipt of payment from end-user. Cash payment shall be accompanied by a detailed accounting of the basis for such payment, identifying the source and amount of applicable revenues received by GUARDIAN. “Net license fee revenue” shall not include maintenance or service fees paid to GUARDIAN by end-users.

8.2.

Amounts payable to EGC shall be subject to a charge-back or credit in favor of GUARDIAN in the amount previously paid EGC with respect to amounts that are refunded to end-users. EGC agrees to cooperate with GUARDIAN and aid in the collection of accounts receivable under license agreements forwarded to GUARDIAN by EGC.

8.3.

EGC shall be responsible for its own expenses and costs under this Agreement, and GUARDIAN shall have no obligation to reimburse EGC for any expenses or costs incurred by EGC in the performance of its duties hereunder.

9.

Term and Termination

9.1.

The term of this Agreement shall commence upon the Effective Date and shall continue for two (2) years thereafter unless sooner terminated in accordance with the provisions hereof. This Agreement shall be automatically renewed for additional two year periods every two years unless there is an uncured default by EGC.

9.2.

GUARDIAN may terminate this Agreement upon written notice to EGC in the event of the breach of any material obligation hereunder by EGC that is not cured by EGC after receipt from GUARDIAN of thirty (30) days’ written notice calling attention to such breach and demanding cure thereof. In the event of such termination for cause, GUARDIAN’s sole obligation to EGC shall be to pay compensation accrued for net revenues collected on covered license agreements accepted by GUARDIAN prior to the date of termination.

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9.3.

Upon termination of this Agreement for any reason, EGC shall within thirty (30) days of such termination return to GUARDIAN all Demonstration Copies of the Products, and all copies of related marketing materials. EGC shall further provide to GUARDIAN copies of EGC’s prospect files.

10.

Indemnities

10.1.

GUARDIAN hereby agrees to indemnify EGC from and against any and all claims, demands, or actions arising out of any material breach by GUARDIAN of any of the terms and conditions of any license agreement with an end-user secured by EGC hereunder or any breach of GUARDIAN’s obligations hereunder.

10.2.

EGC hereby agrees to indemnify GUARDIAN from and against any and all claims, demands, or actions arising out of EGC’s activities or performance outside the express authorization provided EGC under this Agreement or any breach of EGC’s obligations hereunder.

10.3.

The indemnities contained in this Section 10 shall be conditioned upon the indemnifying party’s receiving (i) prompt written notice of any claims, demands, or actions for which indemnity is sought; (ii) cooperation in the defense by the party seeking indemnity; and (iii) control of the defense and/or settlement of such claim, demand, or action as to which indemnity is sought.

11.

Limitations of Liability  

In no event shall either party hereto be entitled to special, indirect, or consequential damages, including lost profits, for breach of this Agreement. Remedies shall be limited to claims for amounts due hereunder or for indemnification as provided for herein. However, the foregoing limitation of remedies shall not apply to any action by GUARDIAN for infringement by EGC; any action based on or with respect to unauthorized publication, disclosure, or use of confidential information or trade secrets of GUARDIAN; or any action based on GUARDIAN’s rights in copyrights, trademarks, or trade secrets or other proprietary rights in the Products.

12.

Trademarks 

Except for purposes of identification of Products, no right, title, interest, or license in or to any trademark or service mark of GUARDIAN is granted to EGC under this Agreement. EGC may on its business cards, stationery and marketing materials state that EGC is an authorized agent of GUARDIAN for the licensing of the Products.

13.

Status of EGC’s Personnel  

The parties to this Agreement are and shall remain independent contractors, and nothing herein shall be construed to create a partnership, or joint venture, between GUARDIAN and EGC. EGC shall be responsible for the wages, hours, and conditions of employment of EGC’s personnel during the term of and under this Agreement. Nothing herein shall be construed as implying that employees of EGC are employees of GUARDIAN.

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14.

Notices  

All notices, demands, or consents required or permitted under this Agreement shall be in writing and shall be delivered personally or sent by certified or registered mail to the appropriate party at the address set forth below, or at such other address as shall be given by either party to the other in writing:

Guardian Technologies International, Inc.	EGC INFORMATICS
516 Herndon Parkway, Suite A	1925 Brickell Ave. Suite D-1510
Herndon, Virginia  20170	Miami, Florida 33129
Attn: Bill Donovan	Attn: Angel Lorie
President & Chief Operating Officer	President & Chief Operating Officer
(703) 464-5495	(786) 306-8740

15.

Choice of Law  

This Agreement shall be deemed to be made in the Commonwealth of Virginia and in all respects shall be interpreted, construed, and governed by and in accordance with the laws of the Commonwealth of Virginia.

16.

Waiver of Rights  

The waiver by either party of any term or provision of this Agreement shall not be deemed to constitute a continuing waiver thereof nor of any further or additional rights such party may hold under this Agreement.

17.

No Assignment; Enforceability  

This Agreement is personal to EGC and is not assignable without the prior written consent of GUARDIAN. Any attempt to assign, transfer, or subcontract any of the rights, duties, or obligations of this Agreement without such consent is void.

18.

Dispute Resolution

18.1.

In the event that any dispute arises between GUARDIAN and EGC in connection with this Agreement, the representatives of each party responsible for the subject matter of such dispute shall use good faith efforts to resolve such dispute promptly. In the event that such dispute cannot be resolved by the parties’ representatives, the matter shall be submitted to the parties’ respective Chief Executive Officers (“CEOs”) for resolution. In the event that the CEOs cannot reach resolution of the issue (an “Unresolved Dispute”), then the matter shall be settled by binding arbitration in accordance with the provisions of Section 18.2 hereof.

18.2.

Any Unresolved Dispute, after the completion of the steps set forth above, shall be settled at the election of either party, by final and binding independent arbitration. All arbitrations pursuant to this Agreement shall be conducted before the American Arbitration Association (“AAA”) in Reston, Virginia, U.S.A., and shall be carried out in accordance with the Commercial Arbitration Rules of the AAA then in effect (the “Rules”) and the provisions of this Agreement.

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GUARDIAN and EGC shall each select one arbitrator and a third arbitrator will be selected unanimously by the arbitrators selected by GUARDIAN and EGC. If the two arbitrators selected by GUARDIAN and EGC are unable to select the third arbitrator within ten (10) days of the appointment of the two arbitrators, the parties consent to the selection of the third arbitrator by the AAA administrator. The award of the arbitrators may be enforced by any court having jurisdiction over the parties.

19.

Export Restrictions

GUARDIAN and EGC each hereby agrees to comply with all export laws and restrictions and regulations of the Department of Commerce or other United States agency or authority, and not to knowingly export, or allow the export or re-export of any Product, or any derivatives thereof, in violation of any such restrictions, laws or regulations, or, without all required licenses and authorizations to any country specified in the then current Supplement No. 1 to Section 770 of the U.S. Export Administration Regulations (or any successor supplement or regulations).

20.

General

20.1.

In the event that any provision of this Agreement shall be rendered invalid or otherwise unenforceable by any competent judicial or government authority, such invalidity or unenforceability shall not affect the validity or enforceability of any other provision of this Agreement and the invalid provision shall be deemed amended to the fullest extent allowable by applicable law to effect the purposes of said provision.

20.2.

GUARDIAN and EGC shall each be excused for any failure or delay in performing any of their respective obligations under this Agreement, if such delay or failure is caused by any act of God, any accident, explosion, fire, storm, riot, embargo, war, any failure or delay of transportation, shortage of or inability to obtain supplies, equipment, fuel or labor or any other circumstance or event beyond the reasonable control of the party relying upon such circumstance or event.

