UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-KSB/A

(Amendment No. 2)

[X]

Annual  Report Pursuant To Section 13 or 15(d) Of The Securities Exchange Act Of 1934.For the fiscal year ended December 31, 2004.



[  ]

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. 0-28238

GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

(Name of small business issuer 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, VA  20170(Address of Registrants principal executive offices and zip code)



(703) 464-5495



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

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





1





Check whether issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

[ ]



Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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  [X]    No  [ ]



Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained herein, and no disclosure will 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-KSB or any amendment to this Form 10-KSB.                   [ ]



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

Yes [  ]  No [X ]



The registrants revenues for its most recent fiscal year were $100,988.



The aggregate value of the voting common equity held by non-affiliates as of March 24, 2005, based upon the closing price of the Common Stock on March 28, 2005, as reported on the Nasdaq OTC Bulletin Board, was approximately $34,856,370.



The number of shares outstanding of each of the issuers classes of common stock, as of March 15, 2005:  28,555,956.



2







EXPLANATORY NOTE

This Amendment No. 2 on Form 10-KSB/A (this Amendment) amends our Annual Report on Form 10-KSB for the year ended December 31, 2004, filed on May 13, 2005, as subsequently amended on May 16, 2005 (2004 Form 10-KSB).  Guardian Technologies International, Inc. (the Company), has filed this Amendment to give effect to the restatement of its consolidated financial statements for the years ended December 31, 2004 and 2003 (the Restatement).  Managements decision, with the concurrence of the Audit Committee of the Companys Board of Directors, to effect the Restatement was made in response to comments received from the staff of the Securities and Exchange Commission (the SEC) as part of the staffs periodic review of our filings, as well as following consultation with our former independent registered public accountants, Aronson & Company, and our current independent registered public accountants, Goodman & Company, L.L.P.  Our consolidated financial statements for the years ended December 31, 2004 and 2003, have been re-audited by our current independent registered public accountants, Goodman & Company, L.L.P.



As discussed in more detail in Note 2 of the notes to the consolidated financial statements, we are restating our consolidated financial statements for the years ended December 31, 2004 and 2003, to give effect to certain adjustments to correct the way we apply certain accounting principles to convertible financial instruments (common stock purchase warrants and convertible notes) and equity instruments with certain redemption rights issued by the Company; the revaluation of certain stock purchase warrants to estimated fair value; and to reclassify certain stock-based compensation expenses to selling, general and administrative expense.  Certain embedded derivative instruments within agreements we entered into related to our convertible note financing require bifurcation and separate valuation under SFAS 133, Accounting for Derivative Instruments and Hedging Activities.  The application of SFAS 133 requires certain derivative instruments to be bifurcated and resulted in a restatement to the Companys consolidated financial statements to properly reflect such convertible debt and embedded conversion features.  Further, we have reclassified and valued, based on the contractual redemption value, shares of our common stock issued as compensation pursuant to an asset purchase agreement, from permanent equity to temporary equity.  These restatements affected changes in all of the consolidated financial statements.  The notes to the consolidated financial statements, particularly Note 4  Financing Arrangements, and Note 6  Acquisitions, have been restated to describe the embedded derivative instruments and the effects of certain redemption rights on the treatment of common stock issued as compensation for an asset purchase.



We are also herein amending certain disclosures in Part II, Item 6. Managements Discussion and Analysis of Financial Condition or Plan of Operations, in Item 7. Financial Statements, in Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure, and in Item 8A. Controls and Procedures.



In addition, Part III, Item 13 is hereby amended to include certifications of the Companys Chief Executive Officer and Chief Financial Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.  These certifications are filed or furnished, as applicable, as Exhibits 31.1, 31.2, 32.1 and 32.2 to this Amendment.



This Amendment continues to speak as of the date of our 2004 Form 10-KSB.  Except as set forth above, this Amendment does not update the disclosures affected by subsequent events.  Accordingly, you should read this Amendment together with amendments to our reports covering subsequent periods, as well as other documents we have filed with the SEC.  The filing of this Amendment is not a representation that any statements contained in the 2004 Form 10-KSB, or this Amendment are true and complete as of any date subsequent to the date of the 2004 Form 10-KSB.  The filing of this Amendment shall not be deemed an admission that the 2004 Form 10-KSB, when made, contained any untrue statement of material fact or omitted to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading.











3





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;

·

other statements that are not historical fact.



Words such as believe, anticipate, plan, expect and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily 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 1. Description of Business under the section entitled Important Factors That May Affect Our Business, Our Operating Results and Our Stock Pricein this report.  Other factors besides those described in this report could also affect actual results.  You should carefully consider the factors described in the section entitled Important Factors That May Affect Our Business, Our Operating Results and Our Stock Price 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).







NOTE REGARDING NUMBER OF SHARES



On February 13, 2004, the Company amended its Certificate of Incorporation, increasing the number of shares the Company is authorized to issue from 16,000,000 to 201,000,000 shares.  The Company is authorized to issue up to 200,000,000 shares of Common Stock, par value $0.001 per share, and up to 1,000,000 shares of Preferred Stock, par value $0.20 per share.



On November 23, 2004, at the Companys Annual Meeting of Stockholders, the stockholders voted to approve an amendment to the Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock (Series A) providing for automatic conversion of the Series A on the basis of 1,000 shares of Common Stock for each share of Series A.  Pursuant to such amendment, effective November 30, 2004, the Company converted 5,527 shares of Series A into 5,527,000 shares of Common Stock.



4





GUARDIAN TECHNOLOGIES INTERNATIONAL, INC. and SUBSIDIARIES



TABLE OF CONTENTS



EXPLANATORY NOTE

3

PART I

6

PART I

6

ITEM 1.  DESCRIPTION OF BUSINESS

6

ITEM 2.  DESCRIPTION OF PROPERTY

22

ITEM 3.  LEGAL PROCEEDINGS

22

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

23

PART II

23

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES  23

ITEM 6.  MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

24

ITEM 7.  FINANCIAL STATEMENTS

37

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

37

ITEM 8A.   CONTROLS AND PROCEDURES

39

ITEM 8B.   OTHER INFORMATION

40

PART III

40

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

40

ITEM 10.  EXECUTIVE COMPENSATION

43

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS  47

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

48

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

50

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

53

SIGNATURES

55

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

56

Consolidated Balance Sheet

57

Consolidated Statements of Operations

58

Consolidated Statements of Stockholders Deficit and Comprehensive Loss

59

Consolidated Statements of Cash Flows

61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

63

NOTE 1.  BASIS OF PRESENTATION

63

NOTE 2.  RESTATEMENT OF FINANCIAL STATEMENTS

64

NOTE 3.  SIGNIFICANT ACCOUNTING POLICIES

67

NOTE 4.  FINANCING ARRANGEMENTS

72

NOTE 5.  PROPERTY AND EQUIPMENT

73

NOTE 6.  ACQUISITIONS

73

NOTE 7.  STOCKHOLDERS EQUITY

75

NOTE 8.  GOODWILL AND INTANGIBLE ASSETS

81

NOTE 9.  INCOME TAXES

82

NOTE 10.  CONTINGENCIES

82

NOTE 11.  EMPLOYMENT AGREEMENTS

83

NOTE 12.  RELATED PARTY TRANSACTIONS

84

NOTE 13.  OPERATING LEASES

86

NOTE 14.  SUBSEQUENT EVENT

86





5





PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

Guardian Technologies International, Inc. and its subsidiaries are collectively referred to in this Report as the Company, Guardian, us, we, or our.  Our business objective is to conceive, develop and commercialize intelligent imaging informatics applications, such as computer-aided detection of threat objects in baggage/cargo/on person or diseases and medical anomalies in medical images.  Our multiple patent-pending core technology has broad-based applications within transportation and facility security (cargo, baggage, and people scans), and healthcare.



We were incorporated in the State of Delaware in February 1996. Prior to our reverse acquisition by RJL Marketing Services Inc., Guardian, through certain subsidiaries, was in the business of (i) fabricating and erecting structural steel for governmental, military, commercial and industrial construction projects through its 50% owned indirect subsidiary Structural Holdings, Inc., (ii) manufacturing and distributing security and safety products, primarily ballistic protective equipment through ForceOne, LLC, of which Guardian indirectly owned a 33% membership interest, and (iii) owning certain real estate properties through Palo Verde, Inc., a wholly owned subsidiary of Guardian.

REVERSE ACQUISITION

On June 26, 2003, pursuant to the terms of an Amended and Restated Agreement and Plan of Reorganization, dated effective June 12, 2003 (Agreement and Plan), by and among Guardian, RJL Marketing Services Inc., a privately held Delaware corporation (RJL), and all of the shareholders of RJL, Guardian acquired all of the outstanding capital stock of RJL in exchange for the issuance of shares of common stock and shares of preferred stock of Guardian.



Although Guardian was the legal acquirer in the acquisition, and remains the registrant with the SEC, under generally accepted accounting principles, the acquisition was accounted for as a reverse acquisition, whereby RJL is considered the acquirer of Guardian for financial reporting purposes since RJLs shareholders controlled more than 50% of the post acquisition combined entity, the management of Guardian was that of RJL after the acquisition, Guardian had no assets or liabilities as of the transaction date, and the continuing operations of the entity are those of RJL.  Since Guardian was a non-operating entity on the transaction date, Guardian recorded the premium over net assets purchased as a reduction of additional paid in capital.  In addition, Guardian is required to present in all financial statements and other public information filings, from the date of completion of the acquisition, prior historical financial statements and information of RJL.  It also requires a retroactive restatement of RJLs historical stockholders equity to reflect the equivalent number of shares of common stock received in the acquisition.