20.3.

The parties agree that this Agreement is the complete and exclusive statement thereof between the parties and that it supersedes and merges all prior proposals and understandings and all other agreements, whether oral or written, between the parties relating to the subject matter hereof. This Agreement may not be modified or altered except by a written instrument duly executed by the parties hereto.

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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as set forth below.

Guardian Technologies International, Inc.	EGC Informatics, Inc.
/s/ William J. Donovan	/s/ Angel Lorie, Jr.
William J. Donovan	Angel Lorie, Jr.
President & Chief Operating Officer	President & Chief Operating Officer
Date:  11/2/07	Date:  11/1/07

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EXHIBIT A

Guardian Technologies automatic threat identification and alert system, PinPoint™ is incorporated into an intelligent image informatics engine (3i) resident on a standard Pentium 4 based microprocessor. The PinPoint™ 3i system can be configured with various options and ordered under the commercial terms of a Perpetual License, Rental or Transactional based terms.

1.

Perpetual License:  

A “Perpetual License” is granted to an end user organization pursuant to an end user license agreement.  The end user shall pay Guardian the following amount(s) with respect to Products delivered under a Perpetual License.

Product Description	License Fee per Scanning Device
	1-99 Licenses	100-499 Licenses	500+ Licenses
PinPoint 3i Engine
PinPoint Module Metal
PinPoint Module Explosives

Annual fees for Support Services

Shall be in addition to the foregoing Perpetual License fees.  Each end user of a Perpetual License shall pay an annual fee for Support Services of 20% of the then-applicable price for the number of Perpetual Licenses held by such license holder beginning in year two and for every year after the Perpetual License is in use.

2.

Rental License:  

A “Rental License” is a license granted to an end user organization pursuant to an end user license agreement under which the end user pays a monthly license fee and the license expires at the end of a three-year license term.  The end user organization shall pay Guardian the following amount(s) with respect to Products delivered to an end user under a Rental License:

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Product Description	Monthly Rental per Scanning Device For Three Years
	1-99 Licenses	100-499 Licenses	500+ Licenses
PinPoint 3i Engine
PinPoint Module Metal
PinPoint Module  Explosives

Guardian and the end user organization may agree to extend the term of the Rental License for successive additional periods of one (1) year each after the expiration of the initial three (3) year period.

Guardian has the right, upon notice, to increase the prices set forth above for Rental Licenses no more than once in any calendar year by a percentage equal to the percentage change during the preceding twelve (12) month period in the Consumer Price Index for All Urban Consumers (CPI-U) for the U.S. City Average for All Items compiled by the U.S. Bureau of Labor Statistics (or a successor country index thereto).

The Prices set forth above include Annual Support Services during the term of the Rental License.  

3.

Transactional License:

A “Transactional License” is a license granted to an end user organization pursuant to an end user license agreement under which the end user pays a per passenger fee and the license expires at the end of a three-year license term.  The end user organization shall pay Guardian the monthly total fees based upon the following per passenger fee with respect to Products delivered to an end user under the Transactional License:

Product Description	Transaction Fee Per Passenger for a Term of Three Years
PinPoint 3i Engine
· PinPoint Module Metal
· PinPoint Module  Explosive

The Prices set forth above include Annual Support Services during the term of the Rental License.  

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The end user organization may also elect to increase the fee to cover administrative expenses.

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EXHIBIT B

PROPRIETARY SOFTWARE LICENSE AND HARDWARE LEASE AGREEMENT

This is a Proprietary Software License and Hardware Lease Agreement (“Agreement”) dated as of ______________, 200_ (the “Effective Date”) by and between _________________ (“Client”), a ___________ having a place of business at __________________________, and Guardian Technologies International, Inc. (“Licensor”), a Delaware corporation having its principal place of business at 516 Herndon Parkway, Herndon, Virginia 20170.

21.

SOFTWARE LICENSE

21.1.

Software License.  Licensor hereby grants to Client a perpetual, nonexclusive, nontransferable license commencing on the Effective Date to use Guardian Technologies International, Inc.’s (“Guardian”) computer software components (the “Software”) and documentation (collectively, the “Documentation”) listed in Exhibit A on the terms and conditions of this Agreement.  The term “Software” as used in this Agreement includes any maintenance releases to the Software that may be provided to Client from time to time under pursuant to this Agreement, but specifically excludes any other modifications or customizations to the Software.

21.2.

License Limitation.  Client may use the Software only at the specific facilities identified in Exhibit A and only on the terms and conditions of this Agreement.  Client may not use the Software as part of a commercial time-sharing or service bureau operation or in any other resale capacity.  Client may use the Documentation solely in support of the Software.  Client agrees not to reverse engineer, decompile, disassemble or extract, as applicable, any ideas, algorithms or procedures from the Software or Documentation for any reason.  Client may not use the System as a guide or template for the purposes of determining specifications or requirements for or in any way developing a similar or competing product.  Client may not reverse engineer or decompile the Software.  

21.3.

Copies.  Client may not copy the Software.  Client may copy the Documentation to support Client’s licensed use of the Software in accordance with this Agreement, subject to any restrictions specified in Exhibit A.  Any copies Client makes of the Documentation, in whole or in part, are Licensor’s property.  Client agrees to reproduce and include Licensor’s [and Guardian’s] copyright, trademark, and other proprietary rights notices on any copies of the Documentation, including partial copies.

21.4.

Ownership.  This Agreement does not convey to Client title or ownership of the Software and Documentation, but only a right of limited use in accordance with this Agreement.  All terms and conditions of this Agreement are material terms of the license granted by this Agreement.

21.5.

Third Party Software.  All third party software provided by Licensor to Client as a part of the Software is also subject to the terms and conditions of the applicable third party license agreement.  Changes in the Software that Licensor may make from time to time may make it necessary for Client to acquire, at its own expense, updated versions of the third party software or additional third party products.  Licensor will have no warranty or maintenance obligations for any Third Party Products or additional third party products.

22.

HARDWARE LEASE

22.1.

Lease of Hardware.  Licensor leases to Client, and Client leases from Licensor, the hardware listed or described in Exhibit A (the “Hardware”).  This Agreement does not convey to Client title or ownership of the Hardware, but only a right of limited use in accordance with this Agreement.  

22.2.

Subleases.  Client may not sublease any or all of the Hardware or assign, transfer or encumber Client’s rights, interests or obligations under this Agreement.  Any attempted sublease, assignment, transfer or encumbrance in violation of the preceding sentence will be null and void.  

22.3.

True Lease.  Licensor retains full legal title to the Hardware notwithstanding the possession and use of the Hardware by Client.  It is the intent of the parties that the transaction contemplated by this Agreement (1) constitutes an lease from Licensor to Client for purposes of Client's financial reporting pursuant to generally accepted accounting principles, and (2) constitutes a true lease, and not a sale of Hardware, for federal and state law, income tax, bankruptcy and other purposes.  Each of the parties to this Agreement agrees that it will not, nor will any person controlled by it, or under common control with it, directly or indirectly, at any time take any action or fail to take any action with respect to the filing of any income tax return, including an amended income tax return, inconsistent with Licensor’s status as owner and lessor of the Hardware.  Title to the Hardware will at all times remain in Licensor, and Client acquires no ownership, title, property, right, equity, or interest in the Hardware other than its leasehold interest solely as lessee subject to all the terms and conditions of this Agreement.  

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22.4.

Restrictions on Use of the Hardware.  Client may not install, or remove any software on the Hardware, or make any other modifications to the Hardware without Licensor’s prior written consent.  Client may not modify the Hardware in any way.

22.5.

Risk of Loss and Damage.  Client is responsible for any damage to or loss of the Hardware that may occur during the Term or return shipment of the Hardware from Client to Licensor.  Client shall use commercially reasonably efforts to keep the Hardware in the same condition as when received, except for normal wear and tear.  Client must reimburse Licensor for the replacement value of any Hardware damaged or lost during either the Term or return shipping to Licensor.

23.

MAINTENANCE

During the Term, Licensor will provide the following maintenance services for the System.  

23.1.

Licensor will consult with Client for a reasonable amount of time by telephone during Licensor’s normal business hours to assist Client in the use of the System;

23.2.

Licensor will supply computer program code to correct any Errors (as defined in section 26.1 of this Agreement) in the Software.  If a suspected Error is attributable to a cause other than the Software as delivered by Licensor, then Client will pay for Licensor’s work on a time-and-materials basis.  If the Software module containing the Error has been modified by non-Licensor personnel, Licensor will charge Client on a time-and-materials basis at Licensor’s then-current hourly rates for analyzing and fixing the Error in Client’s version, and for any installation assistance Client requires;

23.3.

Licensor will provide Client with all enhancements to the Software that Licensor develops and generally makes available at no charge to other licensees of the Software (“Enhancements”);

23.4.

If the Hardware does not conform with its manufacturer’s specifications, Client may return such Hardware unit (the “Returned Hardware”) for repair or exchange as provided in this Section 23.4.  Upon Client’s valid request, Licensor will issue an Return Material Authorization (“RMA”) within one business day.  Client may not make, and Licensor will not accept, returns of Hardware for repair or exchange unless Client first obtains an RMA.  Upon issuance of an RMA, Licensor will ship a replacement Hardware unit (the “Replacement Hardware”) to Client within one business day, freight pre-paid.  Client will ship the Returned Hardware to Licensor, freight pre-paid, on the next business day after receiving the replacement unit.  Licensor will test the Returned Hardware upon receipt and verify that i t is defective.  

23.4.1.

If the Returned Hardware is defective, (i) Licensor will credit Client for the cost of the freight to return the Returned Hardware; and (ii) Client may retain the Replacement Hardware as a replacement for the Returned Hardware and the Replacement Hardware will become a part of the Hardware under this Agreement.  

23.4.2.

If the Returned Hardware is not defective, Licensor will return it to Client and (i) Client will return the Replacement Hardware to Licensor at Client’s expense; and (ii) Licensor may invoice Client for a sum not to exceed $60.00 per man-hour for the time and personnel required to test the Returned Hardware, as well as the shipping and handling fees to return the Returned Hardware to Client.  

24.

CHARGES

24.1.

Fees.  As compensation for the Software license provided under Section 21, Client will pay the fees specified to be paid in accordance with Exhibit A.  As compensation for the Software Maintenance provided under Section 21, Client will pay the fees specified to be paid with respect to the initial Term (“Initial Term Fees”) in accordance with Exhibit A.  Client’s ability to extend the Term of this Maintenance Agreement for additional one year periods pursuant to Section 29.1 is expressly conditioned upon Client’s payment of the fees specified to be paid with respect to each extension of the Term (“Additional Term Fees”) in accordance with Exhibit A.  

25.

NONDISCLOSURE

25.1.

“Confidential Information” means any and all information that is confidential or a trade secret and is furnished or disclosed to Client under this Agreement, including, without limitation, information owned by Guardian or Licensor.  The Software and Documentation are Confidential Information of Licensor/Guardian.  In addition, Confidential Information includes the specific business terms of this Agreement and any other information that is marked as “Confidential,” “Proprietary,” “Trade Secret,” or in some other manner to indicate it’s confidential, proprietary or trade secret nature.

25.2.

Confidential Information will remain the property of [Licensor][ Guardian or Licensor, as applicable], and Client will not be deemed by virtue of this Agreement or any access to Confidential Information to have acquired any

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right, title or interest in or to the Confidential Information.  Client agrees: (i) to hold the Confidential Information in strict confidence; (ii) to limit disclosure of the Confidential Information to Client’s own employees having a need to know the Confidential Information for the purposes of this Agreement; (iii) not to disclose any Confidential Information to any third party; (iv) to use the Confidential Information solely and exclusively in accordance with the terms of this Agreement in order to carry out its obligations and exercise its rights under this Agreement; (v) to afford the Confidential Information at least the same level of protection against unauthorized disclosure or use as Client normally uses to protect its own information of a similar character, but in no event less than reasonably care; and (vi) to no tify [Guardian and] Licensor promptly of any unauthorized use or disclosure of the Confidential Information and to cooperate with and assist Licensor in every reasonable way to stop or minimize such unauthorized use or disclosure.

25.3.

Client agrees that if a court of competent jurisdiction determines that Client has breached, or attempted or threatened to breach, its confidentiality obligations or [Guardian’s or] Licensor’s proprietary rights, money damages will not provide an adequate remedy.  Accordingly, [Guardian and] Licensor will be entitled to seek appropriate injunctive relief and other measures restraining further attempted or threatened breaches of such obligations.  Such relief or measures will be in addition to, and not in lieu of, any other rights and remedies available to [Guardian and] Licensor.

26.

WARRANTY.  

26.1.

Licensor warrants during the first one (1) year after the Effective Date (the “Warranty Period”), that performance of the Software will not deviate materially from the specifications identified in Exhibit A (the “Specifications”).  A material deviation of the Software from its Specifications is referred to in this Agreement as an “Error.”  If Client believes there has been a breach of this warranty it must notify Licensor in writing within the Warranty Period describing the Error in sufficient detail to enable Licensor to recreate it.  If there has been a breach of this warranty, then Licensor’s sole obligation, and Client’s exclusive remedy, will be for Licensor to correct the Error at no charge.  However, if Licensor is unable to correct an Error after repeated efforts, Client will also be entitled to an equitable adjustment in the Initial Term Fees to reflect any reduction in the value of the Software as a result of the uncorrected Error.  If a reported breach of warranty is attributable to a cause other than a breach of this warranty, then Licensor will be entitled to payment for its investigation and correction efforts on a time and materials basis at Licensor’s then-current rates.

26.2.

Licensor warrants during the Warranty Period, that performance of the Hardware will not deviate materially from the manufacturer’s specifications.  If Client believes there has been a breach of this warranty it must notify Licensor in writing within the Warranty Period describing the alleged breach in sufficient detail to enable Licensor to recreate it.  If there has been a breach of this warranty, then Licensor’s sole obligation, and Client’s exclusive remedy, will be for Licensor to repair or replace the Hardware so that it conforms to its specifications.  However, if Licensor is unable to correct any breach of warranty after repeated efforts, Client will also be entitled to an equitable adjustment in the Initial Term Fees to reflect any reduction in the value of the Hardware as a result of the uncorrected breach of warranty. & nbsp;If a reported breach of warranty is attributable to a cause other than a breach of this warranty, then Licensor will be entitled to payment for its investigation and correction efforts on a time and materials basis at Licensor’s then-current rates.

26.3.

Licensor warrants that the Software does not, to Licensor’s knowledge, infringe any third party copyrights, patents or trade secrets that exist on the Effective Date and that arise or are enforceable under the laws of the United States of America.

26.3.1.

If a third party brings an action against Client making allegations that, if true, would constitute a breach of this warranty, then Licensor will, at its own expense and subject to the provisions of section 28.2, defend, indemnify and hold Client harmless in such proceeding, and Licensor will pay all settlements, costs, damages and legal fees finally awarded.