On the effective date, pursuant to the Agreement and Plan, the two stockholders of RJL, Mr. Robert A. Dishaw and Mr. Michael W. Trudnak, exchanged all of their shares in RJL for an aggregate of 5,511,500 shares of common stock and an aggregate of 4,097 shares of Series A Convertible Preferred Stock, $.20 par value per share (Series A Preferred Stock), of Guardian.  As a condition to the closing, Mr. Moorer, the former President, Chief Financial Officer and a director of Guardian, and Messrs Houtz and Stevens, the former directors of Guardian entered into lock up agreements with RJL and Guardian pursuant to which they agreed not to sell their shares of Guardian for a period of six months, except that they may, during such period, sell an aggregate of 50,000 shares a calendar month.



Concurrently with the closing of the Reverse Acquisition, Guardian closed on an equity financing pursuant to which it placed an aggregate of 1,000,000 shares of common stock at a price of $.50 per share for aggregate proceeds of $500,000.  Such financing was required as a condition to closing of the Reverse Acquisition.  Guardian has granted to investors in such offering a five year piggyback registration right (except for underwritten offerings and offerings other than for cash registered on a Form S-8 or S-4).  Also concurrently with the closing of the Reverse Acquisition, all of the prior officers and directors of Guardian resigned and were replaced by officers and directors designated by RJL.



At closing of the Reverse Acquisition, RJL had commitments to issue an aggregate of 5,970,000 shares of common stock and 2,600 shares of preferred stock to certain consultants, all of which have been issued.



Immediately prior to the closing, and effective as of June 23, 2003, Guardian assigned all of its pre-closing assets and liabilities to a newly formed subsidiary, Black Mountain Holding, Inc.  All of the shares of Black Mountain Holdings, Inc., owned by Guardian have been spun off to Guardians stockholders, pro rata, in the nature of a stock dividend distribution.  Shareholders of Guardian entitled to participate in the spin-off distribution received one share of Black



6





Mountain for each share of Guardian that they held as of the record date.  Guardian established June 23, 2003, as the record date for the spin-off.  Following that date, the shares of Guardian have traded ex dividend.  Guardian has been advised by prior management of Guardian that Black Mountain intends to file a registration statement with the SEC to register under the Securities Act the distribution of the spin-off shares to Guardian shareholders pro rata and the spin-off will not occur until such registration statement is declared effective by the SEC.  Pending effectiveness of the registration statement, the shares of Black Mountain will be held in a spin-off trust for the benefit of Guardians shareholders.  The trustee of the trust is J. Andrew Moorer, the former President and Chief Financial Officer of Guardian.



On February 23, 2004, at the Companys Annual Meeting, the shareholders voted to approve the conversion of each share of Series A Preferred Stock into 1,000 shares of Common Stock, effective November 30, 2004.  Based on the conversion terms, Mr. Dishaw and Mr. Trudnak received 1,000 shares of Common Stock for each share of Series A Preferred Stock they held, or an aggregate of 4,097,000 shares.

EXCLUSIVE DISTRIBUTION AGREEMENT WITH DIAGNOS

Effective as of, and as a condition to, the closing of the Reverse Acquisition, we entered into an Exclusive Distribution Agreement with Diagnos, Inc., a Canadian public company, pursuant to which we were appointed as the exclusive distributor of certain knowledge extraction software that has been developed by Diagnos.  Under the agreement, we were the exclusive distributor of Diagnos products to the U.S. federal, state and municipal governments, U.S. government contractors, and the U.S. bio-medical market, subject to certain limited carve-outs.  Upon execution of the agreement, we were required to make a royalty payment to Diagnos in the amount of $150,000, which is to be credited against the first seven licenses that Guardian sells. The agreement was a renewable ten-year agreement.



The Exclusive Distribution Agreement with Diagnos was mutually terminated effective as of January 14, 2004. The agreement was terminated for our failure to deliver the required minimum revenues included in the agreement.  Our failure to meet those minimum revenue requirements resulted from several factors: (i) our inability to sell the product to the U.S. government intelligence organizations due to the fact the product was produced and owned outside the U.S., (ii) the product was a desktop version, not an enterprise version, and (iii) the high-level of technical sophistication required to be a user of the product.  The termination of the Exclusive Distribution Agreement required us to:  cease the use of the Diagnos/MCubiX logo and name on our materials, return all intellectual property owned by Diagnos, and to pay all outstanding invoices (an aggregate of $25,000) immediately.



In view of the development of our business since the date of the Reverse Acquisition, management of Guardian does not believe that the termination of the Exclusive Distribution Agreement will have any material adverse impact on our current plan of operations or our ability to develop, market, or distribute our healthcare or security products. Our healthcare and security products have been developed independent of MCubiX and Diagnos.

RECENT ACQUISITIONS

On July 27, 2004, we completed the acquisition of Wise Systems Ltd. that provided Guardian with a premier 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 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 MRIs and CT scans, together 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



7





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.  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 for a period of two years following closing at a base salary of $210,250 per annum. Also, Mr. Martin Richards and Ms. Susan Richards have 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 of 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 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           
|Less cash acquired                                 | 609                 
|Net cash paid, including $150,000 deposit          | $      2,229,783    
|                                                   |                     



On October 23, 2003, we entered into an agreement with Difference Engines Corporation, 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 the agreement, Guardian issued 587,000 shares of its common stock as consideration for the purchase of the IP and cancelled a convertible promissory note that Difference Engines had issued to Guardian in the amount of approximately $25,000 representing advances Guardian made to Difference Engines.  The 587,000 shares of common stock are subject to a two (2) year lock up.  Guardian has granted Difference Engines piggyback registration rights for a period of three (3) years commencing on the date of the expiration of the lock up period with regard to the shares issued in the transaction.  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.  The founders of Difference Engines, including Messrs. Ludwig and Victor T. Hamilton, provided certain releases to Guardian related to their contribution of the technology to Difference Engines.  The closing of the acquisition of the IP was subject to certain conditions, including a requirement that Difference Engines obtain approval of its stockholders for the transaction and that Messrs Ludwig and Hamilton enter into two (2) year and one (1) year employment agreements, respectively, with Guardian at base salaries of $120,000 and $90,000 per annum, respectively.   Effective May 18, 2004, Mr. Ludwig resigned as an officer and director.  In connection with the settlement of certain litigation involving Difference Engines, Mr. Ludwig, Mr. Hamilton, and Guardian, we released the lock up restrictions on 58,700 of the shares we issued as consideration in the acquisition of Difference Engines intellectual property.  We released the lock up restrictions to permit Difference Engines to resell the stock for the purpose of paying from the sale of such shares any judgment or settlement arising from certain claims by others against Guardian and its assets.





8





The closing of the acquisition of the IP was effective December 19, 2003, after Difference Engines obtained the approval of its stockholders for the transaction.

RECENT FINANCINGS

During October and November, 2003, we closed on the sale of an aggregate of 545 shares of our Series C Convertible Preferred Stock.  Berthel Fisher acted as the placement agent for the offer and sale of such shares.  We received net proceeds from the sale of such shares of $629,895 and paid to Berthel Fisher a commission of 6% of the aggregate proceeds or $37,250, a due diligence fee of 2% of the aggregate proceeds of the offering or $13,625, and issued to Berthel Fisher placement agents warrants to purchase an aggregate of 21,800 shares of our common stock, and to reimburse certain extraordinary expenses of Berthel Fisher.  The placement agents warrants are exercisable at a price of $1.95 per share during the five year period following the issuance thereof and contain piggy back registration rights.  On February 13, 2004, pursuant to the authorization of our stockholders, we increased our authorized shares of common stock to 200,000,000 shares.  Under the provisions of the Series C Convertible Preferred Stock, the shares of Series C Convertible Preferred Stock automatically converted into an aggregate of 545,000 shares of our common stock.



Beginning December 8, 2003, and concluding December 19, 2003, we entered into a series of purchase agreements with eight individuals under which we sold and issued to such individuals convertible promissory notes in the aggregate amount of $700,000 and warrants to purchase 311,250 shares of our common stock.  200,000 of the warrants are exercisable during the eighteen (18) month period commencing on the date of issuance at a price of $2.50 per share.  The remaining warrants are exercisable as follows:  (i) 80,000 warrants exercisable during the twenty-four (24) month period commencing on the date of issuance at a price of $2.50 per share, and (ii) 31,250 warrants exercisable during the sixty (60) month period commencing on the date of issuance at a price of $5.00 per share.  The proceeds of the sale of the notes were used by Guardian for working capital purposes.  The notes earned interest at 10% per annum ($70,000) and were repayable sixty days after the date of issuance of the notes (maturity date).  The unpaid notes and interest, beyond the maturity date, earned interest at the rate of 18% per annum.  The notes provide that the principal and accrued interest under the notes may be converted into units of securities, each unit consisting of four shares of common stock and one warrant, at a price of $6.40 per unit.  A note holder is also entitled to receive 1,000 warrants to purchase our common stock at a price of $2.50 per share for each $25,000 in principal amount of note outstanding for each 30 day period during which the notes are outstanding beyond the maturity date.  The foregoing warrants contain certain anti-dilution provisions, one time piggy-back registration rights and other customary provisions.



On April 28, 2004, all holders of the convertible bridge financing notes elected to convert their outstanding principal and accrued interest into equity, on the same terms and conditions as the private placement.  At that time, the note holders converted $700,000 in outstanding principal and $99,184 of accrued interest into 499,480 shares of Guardian common stock (converted at $1.60 per share) and 124,870 stock purchase warrants ($2.65 per share expiring eighteen [18] months from date of issue).



Pursuant to the terms of a placement agreement, dated December 22, 2003, as amended February 27, 2004, we engaged Berthel Fisher & Company Financial Services, Inc. (Berthel Fisher) to act as our placement agent in connection with a contemplated private offering of our securities exclusively to certain accredited investors pursuant to Rule 506 of Regulation D under the Securities Act.  Under the terms of the offering, investors received units of securities, each unit consisting of four shares of common stock and one common stock purchase warrant to purchase one share of common stock exercisable at a price of $2.65 per share during an eighteen month period following the initial closing.  We paid or issued the following compensation to Berthel Fisher for its services as placement agent in connection with the offering: (i) 199,800 shares of common stock; (ii) placement agents warrants to purchase 10% of the shares issued in the offering (excluding the shares underlying the Class A Warrants) for an aggregate of 499,502 warrants; (iii) investment banking fees, commissions and reimbursable expenses in the aggregate amount of approximately $766,000.  The placement agents warrants are exercisable at a price of $1.92 per share for a period of five years from the date of issuance; contain certain piggyback registration rights and a cashless exercise provision.

















9





The table below details the investment transactions that occurred:



|             |           |            |           |           |         |           |           |            |         |             |           |           
|------------ | --------- | ---------- | --------- | --------- | ------- | --------- | --------- | ---------- | ------- | ----------- | --------- | ----------
|             |           |            |           |           |         |           |           |            |         |             |           |           
|             |           |            |           | Shares    |         | Warrants  |           |            |         |             |           |           
|             |           | Amount     |           | Issued to |         | Issued to |           | FMV of     |         | Transaction |           | Net       
|Date         |           | Invested   |           | Investors |         | Investors |           | Warrants   |         | Costs       |           | Proceeds  
|             |           |            |           |           |         |           |           |            |         |             |           |           
|Mar 24,2004  | $195,194  |            | 121,996   |           | 30,499  |           | $37,654   |            | $30,612 |             | $164,582 
|Apr 2,2004   | 185,498   |            | 115,936   |           | 28,984  |           | 57,968    |            | 16,725  |             | 168,773  
|Apr 20,2004  | 275,072   |            | 171,920   |           | 42,980  |           | 207,593   |            | 34,795  |             | 240,277  
|Apr 27,2004  | 656,960   |            | 410,600   |           | 102,650 |           | 896,135   |            | 59,156  |             | 597,804  
|May 3, 2004  | 2,100,752 |            | 1,312,970 |           | 328,243 |           | 1,716,706 |            | 189,098 |             | 1,911,654
|May 14, 2004 | 4,578,540 |            | 2,861,588 |           | 715,397 |           | 1,917,264 |            | 472,995 |             | 4,105,545
|             |           | $7,992,015 |           | 4,995,010 |         | 1,248,752 |           | $4,833,320 |         | $803,381    |           | $7,188,634



The table below details the fees, reimbursable expenses, stock grants, and stock purchase warrants earned by the placement agent:



|       |         |            |         |            |        |            |         |            |         |            |         |            |         |            |           |           
|------ | ------- | ---------- | ------- | ---------- | ------ | ---------- | ------- | ---------- | ------- | ---------- | ------- | ---------- | ------- | ---------- | --------- | ----------
|       |         |            |         |            |        |            |         | Cash       |         | Stock      |         |            |         | Warrants   |           |           
|       |         |            |         | Investment |        |            |         | Paid to    |         | Issued to  |         |            |         | Issued to  |           |           
|       |         |            |         | Banking    |        | Reimbursed |         | Investment |         | Investment |         | FMV of     |         | Investment |           | FMV of    
|Date   |         | Commission |         | Fees       |        | Expenses   |         | Bank       |         | Bank       |         | Stock      |         | Bank       |           | Warrants  
|       |         |            |         |            |        |            |         |            |         |            |         |            |         |            |           |           
|Mar 24 | $17,567 |            | $10,000 |            | $3,045 |            | $30,612 |            | 4,880   |            | $18,544 |            | 12,200  |            | $25,132  
|Apr 2  | 16,695  |            | -       |            | 30     |            | 16,725  |            | 4,637   |            | 21,191  |            | 11,594  |            | 32,811   
|Apr 20 | 24,765  |            | 10,000  |            | 30     |            | 34,795  |            | 6,877   |            | 50,890  |            | 17,192  |            | 97,307   
|Apr 27 | 59,126  |            | -       |            | 30     |            | 59,156  |            | 16,424  |            | 185,591 |            | 41,060  |            | 392,534  
|May 3  | 189,068 |            | -       |            | 30     |            | 189,098 |            | 52,518  |            | 409,640 |            | 131,297 |            | 795,660  
|May 14 | 412,069 |            | 17,333  |            | 10,729 |            | 440,131 |            | 114,461 |            | 600,920 |            | 286,159 |            | 1,004,418
|       |         | $719,291   |         | $37,333    |        | $13,893    |         | $770,517   |         | 199,797    |         | $1,286,776 |         | 499,502    |           | $2,347,861



The foregoing securities were issued to the investors and Berthel Fisher in reliance upon an exemption from the registration requirements of the Securities Acts set forth in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder, and constitute restricted securities within the meaning of Rule 144 (a)(3) under the Securities Act.



On March 25 and May 15, 2004, the Company accepted direct investments from two investors of $64,000 and $23,200, respectively, on the same terms and conditions as the private placement offering.  The investors were allowed to invest outside the private placement offering as a result of their prior affiliation with the Company.  The investors received 40,000 and 14,500 shares of common stock, as well as, 10,000 and 3,625 stock purchase warrants at a price of $2.65 per share, expiring eighteen months from the date of issuance.



On November 8, 2004, the Company accepted direct investments from two investors of $416,000 and $45,000, respectively, on the same terms and conditions as the private placement offering.  The investors received 260,000 and 28,125 shares of common stock, as well as, 65,000 and 7,031 stock purchase warrants at a price of $2.65 per share, expiring eighteen months from the date of issuance.



In January 2005, the Company issued an aggregate of 500,000 shares of common stock in a private placement to certain accredited investors for proceeds to the Company of $1,000,000.



On January 20, 2005, the Company entered into an agency agreement, effective January 14, 2005, with an investment bank to act as the Companys non-exclusive placement agent with regard to sales of the Companys securities in a private placement of up to $20 million in equity, equity-related or debt securities.  The private placement is to be effected in reliance upon the exemption from the registration requirements set forth in Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder and such securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.





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The Company has agreed to pay to the investment bank upon closing cash compensation in the amount of 8% of the aggregate gross proceeds of the securities sold in the private placement and issue warrants equal to 15% of the shares of common stock sold or issued in the offering or upon conversion of any convertible securities issued in the offering.  The terms of the warrants issuable to the investment bank shall be identical to the warrants issued in the private placement.  If no warrants are issued in the offering, the placement agents warrants will be exercisable at a price of 130% of the price of any stock sold in the offering to investors or the conversion price of any convertible securities sold in the offering, shall have a cashless exercise provision commencing one year after issuance, a five year term, a piggyback registration right, and other customary provisions.



The agency agreement was for a term of forty-five days but would terminate automatically upon completion of the offering.  The Agreement contains certain confidentiality and indemnification provisions, and provides for arbitration in the event of certain disputes between the parties.  The agency agreement terminated on March 6, 2005.



On January 26, 2005, the Company entered into a placement agreement with an investment bank to act as the Companys non-exclusive placement agent with regard to sales of the Companys securities in a private placement of up to $20 million in equity securities.  The private placement is to be effected in reliance upon the exemption from the registration requirements set forth in Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder and such securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.  The private placement will be made exclusively to certain accredited investors who are also institutional investors or who have a net worth of more than $5 million. The terms of the securities have not been determined as of the date of this Report and are subject to the negotiation of definitive purchase agreements between the Company and the investors.



As compensation for the placement agents services, the Company has agreed to pay to the investment bank upon closing of the private placement a commission equal to 7% of the aggregate gross proceeds of the securities sold in the private placement, a non-accountable expense allowance of 1% of the aggregate gross proceeds of the securities sold in the private placement, and issue warrants equal to 15% of the shares of common stock sold or issued in the private placement (excluding stock underlying any warrants issued to investors).  The placement agents warrants will be exercisable at any time during the five year period from the date of issuance.  The exercise price and other terms of the placement agents warrants shall be identical to the warrants issued to investors in the private placement.  If no warrants are issued to investors, the placement agents warrants will be exercisable at a price of 130% of the price of any stock sold in the private placement to investors or if no such warrants are issued to investors, both the Company and the placement agent will negotiate the exercise price of the warrants in good faith. The placement agents warrants shall have a cashless exercise provision and a one-time piggyback registration right.



The placement agreement was for a term of thirty days but would terminate automatically upon completion of the sales of the Companys securities to investors in the private placement.  The Company may terminate the placement agreement at any time.  The placement agreement also contains certain confidentiality and indemnification provisions.  On February 28, 2005, the Company extended this placement agreement for an additional sixty (60) days.



OUR BUSINESS

Guardian is a technology company that designs, develops and delivers sophisticated imaging informatics solutions to its target markets:  security and healthcare. We utilize high-performance 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.



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









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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 the Company is addressing.



Currently, the Company is focused on providing technology solutions and services in two primary markets, healthcare and aviation security.  However, as we develop new or enhanced solutions the Company expects to expand into other markets, such as military and defense utilizing hyper-spectral technology and imaging diagnostics for the medical industry.  The Company 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.  The Companys strategy is based upon the following 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 & 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.

·

Acquire other healthcare information companies with product focus, reputation, and market share in the areas of cardiology, pathology, laboratory, orthopedics, and ophthalmology.

·

Seek to broaden our investment appeal to large institutions.



To achieve our strategic vision, we are exercising the 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 2004, we focused on completing the product development of our PinPoint Threat Identification System, upgrading and adapting our integrated RIS/PACS for the US marketplace, strengthening our financial foundation through certain financings, developing our sales and distribution channels, beginning the process towards the global branding of our PinPoint and FlowPoint product names, and moving steadily towards being recognized as an innovative developer and source of intelligent image informatics.  In line with this tightly focused operational plan, we accomplished:

·

The acquisition and integration of DEVision compression technology into our integrated RIS/PACS product offering.

·

Established an OEM contract with Brit Systems for the distribution of DEVision.  BRIT Systems, a provider of custom, turnkey solutions for PACS and teleradiology applications, will incorporate the DEVision JPEG-2000 compression capabilities into its Picture Archiving and Communication System (PACS) product line that is distributed to healthcare imaging facilities nationwide.