26.3.2.

If such a proceeding is brought or appears to Licensor to be likely to be brought, Licensor may, at its sole option and expense, either obtain the right for Client to continue using the allegedly infringing item(s) or replace or modify the item(s) to resolve such proceeding.  If Licensor finds that neither of these alternatives is available to it on commercially reasonable terms, Licensor may require Client to return the System, in which case Client will receive a refund of the amounts paid by it for the System, less a reasonable adjustment for depreciation.

This section 26.3 states Licensor’s entire obligation to Client and Client’s exclusive remedy with respect to any claim of infringement and is in lieu of any implied warranties of non-infringement or non-interference with use and enjoyment of information.

26.4.

Licensor is not responsible for any claimed breaches of the foregoing warranties caused by:  (i) modifications made to the System by anyone other than Licensor and its subcontractors working at Licensor’s

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direction; (ii) the combination, operation or use of the System with any items that Licensor did not supply; or (iii) Client’s failure to use any new or corrected versions of the System made available by Licensor.

26.5.

Licensor does not warrant that the Software will be error-free or that its operation will be uninterrupted.  Client acknowledges that it is responsible for the results obtained from use of the System, including without limitation the completeness, accuracy and content of such results.

26.6.

THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, INTEGRATION, PERFORMANCE AND ACCURACY AND ANY IMPLIED WARRANTIES ARISING FROM STATUTE, COURSE OF DEALING, COURSE OF PERFORMANCE OR USAGE OF TRADE.

27.

LIMITATION OF LIABILITY

27.1.

If Client should become entitled to claim damages from [Guardian or] Licensor (including without limitation, for breach of contract, breach of warranty, negligence or other tort claim), [Guardian and] Licensor will be liable only for the amount of Client’s actual direct damages, not to exceed (in the aggregate for all claims) the amount of the fees paid by Client to Licensor with respect to the particular one-year Term in which the claim arises.  This limit also applies to Licensor’s licensors.  It is the maximum liability for which Licensor and its licensors are collectively responsible.

27.2.

In no event will [Guardian or] Licensor or any person or entity involved in the creation, manufacture or distribution of any software, services or other materials provided by Licensor under this Agreement be liable for:  (i) any damages arising out of or related to the failure of Client or its Affiliates or suppliers to perform their responsibilities; (ii) any claims or demands of third parties (other than those third party claims covered by sections 26.3.1); or (iii) any lost profits, loss of business, loss of data, loss of use, lost savings or other consequential, special, incidental, indirect, exemplary or punitive damages, even if Licensor has been advised of the possibility of such damages.  Licensor will not be held responsible, or to have failed to meet its obligations under this Agreement, if it either delay s performance or fails to perform as a result of any cause beyond its reasonable control.

27.3.

The foregoing limitations do not apply to the payment of settlements, costs, damages and legal fees referred to in section 26.3.1.  The limitations of liability set forth in this section 27 will survive and apply notwithstanding the failure of any limited or exclusive remedy for breach of warranty set forth in this Agreement.  The parties agree that the foregoing limitations will not be read so as to limit any liability to an extent that would not be permitted under applicable law.

28.

INDEMNIFICATION

28.1.

CLIENT ACKNOWLEDGES THAT THE SYSTEM IS ONLY AN AID IN THE DETECTION OF CERTAIN THREATS IN SCANNED LUGGAGE AND/OR PACKAGES.  RESPONSIBILITY FOR DETECTING THREATS IN SCANNED LUGGAGE AND/OR PACKAGES REMAINS CLIENT’S RESPONSIBILITY ENTIRELY.  IN THAT REGARD, CLIENT ACKNOWLEDGES THAT THE SYSTEM WILL NOT IDENTIFY ALL THREATS IN SCANNED LUGGAGE AND/OR PACKAGES.  IT IS ONLY DESIGNED TO ACT AS AN AID TO SECURITY PERSONNEL IN THEIR EXERCIDE OF THEIR DUTIES.  Each of the parties acknowledges and agrees that by entering into and performing its obligations under this Agreement, Licensor will not assume and should not be exposed to any liability with respect to passenger safety or with respect to the failure of the System to identify a threat in any scanned luggage or packages.  Therefore, except for claims covered by Section 26.3. 1, Client will, at its own expense and subject to the provisions of Section 28.2, defend, indemnify and hold Licensor [and Guardian] harmless in all claims or actions by third parties arising out of or relating to the conduct of Client’s business, including without limitation, Client’s operation and use of the System and with respect to passenger safety and security, and Client will pay all settlements, costs, damages and legal fees and expenses finally awarded.

28.2.

A party’s indemnification obligations specified in this Agreement are conditioned upon the indemnified party promptly notifying the indemnifying party in writing of the proceeding, providing the indemnifying party a copy of all notices received by the indemnified party with respect to the proceeding, cooperating with the indemnifying party in defending or settling the proceeding, and allowing the indemnifying party to control the defense and settlement of the proceeding, including the selection of attorneys.  The indemnified party may observe the proceeding and confer with the indemnifying party at its own expense.

29.

TERMINATION

29.1.

Term.  The term of the software license is perpetual unless terminated as defined below.

29.2.

Termination for Cause.  If a party believes that the other party has failed to perform a fundamental obligation the failure of which defeats the essential purpose of this Agreement (a “Breach”), then that party may

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provide written notice directed to the breaching party describing the alleged Breach in reasonable detail and containing a reference to this Section 29.2.  If the breaching party does not, within thirty (30) days after receiving such written notice, either (i) cure the Breach or (ii) if the Breach is not one that can reasonably be cured within thirty (30) days, develop a plan to cure the Breach and diligently proceed according to the plan until the Breach has been cured, then the non-breaching party may terminate this Agreement for cause by written notice to the breaching party.  If Client breaches the restrictions imposed under Sections 21 and 22 or its nondisclosure obligations under Section 25, Licensor will have the right, without affecting any other rights and remedies Licensor may have , to terminate this Agreement immediately upon written notice to Client.  Termination of this Agreement will be in addition to, and not in lieu of, other remedies available to the terminating party under this Agreement.

29.3.

Return of the Software.  Within thirty (30) days after the termination of this Agreement for any reason, Client must return the Software to Licensor.  Client must return the Software to Licensor at the address listed in Exhibit A via an internationally recognized express courier service providing shipping tracking and confirmation services, shipping pre-paid, using suitable packaging materials at its own cost.

29.4.

Survival.  Any provision of this Agreement that imposes or contemplates continuing obligations on a party will survive the expiration or termination of this Agreement, including but not limited to sections 25 and 27.

30.

LAW AND DISPUTES

30.1.

This Agreement will be governed by the laws of the Commonwealth of Virginia, United States of America, without regard to any provision of Virginia law that would require or permit the application of the substantive law of any other jurisdiction.

30.2.

Both Licensor and Client agree to comply fully with all relevant export laws and regulations of the United States to ensure that no information or technical data provided pursuant to this Agreement is exported or re-exported directly or indirectly in violation of law.

30.3.

At the written request of either party, the parties will attempt to resolve any dispute arising under or relating to this Agreement through the informal means described in this Section 30.3.  Each party will appoint a senior management representative who does not devote substantially all of his or her time to performance under this Agreement.  The representatives will furnish to each other all non-privileged information with respect to the dispute that the parties believe to be appropriate and germane.  The representatives will negotiate in an effort to resolve the dispute without the necessity of any formal proceeding.  Formal proceedings for the resolution of the dispute may not be commenced until the earlier of:  (i) the designated representatives conclude that resolution through continued negotiation does not appear like ly; or (ii) thirty (30) calendar days have passed since the initial request to negotiate the dispute was made; provided, however, that a party may file earlier to avoid the expiration of any applicable limitations period, to preserve a superior position with respect to other creditors, or to apply for interim or equitable relief.