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·

Successfully tested the detection capabilities of PinPoint, through blind testing, with an independent manufacturer of baggage scanning equipment.  Exceeded the published and market speculated rates of detection of the current systems.

·

Completed private placements of our securities which resulted in net proceeds of approximately $7.3 million.

·

Completed the acquisition and integration of Wise Systems, Ltd. which brought thirteen years of healthcare industry experience in RIS/PACS and over thirty product installations in hospitals in the UK.  Their PACS is a unique web-based image management system with a set of completely integrated services based on DICOM and HL-7 industry standards.  The system provides radiology patient information, image management, web-based imaging, and information distribution to the healthcare enterprise. While other systems may have a web front-end for users, Wises PACS system is the only one thats built on a dot.net platform for complete web-based image and information distribution using a single database and proven technology.

·

Attracted well-known and respected healthcare industry leaders to form the core management of our US-based healthcare operations.

·

Launched the seamlessly integrated FlowPoint (RIS/PACS) system at the Radiology Society North America convention held in Chicago during the first week of December 2004.

·

Developed product OEM or other resale arrangements with IBM, Eizo Nanao Technologies, Motion Computing, AVNET, and NeuroStar Solutions for FlowPoint RIS/PACS.

·

Signed an Exclusive Teaming Agreement with Lockheed Martin Systems Integration Division to pursue opportunities for airport checkpoint security using PinPoint to enhance detection of explosives and other threat items.  The Guardian Teaming Agreement is with Lockheed Martin Systems Integration (LMSI) located in Owego, NY. LMSI is a leader in providing advanced-technology products, services and systems integration solutions to defense, civil and commercial customers worldwide.   LMSI is a world leader in development and production of maritime helicopter systems, one of the largest suppliers of postal automation systems to the United States Postal Service, and a primary supplier of information technology solutions in the federal market.  Lockheed Martin has been a trusted advisor to many US government organizations.  They have been involved in numerous awards from the Federal Aviation Administration and Transportation Security Administration (TSA) for development and integration projects along with training of TSA personnel.  The Teaming Agreement is for a three-year term; LMSI will exclusively market our PinPoint product and services to TSA for state-of-the-art threat detection capabilities to meet TSAs checkpoint threat detection needs in three critical areas:  (i) increase machine throughput, (ii) improve passenger throughput efficiency, and (iii) enhance current explosives and threat detection capabilities to enhance travel safety.  The agreement provides for collaborative development of integrated and enhanced explosive detection systems through dedicated technical resources from each company.   The team will pursue TSA checkpoint opportunities via Broad Agency Announcements, Request for Proposals, grants and unsolicited business opportunities.



The disciplined management of our resources, strong financial foundation and comprehensive product offerings with our PinPoint Threat Detection System and FlowPoint RIS/PACS product line has created momentum that we believe will increase throughout 2005.  Future growth will be driven by 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 acquisitions/partnerships that contribute to our product innovation efforts or expand the distribution of our products and professional services.  Our goal is to have acquisitions/partners in certain target markets, primarily the international markets, focused on distributing and servicing our PinPoint and FlowPoint software products. In addition to the several technology acquisitions/partnerships formed in 2004, we intend to develop and leverage additional technology acquisitions/partnerships to expand our product offerings or enhance our existing products to appeal to a specific market.

ACQUISITION STRATEGY

As a key component of our overall business strategy, acquisitions will be a primary focus for 2005.  We have developed a bifurcated strategy that focuses the underlying goals on each of our two target marketplaces: security and healthcare.  Always at the nucleus will be our core technologies in intelligent imaging informatics.  While our overriding general strategies are to develop new products/technologies, new clients, new markets, or additional revenue base, we have explicit strategies, as follows:



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Security

·

Leverage PinPoint technologies into new market opportunities

·

Expand PinPoint capabilities through new technologies

·

Expand breadth of product/service offerings to existing clients

·

Position Guardian as the leading provider of imaging solutions for security/defense/military applications

Healthcare

·

Leverage PinPoint detection capabilities to develop a computer-aided detection solution for the analysis of medical imagery and the identification of disease or medical anomalies

·

Expand our healthcare information systems into cardiology, pathology, laboratory, orthopedics, oncology, and ophthalmology markets.

·

Position Guardian as the leading provider of imaging solutions for all healthcare modalities

CORE TECHNOLOGY

Guardians core technology is an intelligent imaging informatics (3i) engine that is capable of extracting imbedded 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.  To date, the technology has been extensively tested in the area of threat detection for baggage scanning at airports.  However, 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 the current results of internal testing indicate that the technology should produce results equal to or greater than those currently achieved in baggage scanning.



While the security/defense/military marketplace has absorbed the majority of our research and development activities, the healthcare marketplace may represent the larger opportunity.  Our research scientists have performed preliminary development activities in the areas of mammography, oncology, and ophthalmology with exceptional results.  As the research and development area of the Company grows in headcount and specific medical expertise, we will be able to fully utilize the pioneering and diverse capabilities of our technology to assist physicians in the detection of previously undetected diseases and medical anomalies in all digital imaging examinations.

PRODUCTS

Currently, we have two products that we market and sell:



PinPoint

·

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

·

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

·

Two utility patents and eleven provisional patents have been filed on the underlying technology.

·

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).

·

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

·

In December 2004, the Company entered into a Teaming Agreement (details of the agreement were filed on an 8-K dated December 24, 2004) with Lockheed Martin to implement PinPoint into its existing scanning technologies, for deployment at US airports, for checkpoint security.

·

Awarded theInnovation Technology Award for Non-Intrusive Explosive/Threat Detection by the Security and Safety Technologies Forum hosted by the Government of Russia.



FlowPoint

·

Radiology Information System (RIS) and Picture Archiving & Communication System (PACS).



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·

Manages radiology workflow, patient information, treatment history, and billing information.

·

Manages digital images through image viewers, compression technologies, storage, image archiving, image retrieval and transfer.

·

Software applications developed using Microsoft .NET technology.

·

Modular structure.

·

Ease of customization.

·

Ease of integration to other software applications.

·

Over 30 current installs in England.

·

Adapted for use in the United States marketplace.



AVIATION SECURITY SCREENING

MARKET

Security oversight of airports in the United States (U.S.) 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 carryon 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, it is estimated that the market is 4 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.



The marketplace discussions below are focused on the aviation industry in the U.S.  Data about the marketplace was extracted from research reports published by the Homeland Security Research Corporation (HSRC).



Baggage Screening

The following market information was extracted from HSRC report, 2003-2010 Luggage and Large Parcel Screening Market Report.   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 with the demand for products and services reaching the billions of dollars.  The growth in the marketplace for products and services was never an option and always a must if the Transportation Safety Administration was to be positioned 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.



Technology will convert the marketplace from a largely services (labor-driven) environment to technology intensive.  The current technology is a stopgap measure rather than a delivering solution.  By 2006 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 will 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).



People Portals

The following market information was extracted from HSRC report, 2003-2010 People Screening Weapon & Explosives Detection Market Report.  Almost every threat that requires people screening is currently monitored by a different system (explosives, weapons, biological, chemical, and nuclear/radiological).  It is a known fact that most of 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.



Present people portal technology fails to meet the post-9/11 requirements.  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 will be over $50 billion.  During the 2006-2010 period,



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over 80% of ($) sales of people portal systems will be for technologies that were not in existence in 2003.  The cost of screening a single person will be reduced by a factor of 10 from $4-$5 per person to under $0.50 for the same procedure.



Cargo Scanning

The following market information was extracted from HSRC report, 2003-2010 Cargo Screening Market Report.  Currently, less than 1% 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.  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.



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 is forecasted to surpass $2 billion in 2006.  Present airline insurance costs are $6 billion/year, six times higher than their pre 9/11 levels.  A single cargo terror event will 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.

Guardian is currently teamed with Lockheed Martin to pursue the deployment of PinPoint for U.S. airport security checkpoints.  It is anticipated that the Company could realize its first revenues from the U.S. market sometime during the later part of the third quarter or the fourth quarter of 2005.  However, management believes that the Company will generate revenues from PinPoint internationally prior to earning its first U.S. revenues.  The reasoning for this position is twofold: (i) the Company has established/is in the process of establishing Distribution/Reseller Agreements in Russia, China and Taiwan, and Central and South America, and (ii) the Company is involved in several opportunities for the sale of PinPoint in Malaysia, Russia, and Venezuela.

AVIATION SECURITY SCREENING PRODUCTS

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).



Guardians objective is to become the leading provider of contraband detection systems worldwide and to extend its technology expertise to address broader applications for detection. Specific elements of Guardians 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.

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: AS&E, Smiths-Detection, OSI Rapiscan, InVision, and L3, each of which is better capitalized and has greater marketing and other resources than Guardian.  The competition between manufacturers is so intense because the stakes are so high - hundreds of millions of dollars 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 expect to be able to integrate PinPoint with any manufacturers equipment.  We believe our technology will be able to improve 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 can now be redeployed for the acquisition of required technologies such as body scanners or cargo scanners.





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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 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 its 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.

BROAD-BASED AUTOMATED DETECTION APPLICATIONS

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 3itechnology 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 humans.  Our research and development work has also included, on a preliminary basis, the development of 3itechnology for deployment in the hyper spectral environment.  One such use within the hyper spectral environment would be a military use for target acquisition.



HEALTHCARE SYSTEMS

OVERVIEW OF GUARDIAN HEALTHCARE SYSTEMS

Our Guardian Healthcare Systems Division has, since our acquisition of Wise Systems Ltd., made investments in the acquired RIS platform adding features and functionality to fully develop a complete RIS/PACS system in a single, seamless and scalable web services application. At the Radiological Society of North America Conference 2004, Guardian introduced FlowPoint, our comprehensive Radiology Information and Image Management System incorporating extensive enhancements to the Wise Systems integrated product.  Based on an innovative web services product architecture, this unique offering provides feature-rich clinical and business radiology functions aligning information technologies with users and processes, designed to maximize the clinical and financial value of radiology to the healthcare enterprise.