30.4.

The parties submit to the exclusive jurisdiction of the courts of Fairfax County, Virginia and the United States District Court for the Eastern District of Virginia, Alexandria Division.  Due to the high costs and time involved in commercial litigation before a jury, the parties waive all right to a jury trial with respect to any and all issues in any action or proceeding arising out of or related to this Agreement

30.5.

No proceeding, regardless of form, arising out of or related to this Agreement may be brought by either party more than two (2) years after the accrual of the cause of action, except that (i) proceedings related to violation of a party’s proprietary rights or any duty to protect Confidential Information may be brought at any time within the applicable statute of limitations, and (ii) proceedings for non-payment may be brought up to two (2) years after the date the last payment was due.

31.

GENERAL

31.1.

Entire Agreement.  This Agreement constitutes the entire agreement between the parties, and supersedes all other prior or contemporaneous communications between the parties (whether written or oral) relating to the subject matter of this Agreement.  This Agreement may be modified or amended solely in a writing signed by both parties.

31.2.

Severability.  The provisions of this Agreement will be deemed severable, and the unenforceability of any one or more provisions will not affect the enforceability of any other provisions.  In addition, if any provision of this Agreement, for any reason, is declared to be unenforceable, the parties will substitute an enforceable provision that, to the maximum extent possible under applicable law, preserves the original intentions and economic positions of the parties.

31.3.

No Waiver.  No failure or delay by a party in exercising any right, power or remedy will operate as a waiver of that right, power or remedy, and no waiver will be effective unless it is in writing and signed by the waiving party.  If

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a party waives any right, power or remedy, the waiver will not waive any successive or other right, power or remedy the party may have under this Agreement.

31.4.

Notices.  Any legal notice or other communication required or permitted to be made or given by either party pursuant to this Agreement will be in writing, in English, and will be deemed to have been duly given:  (i) five (5) business days after the date of mailing if sent by registered or certified U.S. mail, postage prepaid, with return receipt requested; (ii) when transmitted if sent by facsimile, provided a confirmation of transmission is produced by the sending machine and a copy of the notice is promptly sent by another means specified in this section; or (iii) when delivered if delivered personally or sent by express courier service.  All notices will be sent to the other party at its address as set forth below or at such other address as the party may specify in a notice given in accordance with this section.

In the case of Client:	with a copy of legal notices to:
__________________________ __________________________ __________________________ Attn:  _____________________ Fax:  ______________	___________________________ ___________________________ ___________________________ Attn:  ______________________ Fax:  _______________
In the case of Licensor:	with a copy of legal notices to:
____________________________ ____________________________ ____________________________ Attn:  _______________________ Fax: _________________	___________________________ ___________________________ ___________________________ Attn:  ______________________ Fax:  _______________ and Pillsbury Winthrop Shaw Pittman LLP 1650 Tysons Blvd. McLean, VA 22102 Attn: Lawrence Schultis, Esq. Fax: 1.703.770.7901

31.5.

Assignment.  Neither party may assign or otherwise transfer any right or obligation set forth in this Agreement (whether by operation of law or otherwise) without the other party’s prior written consent, except that Licensor may assign any right or obligation set forth in this Agreement to an affiliate or to a successor entity in the event of a merger, consolidation or sale of Licensor’s business or all or substantially all of Licensor’s stock or assets, provided the assignee agrees in writing to assume all of Licensor’s obligations and liabilities under this Agreement.  Any purported assignment in violation of the preceding sentence will be void.  This Agreement will be binding upon the parties’ respective successors and permitted assigns.  

31.6.

Third Party Beneficiary.  Guardian has the right to enforce all obligations of the Client and receive all benefits of this Agreement as an intended third party beneficiary.

31.7.

Exhibits.  The Exhibits referred to in and attached to this Agreement are made a part of it as if fully included in the text.

Each party has caused its authorized representative to execute this Agreement as of the Effective Date.

_____________________________________ (Licensor)	________________________________ (Client)
By:	By:
Name:	Name:
Title:	Title:

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PROPRIETARY SOFTWARE LICENSE

EXHIBIT A

1.

Software provided under this license:  Licensor is licensing to Client the following computer software components comprising the Software:

[insert list or description of software modules]

2.

Specifications: The Specifications for the Software are as set forth in the following documentation:

[List of Technical Documentation containing the specifications for the Software]

3.

Associated documentation:  Licensor is licensing to Client the documentation that sets forth the Specifications, as listed above, and the following other documentation, all of which Licensor will deliver to Client, and which is collectively referred to in this Agreement as the “Documentation”:

[List of all other Documentation]

4.

Hardware provided under this license:  Licensor is leasing the following Hardware to Client:

[insert list or description of hardware]

5.

Sites: Client is permitted to use the Software at the facility or facilities listed below:

____________________________
____________________________
____________________________
____________________________

6.

Software License Fee:  The Software License Fee is payable as follows:

Guardian Technologies (Guardian) automatic threat identification and alert system, PinPoint is incorporated into an intelligent image informatics engine (3i) resident on a standard Pentium 4 based microprocessor. The PinPoint 3i system can be configured with various options and ordered under the commercial terms of a Perpetual License, Rental or Transactional based terms.

1.

Perpetual License:  A “Perpetual License” is granted to an end user organization pursuant to an end user license agreement.  The end user shall pay Guardian the following amount(s) with respect to Products delivered under a Perpetual License.

Product Description	License Fee per Scanning Device
	1-99 Licenses	100-499 Licenses	500+ Licenses
PinPoint 3i Engine
PinPoint Module Metal
PinPoint Module Explosives

GDTI _____  EGC _____

2.

Rental License:  A “Rental License” is a license granted to an end user organization pursuant to an end user license agreement under which the end user pays a monthly license fee and the license expires at the end of a three-year license term.  The end user organization shall pay Guardian the following amount(s) with respect to Products delivered to an end user under a Rental License:

Product Description	Monthly Rental per Scanning Device For Three Years
	1-99 Licenses	100-499 Licenses	500+ Licenses
PinPoint 3i Engine
PinPoint Module Metal
PinPoint Module  Explosives

Guardian and the end user organization may agree to extend the term of the Rental License for successive additional periods of one (1) year each after the expiration of the initial three (3) year period.

Guardian has the right, upon notice, to increase the prices set forth above for Rental Licenses no more than once in any calendar year by a percentage equal to the percentage change during the preceding twelve (12) month period in the Consumer Price Index for All Urban Consumers (CPI-U) for the U.S. City Average for All Items compiled by the U.S. Bureau of Labor Statistics (or a successor country index thereto).

The Prices set forth above include the provision of Support Services during the term of the Rental License.  

3.   A “Transactional License” is a license granted to an end user organization pursuant to an end user license agreement under which the end user pays a per passenger fee and the license expires at the end of a three-year license term.  The end user organization shall pay Guardian the monthly total fees based upon the following per passenger fee with respect to Products delivered to an end user under the Transactional License:

Product Description	Transaction Fee Per Passenger for a Term of Three Years
PinPoint 3i Engine
· PinPoint Module Metal
· PinPoint Module  Explosive

The Prices set forth above include Annual Support Services during the term of the Rental License.  

The end user organization may also elect to increase their passenger security fees to cover administrative expenses.

Guardian and the end user organization may agree to extend the term of the Rental License for successive additional periods of one (1) year each after the expiration of the initial three (3) year period.

Guardian has the right, upon notice, to increase the prices set forth above for Rental Licenses no more than once in any calendar year by a percentage equal to the percentage change during the preceding twelve (12) month period in the Consumer Price Index for All Urban Consumers (CPI-U) for the U.S. City Average for All Items compiled by the U.S. Bureau of Labor Statistics (or a successor country index thereto).

The Prices set forth above include the provision of Support Services during the term of the Rental License.  

7.

Software Maintenance Fee:  The Annual Software Maintenance fee equals 20% of the total Software License Fee provided in paragraph five (5) above.

8.

Address for return shipping:  

20

GDTI _____  EGC _____

Guardian Technologies International, Inc.

516 Herndon Parkway

Herndon, Virginia 20170

Telephone Number:  703-464-5495

21

GDTI _____  EGC _____

EX-10

SALES, INSTALLATION, AND SERVICING AGREEMENT TERM SHEET

January 14, 2008

This Term Sheet sets out general terms for a Sales, Installation, And Servicing Agreement between Guardian Technologies International, Inc. (Guardian), Herndon, VA, and Hi-Tec Aviation Safety & Security Systems Pvt. Ltd (Hi-Tec) with registered address, 210 A, Ansals Jyoti Shikhar, 8-District Centre, JanakPuri, New Delhi  110058, India (collectively the Parties) for Guardian’s Products (Pinpoint^TM. nSight^TM, and future healthcare technologies developed from Signature Mapping^TM) within the defined Territory.

1.

Under the Agreement Hi-Tec will market and sell the Products and provide installation and aftermarket service for the Products in the Territory.

2.

Hi-Tec will neither represent Guardian nor be an agent of Guardian, but will be an authorized reseller of Products in the Territory.

3.

Sales in the Territory will be made direct to the end user by Hi-Tec and Hi-Tec will purchase Products from Guardian at prices and terms to be agreed upon in order to satisfy such sales. Resale of Products in the Territory shall be at prices and terms to be determined by Hi-Tec and shall be for Hi-Tec’s account. Guardian will publish list prices for use by Hi-Tec to establish the Hi-Tec discount schedule for their clients.

4.

Supply of installation and aftermarket services to end users for Products in the Territory will be for Hi-Tec’s account and Guardian shall have no obligations therein. In the event Guardian is needed to assist in such activities then such engagement shall be through Hi-Tec and Guardian shall be appropriately compensated by Hi-Tec for its services.

5.

All business, relationships, contracts, monetary exchanges, warranties, and obligations with respect to end users concerning Products in the Territory will be between Hi-Tec and the end users and Guardian shall have no obligations therein except normal and customary Product warranties to Hi-Tec.

6.

Guardian shall provide Hi-Tec with information and training with respect to Products appropriate to help Hi-Tec to market, sell, and service Products in the Territory.

7.

The Territory is India and adjacent countries having a common boundary with India with the exception of China.

8.

Hi-Tec will be the exclusive reseller of Products for India and non-exclusive reseller of Products for adjacent countries within the Territory.

9.

Hi-Tec agrees that ownership and all rights to Products and its designs (both hardware and software) are solely that of Guardian and that the Agreement does not provide or imply an transfer to Hi-Tec of any such ownership, rights, or any license to Products other than to resell Products purchased from Guardian within the Territory.

10.

Hi-Tec agrees that neither it or any other person or entity related to Hi-Tec or acting for Hi-Tec’s benefit shall copy, reverse engineer, or otherwise attempt to duplicate Products or make a similar

product. Hi-Tec further agrees that it will not sell or represent within the Territory any other similar product that competes with Products.

11.

Hi-Tec agrees that all modifications or changes of any type to Products, including both hardware and software, shall be solely the right of Guardian and that Hi-Tec will not attempt or make any such changes or modifications nor encourage others to make any such changes or modifications.

12.

Hi-Tec agrees that it may receive Confidential Information concerning Products from Guardian in order to better be able to install and service Products and that it will execute a Confidentiality Agreement with Guardian in conjunction with this Agreement.

13.

Term of Agreement shall be for a period of five (5) years renewable for an additional five (5) years upon agreement by both Parties.

14.

Termination – either Party may terminate the Agreement upon 120 days written notice to the other Party. In such case either Party shall not be relieved of any monetary obligations to the other party or to obligations set out in terms 9, 10, 11, and 12 herein for a period of time to be agreed upon.

15.

The Agreement shall be construed and interpreted in accordance with the laws of the Commonwealth of Virginia.

/s/ William J. Donovan

1/14/08

/s/ Trib Singh

2/11/08

William J. Donovan

Date

Trib Singh

Date

President

President/CEO

Guardian Technologies

Hi-Tec Systems

EX-10

GUARDIAN DISTRIBUTOR AGREEMENT

     THIS AGREEMENT is made as of March 14, 2008, by and between Guardian Technologies International, Inc, having its principal office at 516 Herndon Parkway, Suite A, Herndon, Virginia,(the "Company") and Borlas Security Systems, Ltd., with its principal office at 9, bld.1, Varshavskoe shosse, Moscow, Russian Federation, 117105 (the "Distributor").

1.

Appointment of Distributor

a.

Appointment: Distributor's Location(s)/Territory. Upon the terms and conditions of this Agreement, the Company hereby appoints the Distributor as an authorized non-exclusive distributor of the Company's line of security products (the "Security Products"), and the Distributor hereby accepts such appointment as set forth in Schedule B, with respect to the Distributor's location(s) and within the territory ("Territory") set forth in Schedule A attached hereto and incorporated herein. In such capacity, the Distributor will purchase Security Products from the Company and will devote its continuing best efforts to the promotion and sale of such Security Products in the Territory.

b.

Amendments to Schedule A. The parties may amend Schedule A from time to time to add or remove Distributor location(s) and/or modify the Distributor's Territory.

c.

Addition, Discontinuance and Modification of Products. The Company shall have the right at any time to introduce new Security Products, discontinue the manufacture or sale of any of its Security Products and make changes in the design or construction of any of such Security Products without incurring any obligation or liability whatsoever. The Company will give the Distributor thirty (30) days prior notice of any discontinuance of a Security Product.

2.

Terms of Purchase

a.

Ordering of Security Products. All orders for Security Products placed by Distributor shall be in writing or by fax or e-mail. (A telephone request to purchase, or to modify an existing order, shall not be considered an order unless and until followed up in writing.) All orders shall be subject to acceptance by the Company at Herndon, Virginia.

b.

Prices. The Distributor shall purchase Security Products at the prices in effect at the time of order. The Company may implement price changes at any time during the term of this Agreement upon thirty (30) days prior written notice thereof to Distributor. In addition to the purchase price, Distributor shall pay to the Company the amount of all taxes, excises or other governmental charges that the Company may be required to pay on the sale or delivery of any Products sold and delivered hereunder, except where the law otherwise provides.

c.

Delivery. All products shall be shipped FOB shipping point, with title and risk of loss passing at such point. The shipment destination must be within the Distributor's Territory. The Company will not ship product outside of the Distributor's Territory unless the Company elects to do so in certain limited situations. Any taxes, administrative or governmental charges incurred as a result of the purchase of Security Products are the sole responsibility of the Distributor.

d.

Pre-Payment. The Company shall invoice the Distributor for the Security Products and the Distributor shall pay within ten (10) days of scheduled shipment or otherwise specified.  

e.