In this rapidly growing digital image market, many smaller hospitals and imaging centers are now transitioning from film to digital.  To assist these enterprises in making this conversion we have positioned ourselves to provide a Low Cost of Total Ownership business approach.  By embracing open systems architectural principles, supporting industry standards and taking advantage of commercial off-the-shelf technologies, Guardian maximizes the efficient use of our clients hardware and software resources.  Our systems design approach, combined with Guardians flexible pricing programs, affords clients an economical transition from film to digital.



17





HEALTHCARE SYSTEMS MARKET

In the US, we are concentrating on the radiology marketplace, and more narrowly on free-standing single and multiple site radiology practices and small hospitals (<200 beds). While our technology and services are applicable to other provider specialties, radiology presents a set of unique challenges and opportunities.



According to the American Hospital Association, there are 5,801 hospitals in the U.S.  Approximately one-third have less than 200 beds and according to the American Medical Information, Inc. there are 2,795 major diagnostic imaging centers and more than 5,000 smaller imaging centers in the U.S.  Further, according to market analysts Frost and Sullivan in their 2002 report, less than 30% of our target markets are currently utilizing a PACS to achieve a filmless workflow environment and even fewer have fully integrated RIS/PACS providing a truly filmless environment or paperless workflow.



According to the 2003 Edition of the Verispan Report, the number of Diagnostic Imaging Centers (DICS) in the US, grew 56% between 1999 and 2002 and of the estimated 300 million procedures performed in the US in 1999 (most recent year for national information) generating $60 Billion in revenue, 60% of that revenue or $36 Billion is generated on an outpatient basis.  Guardians Healthcare Systems division (GHS) provides products and services to one of the fastest-growing sectors in healthcare and healthcare information management: diagnostic radiology.  The Concord Consulting Group has released data which indicates that, with service and upgrades, the total PACS and teleradiology market will exceed $2.7 billion annually.



Due to a convergence of improved technology along with the need to communicate over vast distances and the declining prices in hardware associated with providing RIS and PACS, a large segment of the healthcare marketplace is now eager to obtain these services. This historically underserved market now has many more options than the proprietary solutions historically provided by large film and modality vendors and traditional PACS vendors.



As we launch our fully integrated and scalable RIS/PACS product in the largest world market, the US, we are confident that there is a valuable opportunity to obtain a significant market share in the near future.



According to the Centers for Medicare and Medicaid Services (formerly the Health Care Financing Administration), health care was the largest single sector of the U.S. economy in 2002.  The total healthcare system represents approximately $1.5 trillion, or 14% of the U.S. gross domestic product.



Increased consumer, government, employer and payer awareness of the high incidence and resulting cost of medical errors is resulting in an increased interest in clinical information systems. According to the report published by the Institute of Medicine (IOM) of the National Academies, between 44,000 and 98,000 unnecessary deaths result in the United States each year from errors in medical treatment, making medical errors the eighth leading cause of death, ahead of automobile accidents, breast cancer, and AIDS. Aside from human costs, the total financial cost of medical errors has been estimated at up to $8 billion per year.



The President of the US is fully aware of the need for improved Information Technology in the Healthcare System focusing directly on the challenges at a news conference on January 27, 2005 at the Cleveland Clinic.  The President's budget for FY 2006 supports the use of health information technology by increasing funding to $125 million for demonstration projects that will help test the effectiveness of health IT and allow for widespread adoption in the health care industry. The Administration is also seeking an additional $50 million for FY 2005 (in addition to the $50 million already appropriated by Congress for 2005) to support the use of health IT.



Excerpts from the Presidents January 27, 2005 speech at the Cleveland Clinic:

·

Information technology is changing American industry. At the end of the 1990s, most American industries were spending approximately $8,000 per worker for IT, but the health care industry was investing only approximately $1,000 per worker. The United States has always been innovative with medical care, but continues to face major hurdles in our health information systems as we move into the 21st century. Despite spending over $1.6 trillion on health care as a Nation, there are still serious concerns about high costs, avoidable medical errors, administrative inefficiencies, and poor coordination - all of which are closely connected to the failure to incorporate health information technology into our health care system.

·

Current health information systems use an outdated, paper-based system: The innovation that has made our medical care the world's best has not been applied to our health information systems.



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·

America's patients deserve an up-to-date medical information system.  A patient's vital medical information is scattered, and full records are often unavailable at the time of care, and especially during emergency care.

·

America's doctors should have a high-quality, health information system to best serve their patients.

·

In a follow-up report issued by the Institute of Medicine (IOM) of the National Academies, the IOM reiterated the urgency of reducing medical errors, but stated that the United States healthcare system is plagued with even deeper quality problems which together detract from the "health, functioning, dignity, comfort, satisfaction and resources of Americans." The use of information technology to support clinical and administrative processes is prominent in the report's recommended strategies to improve the overall quality of healthcare within the next ten years.

Healthcare organizations face increasing regulation and scrutiny by federal, regional and local authorities. Compliance with regulations governing healthcare cost reimbursement, insurance, and administration impose financial burdens on healthcare organizations. Recently, proposed and final regulations published under the Health Insurance Portability and Accountability Act of 1996 has created significant operational challenges to healthcare providers and payers.

There are major challenges facing the modern radiology enterprise; increased pressure to improve quality of care while controlling and reducing health care costs; growing complexity of the practice and delivery of healthcare; growing competition among diagnostic imaging centers, hospitals, medical group practices and outpatient surgical centers for imaging share; severe shortages of trained and qualified personnel; increased demand of an aging population for healthcare and radiological procedures; increased demand for convergence and integration of all types of patient information; increased need to distribute, share and collaborate critical information ubiquitously in the healthcare enterprise and remote centers and required compliance to complex regulations and standards.

Radiology is inexorably moving from film to digital, and this is creating enormous amounts of data that must be catalogued, managed, moved, and archived.  Newer imaging technologies such as CT (computerized tomography) and MRI (magnetic resonance imaging) are digitally incepted (though in practice, reads of these modalities are often done by printing film from the digital image).  Even historically film-based modalities such as general x-ray and mammography are moving toward digital inception. It has not happened as quickly as some people had predicted, but the pace is quickening.

As digital modalities drive radiology toward film-less, the data volumes become staggering.  A single mammography study is 300 megabytes, and a large center can do hundreds in a day.  A CT or echocardiography study can be 30-50 gigabytes.  In many cases records must be kept for 7 years, 10 years, or even the lifetime of the patient.

Patient records in radiology are increasingly managed on computers; however, the vast bulk of the radiology archive is still in millions of linear feet of film racks.  Radiology IT systems fall into two broad classes:  picture archiving and communication systems, or PACS, and radiology information systems, or RIS.  The increasing trend is for full integration of PACS and RIS, both at the macro software level, and at the patient record level.

There were 350 million imaging procedures performed in the U.S. in 1998, according to Dr. Bob Bell, R. Bell & Associates in February 2000.  The National Healthcare Statistics Group of HHS estimates total U.S. patient spending on radiology at $75 billion annually, with a 9-12% growth rate.  Capital expenditures on diagnostic imaging equipment are $4.52 billion annually, according to Economic Analysis of Filmless Radiology, by Charles Flagle.

STRATEGIC APPROACH

Building on Wise Systems past successes in the UK hospital market, we will launch and grow market share in the US by capitalizing on our technical innovation, customizable and easily integratable systems, flexible pricing to allow for a lower cost of system ownership and strong focus on customer service and satisfaction.



By working directly with our clients, Guardian Healthcare Systems will help them manage their business, achieve profitable efficiencies and provide a better return on investment.



Since the purchase of Wise Systems, Inc. in July 2004, we have focused on improving the products and processes necessary to launch FlowPoint in the US marketplace and establishing partnerships and alliances to improve our products and to distribute them worldwide. To that end, in 2004, Guardian established business relationships with numerous companies including: Microsoft, IBM, AVnet, EIZO, Motion Computing, Matrox and NeuroStar.



To allow us to meet our goals, the management of Guardian has instituted the financial and operational discipline required for short, medium and long term success.  We have and will continue to put in place the strategic



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partnerships, human and financial resources and innovative products and processes to help us service the radiology and healthcare marketplace.

FLOWPOINT PRODUCT

FlowPoint RIS/PACS is a next-generation, intelligent, adaptive solution for the radiology enterprise that logically integrates images, voice and data.  Via an open systems integration with existing infrastructure, our FlowPoint RIS/PACS solution enables workflow for any third-party, DICOM-compliant PACS and may supplement or replace the PACS with its inherent imaging capabilities to uniquely suit the client requirements, migration strategy, budgets and timeframes.



Our FlowPoint intelligent imaging information system delivers more personal integrated workflow experiences to users via a new breed of smart technologies designed to integrate with and fully service the entire radiology enterprise.  Guardians feature-rich web services RIS/PACS solution has been designed to be configurable and scalable to meet their current and future needs.



Our strategic acquisition of Difference Engines in December 2003 provided Guardian with a uniquely designed predictive image compression technology.  We fully integrated our acquired compression technology with the Wise Systems technology to provide Guardian with a superior product platform, which we offer as our FlowPoint product.



Guardians DEVision product dramatically increases lossless, completely reversible compression ratios compared with competitive products.  Standard techniques can losslessly compress radiology images between 1.5-3 times; DEVision currently averages over 5:1, with a target average of up to 10:1. For image types such as x-ray and mammography, which can be 300MB each, such an improvement creates dramatic cost savings in archiving and reduces network throughput both inside the enterprise and for offsite teleradiology.



Web services represent an efficient platform on which Guardian builds distributed applications with interoperability as the highest priority. This software architecture provides an easy and economical upgrade path to new features and applications for the continual enhancement of our FlowPoint products performance and value.  Our web services approach provides a flexible clinical platform.  FlowPoints web services design, which includes XML, DICOM and HL-7 provides an exceptional approach for integrating disparate information systems, optimizing healthcare professionals workflow, providing ready access to images, reports and other critical information, and significantly improving the levels of satisfaction for referring physicians and other caregivers utilizing radiology information.