Warranty. The Company warrants that for a period of one (1) year from the date of shipment to the Distributor, the Security Products sold shall be free from defects in workmanship and materials, and shall conform to the Company's standard specifications for such Security Products in effect at the time of the shipment. If defects occur within the warranty period, the Distributor shall notify the Company immediately and, upon confirmation by an authorized Company representative of the defects, the Company's sole responsibility shall be to replace the defective items. This warranty does not apply to defects not caused by the Company (for example, accidents or abuse while in Distributor's or customer’s possession). The Company shall not have any liability of any kind under this warranty unless the Distributor gives the Company notice of its claim within thirty (30) days after the date the Distributor knows or should know of its claim. EXCEPT AS SET FORTH HEREIN, THERE ARE NO WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO SECURITY PRODUCTS. THE COMPANY EXPRESSLY EXCLUDES AND DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY AND ANY WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, APPLICATION OR USE. UNDER NO CIRCUMSTANCES WILL THE COMPANY BE LIABLE FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER SUCH DAMAGES ARE SOUGHT IN CONTRACT, IN TORT (INCLUDING BUT NOT LIMITED TO NEGLIGENCE AND STRICT LIABILITY) OR OTHERWISE, AND THE COMPANY'S LIABILITY SHALL IN NO EVENT EXCEED THE PURCHASE PRICE OF THE SECURITY PRODUCTS ON WHICH SUCH LIABILITY IS BASED.

3.

Guardian Trademarks and or Other Products Resold by the Distributor for the benefit of Guardian  

The Distributor shall have the right hereunder to represent that it is "an Authorized Distributor of Security Company Products." Any other use by the Distributor of the trademark "Guardian" or any other trademark owned by the Company or its partner’s must be in a form and format approved by the Company in advance of such usage.

4.

Promotional Materials

During the term of this Agreement, the Company shall take reasonable action to assist the Distributor in the Distributor's efforts to promote and sell Guardian Products, including the provision of reasonable quantities of support materials such as product information and sales promotional literature.

5.

Duties of the Distributor

a.

Sales Activities. The Distributor agrees to use its best efforts vigorously and actively to promote the sale of Security Products in the Territory. In connection with such efforts, the Distributor, at its sole cost and expense, shall organize and maintain a sales force and shall maintain adequate sales and warehouse facilities within the Territory that are satisfactory to the Company.

b.

Storage of Inventory. The Distributor agrees to store when necessary, Security Products in accordance with the Company’s storage guidelines.

c.

Appropriate Use of Security Products. The Distributor shall use its best efforts to train dealers and contractors in its Territory as to the proper usage and application of Security Products in accordance with Product Cut Sheets, supplied by the Company from time to time to the Distributor.

d.

Spare Parts Inventory Levels. The Distributor agrees to maintain an inventory, to be determined, for maintenance repair services to adequately serve the needs of the customers.

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e.

Advertising. Each printed advertisement, flyer, handbill, television spot, radio script, telephone pages listing, webpage or any other advertising or promotional material bearing or using the trademark or trade name "Guardian" or pertaining to Security Products must be approved by the Company in writing prior to its use by the Distributor. Such approval will not be unreasonably withheld or delayed.

f.

Reputation. The Distributor shall continually maintain to the satisfaction of the Company a general reputation for honesty, integrity and good credit standing and shall maintain the highest quality standards.

g.

Competing Products. With respect to each Distributor location set forth on Schedule A, the Distributor shall notify the Company directly if the Distributor intends to, promote, advertise, manufacture, market, distribute or sell security or associated security products, which competes with Security Products.

h.

Compliance With Law. The Distributor shall comply with all laws, ordinances and regulations, both state and federal, applicable to the Distributor's business.

i.

Expenses. The Distributor shall pay and discharge, and the Company shall have no obligation to pay for, any expenses or costs of any kind or nature incurred by the Distributor in connection with its distribution function hereunder, including, without limitation, any expenses or costs involved in marketing Security Products.

j.

Monthly Reports. Within fifteen (15) days after the end of each calendar month, the Distributor shall submit a report to the Company setting forth a rolling 12 month forecast.  The Company shall provide the format of such report to the Distributor.

6.

Duties of the Company

a.

Company agrees not to represent or sell other hardware products which are deemed to be competitive with the Distributor’s product offering unless the Company provides written notice of intent with the Distributor.

b.

Company further agrees to not enter into any business relationship that would result in competition for a tender that has been presented by the Distributor.

7.

Force Majeure

The Company shall be excused from delay or non-performance in the delivery of an order and the Distributor shall have no claim for damage if and to the extent such delay or failure is caused by occurrences beyond the control of the Company including, but not limited to, market conditions; acts of God; war, acts of terrorism, riots and civil disturbances; expropriation or confiscation of facilities or compliance with any order or request of governmental authority; strikes, labor or employment difficulties whether direct or indirect; or any cause whatsoever which is not within the reasonable control of the Company. The Company shall immediately notify the Distributor of the existence of any such force majeure condition and the anticipated extent of the delay or non-delivery. The Company shall, in such event, have the right to allocate available Security Products among its customers in its sole discretion.

8.

Distributor's Remedies

If the Company, for any reason whatsoever, fails or is unable to deliver any Security Products ordered by the Distributor, the Distributor's sole and exclusive remedy shall be the recovery of the purchase price, if any, paid by the Distributor to the Company for such Security Products.  The Company shall not incur any liability

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whatsoever for any delay in the delivery to the designated delivery location of any Security Products. In no event shall the Company be liable for any incidental, consequential or other damages arising out of any failure to deliver any Security Products to the Distributor or any delay in the delivery thereof.

9.

Relationship of Parties: Indemnification of Company.

a.

Independent Contractor Status. The relationship of the parties established by this Agreement is that of vendor and vendee, and all work and duties to be performed by the Distributor as contemplated by this Agreement shall be performed by it as an independent contractor. The full cost and responsibility for hiring, firing and compensating employees of the Distributor shall be borne by the Distributor.

b.

No Authority to Bind Company. Nothing in this Agreement or otherwise shall be construed as constituting an appointment of the Distributor as an agent, legal representative, joint venture, partner, employee or servant of the Company for any purpose whatsoever. The Distributor is not authorized to transact business, incur obligations, sell goods, solicit orders, or assign or create any obligation of any kind, express or implied, on behalf of the Company, or to bind it in any way whatsoever, or to make any contract, promise, warranty or representation on the Company's behalf with respect to products sold by the Company or any other matter, or to accept any service of process upon the Company or receive any notice of any nature whatsoever on the Company's behalf.

c.

Indemnification. Under no circumstances shall the Company be liable for any act, omission, contract, debt or other obligation of any kind of the Distributor or any salesman, employee, agent or other person acting for or on behalf of the Distributor. The Distributor shall indemnify and hold the Company harmless from any and all claims, liabilities, losses, damages or expenses (including reasonable attorneys, fees and costs) arising directly or indirectly from, as a result of, or in connection with, the Distributor's operation of the Distributor's business. The terms of this indemnity shall survive the termination of this Agreement.

10.

Confidential Information

a.

Definition. As used in this Section, "Proprietary Information" means information developed by or for the Company which is not otherwise generally known in any industry in which the Company is or may become engaged and includes, but is not limited to, information developed by or for the Company, whether now owned or hereafter obtained, concerning plans, marketing and sales methods, materials, processes, procedures, devices utilized by the Company, prices, quotes, suppliers, manufacturers, customers with whom the Company deals (or organizations or other entities or persons associated with such customers), trade secrets and other confidential information of any type, together with all written, graphic and other materials relating to all or any part of the same.

b.

Non-Disclosure. Except as authorized in writing by the Company, the Distributor shall not at any time, either during or after the term of this Agreement, disclose or use, directly or indirectly, any Proprietary Information of which the Distributor gains knowledge during or by reason of this Agreement and the Distributor shall retain all such information in trust in a fiduciary capacity for the sole use and benefit of the Company. In the event that the Distributor operates one or more locations other than those set forth on Schedule A, the Distributor shall not disclose any Proprietary Information to local management or employees of such other location(s).

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11.

Patent and Trademark Indemnity

The Company will defend at its expense any legal proceeding brought against the Distributor based on a claim that Security Products sold by the Company under this Agreement infringe upon a United States patent or trademark, provided that the Company is notified promptly and given full authority, information and assistance for such defense. If the Distributor complies with the foregoing obligation, the Company will pay all damages and costs finally adjudicated against the Distributor, but will not be responsible for any compromise made without the Company's consent. If the Security Products are held to be infringing and their use enjoined, the Company may, at its election and expense, either (1) obtain for the Distributor the right to continue selling the Security Products, (2) replace the Security Products with non-infringing Products, or (3) refund the purchase price paid, upon return of the Security Products to the C ompany.

12.

Term and Termination

a.

Term. The term of this Agreement shall be for a period beginning on the date hereof and ending on March 14, 2009. Thereafter, this Agreement shall automatically renew for successive one (1) year periods unless either party gives to the other party written notice of termination at least one-hundred eighty (180) days prior to the end of the initial or any renewal term.

b.

Voluntary Termination. Either party may terminate this Agreement in its entirety, or with respect to one (1) or more Distributor location(s) set forth on Schedule A, at any time during the term hereof, with or without cause, by giving to the other party one-hundred eighty (180) days prior written notice of termination. If this Agreement is only terminated with respect to one (1) or more Distributor location(s) set forth on Schedule A, and there are remaining Distributor location(s) still remaining on Schedule A, the provisions of this Agreement relating to termination shall only apply to the terminated location(s), and this Agreement shall remain in full force and effect with respect to the other Distributor location(s).

c.

Default by the Distributor. This Agreement may be terminated by the Company immediately upon the failure of the Distributor to pay for Security Products purchased by the Distributor in accordance with the terms of Section 2(d) hereof or upon the material default by the Distributor of any other obligation under this Agreement, or upon the filing of a petition in bankruptcy or for reorganization under the Bankruptcy Act by the Distributor, or upon the making of an assignment for benefit of creditors by the Distributor, or upon the Distributor's taking any action or failing to act in such a manner as to unfavorably reflect upon the Company.

d.

Effect on Outstanding Orders. Upon the effective date of termination of this Agreement, all outstanding orders from the Distributor to the Company shall be deemed cancelled, to the extent Security Products have not yet been shipped by the Company.

e.

Repurchase of Inventory. Upon termination of this Agreement for any reason, the Company shall have the option, within sixty (60) days after the effective date of such termination, to purchase the Distributor's inventory which was purchased by the Distributor within the past twelve (12) months prior to the date of termination. If the Company exercises such option, the Distributor will sell and release to the Company such inventory at a price equal to the price initially paid by the Distributor for such Security Products, provided the Security Products have been properly stored in accordance with Security storage guidelines and are in a good and saleable condition.

f.

Return of Company Property. Upon termination of this Agreement for any reason, the Distributor shall promptly return to the Company any property of the Company, including, without limitation, all sales and marketing documents, manuals and other records and proprietary information of the Company, as well as any samples in the Distributor's possession or control. The Distributor agrees that it will not make or retain any copy of, or extract from, such property or materials. The

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Company agrees to compensate the Distributor for the cost of any returned sales materials that were authorized by the Company and purchased by the Distributors within twelve (12) months of the date of termination.

13.

General

a.

Waiver. Failure of either party at any time to require performance by the other party of any provision hereof shall not be deemed to be a continuing waiver of that provision, or a waiver of its rights under any other provision of this Agreement, regardless of whether such provision is of the same or a similar nature.

b.

Complete Agreement. This Agreement (including the exhibits hereto and all documents and papers delivered pursuant hereto and any written amendments hereof executed by the parties to this Agreement) constitutes the entire agreement, and supersedes all prior agreements and understandings, oral and written, among the parties to this Agreement with respect to the subject matter hereof. This Agreement may be amended only by written agreement executed by all of the parties hereto. No purchase order or sales form will be applicable to any sales pursuant to this Agreement and only the terms of this Distributor Agreement shall govern such sales.

c.

Applicable Law; Jurisdiction and Venue. This Agreement shall be construed under, and governed by, the laws of the Commonwealth of Virginia.

d.

Severability. If any provision of this Agreement is unenforceable or invalid, the Agreement shall be ineffective only to the extent of such provisions, and the enforceability or validity of the remaining provisions of this Agreement shall not be affected thereby.

e.

Assignment. This Agreement may not be transferred or assigned in whole or in part by operation of law or otherwise by the Distributor without the prior written consent of the Company. Upon thirty (30) days prior written notice to the Distributor, the Company may assign its rights, duties and obligations under this Agreement. Without written notice, the Company may assign its rights, duties and obligations under this Agreement to any parent, subsidiary or other affiliated corporation of the Company.

f.

Notices. Any notice or other communication related to this Agreement shall be effective if sent by first class mail, postage prepaid, to the address set forth in this Agreement, or to such other address as may be designated in writing to the other party.

       IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above.

Guardian Technologies International Inc.         

Borlas Security Systems, Ltd.

/s/ William J. Donovan

/s/ Andrey Prozorov

By: William J. Donovan

By: Andrey Prozorov

Its: President & COO

Its: Director Geuetal

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SCHEDULE A

Distributor Location(s) and Territory

Distributor Location(s)

9, bld.1, Varshavskoe shosse, Moscow, Russian Federation, 117105

Territory

Russian Federation and CIS countries

                                                   Initials: Company     ______

                                                              Distributor     ______

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SCHEDULE B

Michael W. Trudnak

Chief Executive Officer

516 Herndon Parkway

Herndon, Virginia 20170

Tel: 703-464-5495

March 14, 2008

To Whom It May Concern:

Subject:  Borlas Security Systems

Borlas Security Systems is an authorized distributor of the following corporations equipment:  Guardian Technologies International, AutoClear, Scintrex, and Logos family of products in Russia and all the countries which formally were part of the Union of Soviet Socialist Republic.

In addition, Borlas Security Systems is authorized to install, maintain and train operators of the aforementioned family of products of the corporations.  

Sincerely,

/s/ Michael W. Trudnak

Michael W. Trudnak

Chief Executive Officer

Guardian Technologies International, Inc.

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EX-21

Exhibit 21

Guardian Technologies International, Inc.

List of Subsidiaries

December 31, 2007

1.

Guardian Healthcare Systems UK, Limited, a company organized under the laws of England and Wales.

2.

Wise Systems Limited, a company organized under the laws of England and Wales.

3.

Applied Visual Sciences, Inc., a Delaware corporation.

4.

RJL Marketing, Inc., a Delaware corporation

EX-23

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in Guardian Technologies International, Inc.’s Registration Statements on Form S-8 (Registration Nos. 333-146103, 333-109585, and 333-114769) of our report, dated April 14, 2008, relating to the consolidated financial statements which appears in this Form 10-K for the year ended December 31, 2007.

/s/ Goodman & Company, L.L.P.

Norfolk, Virginia

April 14, 2008