David Smith, Vice President and Research Director for the Gartner Group, had this to say about Web services, "Simple in nature and timely in their emergence, Web services will drive the next generation of software. Web services will serve as an attractive means through which enterprises can gain access to software and business services.  Businesses that ignore its potential, or decide to sit out its early stages will find themselves outpaced by rivals that take advantage of Web services to improve their agility and even to transform themselves into new kinds of enterprises."



Guardian recognizes that radiology healthcare today requires not only an adaptable and efficient technology strategy, but also a flexible financial strategy to meet the needs of a challenging and competitive industry.  To meet these demands, Guardian provides various acquisition programs tailored to our clients individual needs.

3i HEALTHCARE TECHNOLOGY

The Companys acquisition strategy and overall growth strategy for the healthcare marketplace is targeted to the development of 3i for the detection and analysis of diseases and medical anomalies within all medical modalities.  Combined with sophisticated data mining tools, the Company believes that it will be able to deliver, within five to ten years, the next generation of medical tools  predictive medicine.  Just as the 3i technology allows baggage screeners to see threat items that are not otherwise identifiable by the human eye, medical practioners will be able to detect diseases well before the human eye will detect their existence.  The combination of early detection and the application of data mining tools to databases of patient backgrounds, medical treatments, family histories, prior medical images, and eventual diagnoses will allow our FlowPoint product to provide physicians with proactive diagnosis based on comparative analysis, statistics, and levels of confidence.





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COMPETITION

The Company faces competition from other providers of radiology information services providers.  However, the current diagnostic imaging market is highly fragmented.  In this market, it is widely accepted that there is no one size fits all product available.  However, there are companies that have or are developing comparable integrated, web-enabled products:  (e.g. Merge , Amicas/Vitalworks, DR Systems, Swearinger, and Ramsoft).



In the area of integrated RIS and PACS workflow applications, there are newly emerging competitors who offer segments of the integrated radiology solution through their RIS and/or PACS to the market targeted by Guardian Healthcare Systems. Furthermore, some competitors have recently begun integrating and offering RIS and PACS technologies through partnership and acquisition activities.



The Company believes that the flexible pricing, continued innovation, our commitment to quality and adherence to industry standards and our integrated service offerings will afford us a competitive value proposition. Current RIS/PACS offerings from major competitors such as GE, Siemens, Cerner, and Phillips have major competitive disadvantages relative to FlowPoint when addressing the small hospital/freestanding clinic market.  Additionally, some of our competitors are also in the primary business of selling modalities (MR, CT, or nuclear medicine devices) as well as PACS or RIS.  Their sales emphasis is on these larger-ticket items, rather than customer-centric open architecture, RIS/PACS.



The Diagnostic Imaging Center and small hospital market is generally quite underserved in healthcare information technology offerings, despite a generally much shorter selling cycle and more obvious ROI calculation.  In imaging centers, decisions are typically made by the radiologist/partners, without the IT gatekeepers found in larger enterprises.  As well, provable cost savings devolve to the partners themselves, rather than into a general operating budget as in a hospital.

EMPLOYEES

As of December 31, 2004, we employed 20 full-time employees in the United States and 9 employees 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.  The Company also employs 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

The Company relies 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.  The Company does 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 to prevent misappropriation of our proprietary rights or to deter independent, third-party development of similar proprietary assets.



The Company has filed patent applications in the United States covering the application of our core technology.  However, the Company has not been granted any patents as of the date of this report.  In addition, the Company expects to file six additional patent applications for adjunct technologies.  The Company cannot provide assurance that any or all of these patents will be granted or that they will not be challenged, or that rights granted to us would actually provide us with advantage over our competitors.  Prior art searches have been conducted, and the Company believes that it will not infringe any current third party patents.



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.



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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), and no high-risk development issues exist, then expenditures may be capitalized.  The Company concluded that capitalizing such expenditures for PinPoint was inappropriate and expensed all research and development costs.  The Companys research and development costs are comprised of staff and consultancy expensed on PinPoint.

GENERAL

The Company maintains two offices:  (i) 516 Herndon Parkway, Suite A, Herndon, Virginia 20170, and (ii) Portman House, 7a High Street, Corsham Wiltshire in the United Kingdom.  Our U.S. telephone number is (703) 464-5495.  Our UK telephone number is 01249 717000.  Our Internet address is www.guardiantechintl.com.  Information on our website is not deemed to be part of this Annual Report on Form 10-KSB.



ITEM 2.  DESCRIPTION OF PROPERTY

We maintain our corporate offices at 516 Herndon Parkway, Suite A, Herndon, Virginia  20170.  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 rental rate of $266,927, subject to annual rental escalation of 2.5%.  Also, we maintain an office at Portman House, 7a High Street, Corsham, Wiltshire, UK.  The office is comprised of approximately 2,000 square feet.  The lease commenced on July 28, 2004, and is for a term of 5 years at an annual rental rate of $15,686.  We believe that our facilities will be adequate for our needs for the next 60 months.



We previously leased approximately 4,200 square feet of office space at 21351 Ridgetop Circle, Dulles, Virginia pursuant to a month-to-month lease that commenced on June 5, 2003.



ITEM 3.  LEGAL PROCEEDINGS

On July 29, 2004, we filed a complaint in the Circuit Court for Montgomery County, Maryland, against Difference Engines Corporation (DEC), Mr. Walter Ludwig and Mr. Victor T. Hamilton arising from certain claims asserted by Mr. Thomas Bentsen against the Company in connection with the transfer of certain assets by DEC to the Company pursuant to an Asset Purchase Agreement, dated October 23, 2003 as amended (the Asset Purchase Agreement).  Effective December 17, 2004, the Company, DEC, and Messrs. Ludwig and Hamilton entered into a settlement agreement and release and subsequently filed a stipulation of dismissal in this case. The settlement agreement provided that the defendants are prohibited from distributing or disposing of the 587,000 shares of Company stock that DEC received pursuant to the Asset Purchase Agreement, unless, under certain specified conditions, the defendants shall pay any judgment or settlement arising from certain claims by others against the Company or the Companys assets from the sale of such shares. For the purpose of paying such judgment or settlement, the Company agreed to release 58,700 of such shares from the two year lock up provision to which such shares are subject under the Asset Purchase Agreement to permit the resale of such shares. The defendants have agreed to indemnify the Company regarding such claims. The Company agreed to pay Mr. Ludwig $22,676 of payments otherwise unpaid under an agreement with Mr. Ludwig. The defendants executed a release in favor of the Company.



Subsequently, on or about January 17, 2005, the Company was served with an amended complaint in the case of Bentsen v. Difference Engines Corporation, Ludwig, Hamilton and Guardian Technologies, Inc.,in the Circuit Court of Montgomery County, Maryland. This case was originally brought against DEC and Mr. Ludwig only on March 3, 2004. The amended complaint added the Company and Victor Hamilton as new defendants in the case. Mr. Bentsen alleged he was a former employee of DEC.  Originally, he had sued DEC and Mr. Ludwig, its president, for, among other things, breach of an alleged employment agreement between Mr. Bentsen and DEC. Mr. Bentsen alleged that, among other things, he developed certain technologies for DEC and was not paid for his services. Mr. Bentsen argued that because he was not paid for his services to develop those technologies, those technologies remain his property. Mr. Bentsen alleged that those technologies were sold by DEC to the Company pursuant to the Asset Purchase Agreement.  On February 23, 2005, a settlement and release agreement was entered into effective as of February 8, 2005, by and between Mr. Bentsen, DEC, Mr. Ludwig, Mr. Hamilton and the Company. In that agreement, the parties agreed to execute a stipulation of dismissal of the lawsuit with prejudice which will be held by a named escrow agent. In settlement, DEC has agreed to pay $90,000 (settlement amount) to the escrow agent for the benefit of Mr. Bentsen within 30 days from the latest date as of which the agreement was executed by all parties or an additional 15 days upon a showing of good cause. Upon payment of this sum, the agreement requires the escrow agent to file the



22





stipulation of dismissal and pay the said sum to Mr. Bentsen. The agreement provides for certain releases by the parties that are effective upon filing of the stipulation and payment of the settlement amount.



On August 18, 2004, we became a defendant in a lawsuit in Minnesota state court entitled VisualGold v. Thomas E. Ramsay, Nancy Goetzinger and Guardian Technologies International, Inc.   VisualGold has alleged that the Company tortuously interfered with its contracts and prospective economic advantage by engaging Thomas Ramsay to work as a consultant, and that Ramsay transferred certain of its trade secrets to the Company.  The Company strenuously denies the allegations, and has asserted counterclaims against VisualGold and other third parties for misappropriation of trade secrets.  The Company is seeking compensatory and punitive damages, attorneys fees and costs.  Ramsay and Goetzinger have also filed counterclaims against VisualGold.  On October 15, 2004, following extensive briefing and a hearing on the matter, Judge Isabel Gomez of Hennepin County District Court denied VisualGold's motion for a temporary injunction against the company in all regards.  Discovery is ongoing; however, based on the advice of counsel, the Company believes that it has substantial defenses to the allegations and that the suit is without merit.





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

On November 23, 2004, the Company, held its 2004 annual meeting of stockholders at its principal executive offices.  Stockholders voted on three proposals, as follows: (i) the election of two Class I directors, Mr. M. Riley Repko and Mr. Charles T. Nash, (ii) the appointment of Aronson & Company as our independent accountants for 2004, and (iii) an amendment to the Certificate of Designations, Preferences and Rights of our Series A Convertible Preferred Stock to provide for the automatic mandatory conversion of each outstanding share of Series A Convertible Preferred Stock into 1,000 shares of common stock, effective November 30, 2004.  The two Class I directors were duly elected at the meeting, and the proposals referred to in (ii) and (iii) above were duly approved by a vote of our stockholders.  The terms of office of the following directors continued after the meeting:  Mr. Sean Kennedy, Mr. Robert A. Dishaw and Mr. Michael W. Trudnak.  Voting results of that meeting were previously disclosed under Item 8.01 of a Current Report on Form 8-K, dated November 23, 2004, and reference should be made to such report for information regarding such results.







PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is quoted on The NASDAQ Stock Market, Inc.s OTC Bulletin Board under the symbol GDTI. The following table sets forth the high and low bid prices for each quarter during 2004 and 2003.



|                                     |        |      
|------------------------------------ | ------ | -----
|                                     | High   | Low  
|Fiscal Year Ended December 31, 2004: |        |      
|First Quarter                        | $ 4.75 | $2.80
|Second Quarter                       | $ 5.40 | $1.80
|Third Quarter                        | $12.00 | $3.55
|Fourth Quarter                       | $ 3.90 | $3.85
|                                     |        |      
|Fiscal Year Ended December 31, 2003: |        |      
|First Quarter                        | $ 0.33 | $0.33
|Second Quarter                       | $ 2.55 | $2.40
|Third Quarter                        | $ 2.95 | $2.76
|Fourth Quarter                       | $ 3.90 | $3.85



These over-the-counter market quotations reflect interdealer prices, without retail mark up, mark down or commission, and may not necessarily represent actual trades.  The closing bid price of our common stock on March 17, 2005, was $3.50 and there were approximately 480 record holders 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.





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DIVIDENDS

The Company has never declared or paid cash dividends on the Common Stock.  The Company currently intends to retain earnings, if any, to support its growth strategies and does not anticipate paying cash dividends in the foreseeable future.  Payment of future dividends, if any, will be at the direction of the Companys Board of Directors after taking into account various factors, including the Companys financial condition, operating results, current and anticipated cash needs and plans for expansion.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN

On August 29, 2003, the Companys board of directors adopted our Amended and Restated 2003 Stock Incentive Plan and was approved by our stockholders on February 13, 2004, at a Special Meeting of Stockholders of the Company. The Plan provides for the issuance of qualified and non-qualified options to purchase up to 30,000,000 shares of the Companys Common Stock.  The Company has issued 5,340,000 options to purchase shares of Common Stock under the Plan.



The following table summarizes stock option activity for the year ended December 31, 2004:



|                                 |       |                                 |           |                  
|-------------------------------- | ----- | ------------------------------- | --------- | -----------------
|                                 |       | Weighted Average Exercise Price |           | Number of Options
|Outstanding January 1, 2004      | $0.45 |                                 | 2,080,000
|Granted ($2.25 - $4.10)          | $1.38 |                                 | 3,222,800
|Exercised                        | $0.58 |                                 | (270,000)
|Cancelled                        | $0.81 |                                 | (600,000)
|Outstanding December 31, 2004    | $1.24 |                                 | 4,432,800
|                                 |       |                                 |           |                  
|Exercisable at December 31, 2004 | $0.78 |                                 | 1,739,000
|Vesting in 2005                  | $1.18 |                                 | 2,270,800
|Vesting in 2006                  | $3.62 |                                 | 423,000  
|Vesting in 2007                  | $-    |                                 | -        
|Vesting in 2008                  | $-    |                                 | -        
|                                 |       | $1.24                           |           | 4,432,800        



RECENT SALES OF UNREGISTERED SECURITIES

On January 7, 2005, the Company sold to certain accredited investors 500,000 shares of the Companys common stock at a price of approximately $2.00 per share for net proceeds of $1,000,000.  The private placement was effected in reliance upon the exemption from the registration requirements set forth in Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder and such securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.



ITEM 6.  MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

You should read the following summary together with the more detailed information and financial statements and notes thereto appearing elsewhere in this report.  Throughout this report when we refer to Guardian, we, our or us, we mean Guardian Technologies International, Inc. and its subsidiaries after giving effect to the reverse acquisition of RJL Marketing Services Inc. (Reverse Acquisition) completed in June 2003.



This discussion and analysis of our financial condition and plan of operations is based upon our 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



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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 or Plan of Operations is forward-looking.  The Companys 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 technology (particularly for our PinPoint product), the unpredictability of the Companys sales cycle, the limited revenues and significant operating losses generated to date, and the possibility of significant ongoing capital requirements.



Restatement

The Company restated the consolidated financial statements for 2004 and 2003, and certain disclosures in notes to the consolidated financial statements have been restated to reflect the Restatement adjustments.  In the Restatement, we have:



Reclassified from Permanent Equity to Temporary Equity the Contractual Redemption Value of Common Shares Issued in Conjunction with an Asset Acquisition Agreement that Contained Redemption Rights

Under the terms of an Asset Purchase Agreement, Guardian issued 587,000 shares of its common stock as consideration for the purchase of the intellectual property from Difference Engines Corporation.  The 587,000 shares of common stock were subject to a two (2) year lockup.  Upon expiration of the two (2) year lockup 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.  No recalculation of the redemption value was performed in fiscal year 2004 as the redemption rights, granted under the terms of the Asset Purchase Agreement, could not be exercised due to the two-year lockup with regard to the issued shares of common stock.



Reclassified from Permanent Equity to Derivative Liabilities, Warrants Issued to a Placement Agent and Convertible Note Holders and Others, Resulting from Insufficient Authorized and Unissued Shares of Common Stock

During the year ended December 31, 2003, the Company issued to its placement agent, to the note holders, and to other service providers, warrants for the purchase of common stock.  At December 31, 2003, the Company did not have sufficient authorized and unissued shares of common stock to satisfy all of its outstanding conversion requirements.  Paragraph 20 of EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, requires that a company have sufficient authorized and unissued shares available to settle contracts after considering all other commitments that may require the issuance of stock during the maximum period the derivative contract could remain outstanding in order to classify the derivative contract as equity.  Sufficient shares were not available until February 13, 2004.  Accordingly, the Company calculated the fair value of each derivative instrument, $1,131,415, and recorded this value as a derivative liability on the consolidated balance sheet.



On February 13, 2004, at a Special Meeting of Stockholders of the Company, the Companys stockholders voted to increase the number of shares of Common Stock from 15,000,000 to 200,000,000.  Such increase provided sufficient authorized and unissued shares to settle all contracts under commitment.  Appropriately, the Company reversed the prior entry and reduced derivative liabilities by $1,131,415.  Reversing the entry returns this amount to permanent equity.



Increased Deferred Compensation  Consultants and Stock-Based Compensation to Reflect the Revaluation of Warrants Issued to a Consultant for Services

On May 20, 2004, the Company issued 250,000 stock purchase warrants to an outside consultant for services to be rendered in the succeeding twelve month period of time.  Assumptions made in the calculation of the fair value of the warrants using the Black-Scholes Model proved to be incorrect.  Based on the revised assumptions, the Company



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increased the deferred compensation  consultants balance by $842,400 and amortized from that balance, $526,500 of stock-based compensation expense in 2004 and $315,900 in 2005.



Revalued the Components of a Convertible Debt Instrument that Contained an Embedded Derivative

During December 2003, Guardian entered into a series of purchase agreements under which convertible promissory notes in the aggregate amount of $700,000 and warrants to purchase 311,250 shares of the Companys common stock were issued.  The notes bore interest at 10% per annum and were repayable sixty (60) days after the date of issuance (maturity date).  The outstanding principal and interest are convertible into equity securities based on the terms of a future financing.  Absent a future financing, the outstanding principal and interest are convertible into equity securities at a price of $1.50 per share.  Guardian analyzed the transaction and the associated embedded conversion features and determined that all three criteria for bifurcating an embedded conversion feature, and measuring at fair value, as detailed in SFAS 133, Accounting for Derivative Instruments and Hedging Activities, have been met.  Based on this finding the Company bifurcated the components of the hybrid instrument (the convertible debt) into: (1) the host contract (an interest-bearing note) and (2) the embedded derivative (a put option on the Companys stock).  SFAS 133 requires that a bifurcated embedded derivative be separated from the host contract and measured at fair value.  Guardian estimated the fair value of the host contract by subtracting the fair value of the embedded put option from the fair value of the convertible note.   The Company increased its interest expense by $57,212 for 2003, and allocated the fair value of the hybrid instrument ($700,000) as follows: (1) $202,841 to the host contract and (2) $497,159 to derivative liability  embedded conversion feature.



During the year ended December 31, 2004, and as a result of the recalculation of the embedded put option, the Company beneficially adjusted previously recorded interest expense of $1,043,321, by $15,761 to a total expense of $1,027,560.  Further, on April 28, 2004, all holders of the convertible bridge financing notes elected to convert their outstanding principal and accrued interest into equity, on the same terms and conditions as the private placement.



Cancellation of Warrants Never Issued

During 2004, the Company reversed a warrant transaction in the amount of $145,684 that was recorded but subsequently voided.  During 2004, we recorded an impairment of assets acquired with the stock warrants, believing that the transaction had been completed, and then terminated.  Since the entire transaction had been correctly accounted for in 2003, the entry was a duplication of the 2003 entry.  We reversed the recordation of the 2004 entry which resulted in a decrease in our operating net loss for the year.



Reclassification of Stock-Based Compensation to Selling, General and Administrative

The previously reported statements of operations segregated on a separate line stock-based compensation expense from selling, general and administrative expense.  With this Restatement of the consolidated financial statements for the years ended December 31, 2004 and 2003, the Company added the stock-based compensation expense of $21,297,748 and $4,277,242, respectively, to selling, general and administrative expense for presentation purposes.



Reclassification of Depreciation Expense to Selling, General and Administrative

The previously reported statements of operations segregated depreciation expense from selling, general and administrative expense.  With this Restatement of the consolidated financial statements for the years ended December 31, 2004 and 2003, the Company added the depreciation expense of $31,572 and $26,734, respectively, to selling, general and administrative expense for presentation purposes.



Reclassification of Impairment of Software Technology and the Amortization of Intangible Assets to the Cost of Sales

The previously reported statements of operations included the impairment of software technology and the amortization of intangible assets in selling, general and administrative expense.  With this Restatement of the consolidated financial statements for the year ended December 31, 2004, the Company added the impairment of software technology expense of $1,498,731 and the amortization of intangible assets expense of $761,650 to the cost of sales for presentation purposes.



The following table presents the effect of the Restatement on the consolidated financial statements for December 31, 2004 and 2003.







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|                                                                                                                                       |               |                   |              |            |               |                  
|-------------------------------------------------------------------------------------------------------------------------------------- | ------------- | ----------------- | ------------ | ---------- | ------------- | -----------------
|                                                                                                                                       |               | AS PREVIOUSLY     |              |            |               |                  
|                                                                                                                                       |               | REPORTED          |              |            |               | RESTATED         
|                                                                                                                                       |               | DECEMBER 31, 2004 |              | ADJUSTMENT |               | DECEMBER 31, 2004
|                                                                                                                                       |               |                   |              |            |               |                  
|Consolidated Balance Sheet                                                                                                            
|Common shares subject to repurchase; stated at estimated redemption value - 587,000 shares issued and outstanding at December 31, 2004 | $-            |                   | $2,044,228   |            | $2,044,228   
|                                                                                                                                       |               |                   |              |            |               |                  
|                                                                                                                                       |               |                   |              |            |               |                  
|Consolidated Statement of Operations                                                                                                  
|Cost of sales                                                                                                                          | $208,574      |                   | $-           |            | $208,574     
|Impairment of software technology                                                                                                      | -             |                   | 1,498,731    |            | 1,498,731    
|Amortization of intangibles                                                                                                            | -             |                   | 761,650      |            | 761,650      
|Cost of sales (Restated)                                                                                                               | 208,574       |                   | 2,260,381    |            | 2,468,955    
|                                                                                                                                       |               |                   |              |            |               |                  
|Operating expenses:                                                                                                                   
|Selling, general and administrative                                                                                                    | $4,447,943    |                   | $21,396,610  |            | $25,844,553  
|Impairment of software technology                                                                                                      | 1,498,731     |                   | (1,498,731)  |            | -            
|Depreciation                                                                                                                           | 31,572        |                   | (31,572)     |            | -            
|Amortization of intangibles                                                                                                            | 974,624       |                   | (974,624)    |            | -            
|Amortization of stock compensation                                                                                                     | 20,771,248    |                   | (20,771,248) |            | -            
|Total operating expenses                                                                                                               | 27,724,118    |                   | (1,879,565)  |            | 25,844,553   
|                                                                                                                                       |               |                   |              |            |               |                  
|Interest expense                                                                                                                       | 1,043,321     |                   | (15,761)     |            | 1,027,560    
|                                                                                                                                       |               |                   |              |            |               |                  
|Net loss                                                                                                                               | $(28,855,121) |                   | $(365,055)   |            | $(29,220,176)
|Earnings per share - basic and diluted                                                                                                 | $(1.44)       |                   | $(0.01)      |            | $(1.45)      
|                                                                                                                                       |               |                   |              |            |               |                  
|Consolidated Statement of Cash Flow                                                                                                   
|Operating Activities:                                                                                                                 
|Net loss                                                                                                                               | $(28,855,121) |                   | $(365,055)   |            | $(29,220,176)
|Adjustment to reconcile net loss - reversal of impairment of stock warrants                                                            | 145,684       |                   | (145,684)    |            | -            
|Adjustment to reconcile net loss - stock-based compensation expense                                                                    | 20,771,248    |                   | 526,500      |            | 21,297,748   
|Adjustment to reconcile net loss - non-cash interest expense                                                                           | 1,029,158     |                   | (15,761)     |            | 1,013,397    
|                                                                                                                                       |               |                   |              |            |               |                  
|Consolidated Statement of Stockholders' Equity                                                                                        
|Deferred stock compensation - consultants                                                                                              | $(3,201,966)  |                   | $(315,900)   |            | $(3,517,866) 
|Additional paid-in capital                                                                                                             | 44,112,739    |                   | (1,306,059)  |            | 42,806,680   
|Deficit accumulated                                                                                                                    | (35,480,783)  |                   | (422,268)    |            | (35,903,051) 







27







|                                                        |              |                        |              |            |              |                  
|------------------------------------------------------- | ------------ | ---------------------- | ------------ | ---------- | ------------ | -----------------
|                                                        |              | AS PREVIOUSLY REPORTED |              |            |              | RESTATED         
|                                                        |              | DECEMBER 31, 2003      |              | ADJUSTMENT |              | DECEMBER 31, 2003
|                                                        |              |                        |              |            |              |                  
|Consolidated Statements of Operations                  
|Operating expenses:                                    
|Selling, general and administrative                     | $2,197,042   |                        | $4,303,976   |            | $6,501,018  
|Depreciation                                            | 26,734       |                        | (26,734)     |            | -           
|Amortization of stock compensation                      | 4,277,242    |                        | (4,277,242)  |            | -           
|Total operating expenses                                | 6,501,018    |                        | -            |            | 6,501,018   
|                                                        |              |                        |              |            |              |                  
|Interest expense                                        | 23,417       |                        | 57,212       |            | 80,629      
|Net loss                                                | $(6,524,435) |                        | $(57,212)    |            | $(6,581,647)
|Earnings per share - basic and diluted                  | $(0.78)      |                        | $(0.01)      |            | $(0.79)     
|                                                        |              |                        |              |            |              |                  
|Consolidated Statements of Cash Flow                   
|Operating Activities:                                  
|Net loss                                                | $(6,524,435) |                        | $(57,212)    |            | $(6,581,647)
|Adjustment to reconcile net loss - bridge note discount | 20,417       |                        | 57,212       |            | 77,629      
|                                                        |              |                        |              |            |              |                  
|Consolidated Statements of Stockholders' Equity        
|Stock warrants outstanding                              | $1,031,424   |                        | $(1,031,424) |            | $-          
|Additional paid-in capital                              | 21,084,315   |                        | (2,092,178)  |            | 18,992,137  
|Deficit accumulated                                     | (6,625,663)  |                        | (57,212)     |            | (6,682,875) 





PLAN OF OPERATIONS

We develop targeted, functional, and innovative software solutions to derive intelligence from images for the detection of targeted anomalies.  Today, organizations collect far more data, particularly with the expansive growth in digital imagery, than they actually analyze and meaningfully apply.  The analysis of this data and images can lead to significant improvements in the quality and efficacy of organizational decision-making.  Business and IT consultants predict that the exponential growth in data and images over the next decade will continue at a pace equal to or greater than the growth experienced during the past decade.  The need for more intelligent and expedient methods of analyzing data and images, along with converting the analysis into beneficial decision-making or predictive analysis bodes well for the business prospects of Guardian.



Our focus for the immediate term will be two markets:  aviation security and healthcare radiology.  While each of these markets represents enormous revenue potential, they are also fraught with many obstacles.  In the aviation security marketplace we face the challenge of validating the efficacy of our solution.  Many have tried to solve the imaging analysis and detection problems, all have failed to make substantial improvements.  We believe our PinPoint product resolves the imaging analysis and detection issues facing homeland security  baggage scanning, people scanning and large parcel/cargo scanning.  Our challenge will continue to be navigating the government procurement process.   Through our relationship with Lockheed Martin, and based on Lockheed Martins extensive experience in government contracting, we are confident that we will be able to meet the challenges of government procurement.  In the healthcare radiology marketplace we will be marketing and selling our products to clients with little technological sophistication, who are accustomed to maintaining images on film and data in handwritten records.  Properly developing a cost/benefit analysis will be the key to penetrating the marketplace.  Our target market within the U.S. is hospitals with less than 200 beds, ambulatory care centers, and radiology centers.  In 2005, we plan to build a sales



28





organization of experienced radiology/medical imaging personnel with existing customer/client base.  Further, we will extend our sales and marketing efforts internationally through the development of a reseller/distribution network.



The cash on hand, at December 31, 2004, of $925,999 and the approximately $1,000,000 of proceeds from a stock subscription agreement the Company received during January 2005, is expected to provide working capital for operations through May 31, 2005.  This equates to spending approximately $385,000 per month on operations.  We have signed a placement agent agreement with an investment banker to raise up to $25 million.  During the next twelve months, we expect to satisfy our cash requirements from the proceeds derived from this placement offering.  The offering commenced in late January of 2005 and as of the date of this report, there was approximately $1.2 million in escrow that the Company has not yet drawn down.  We expect to be able to raise $10,000,000.  Proceeds from the offering will be used to: (i) increase staffing of the research and development, technical development, and sales/marketing groups (ii) continue the research and development of PinPoint for a other market opportunities, (iii) complete the patent process on several key patentable algorithms and processes, (iv) complete the acquisition of several strategic businesses, and (v) to support the growth and operating expenses of the Company.  We believe that we will need approximately $4 to $5 million in working capital to sustain operations through the point that cash from operations covers operating expenses.  Based on revenue projections for 2005 of $10 million and the timing of revenue generation, we anticipate that to become operationally self-sufficient in the fourth quarter of 2005.



During this ramp up of the sales/marketing infrastructure and capital formation phase, and until such time as adequate financing is in place, we will closely monitor our costs and our revenue expectations and will take actions appropriate to the market conditions.



We intend to continue to invest in both our existing technologies and in the development or acquisition of additional complimentary technologies, as well as in building an efficient marketing and sales organization.



The Company has identified a number of specific risk areas that may affect the Companys operations and results in the future:



Technical Risks.The PinPoint Threat Identification and Detection System may not deliver the levels of accuracy and reliability needed, or the development of such accuracy and reliability may be delayed.



Market Risks.The market for PinPoint and FlowPoint may be slower to develop or smaller than estimated, or it may be more difficult to build the market than anticipated.  The homeland security community may resist the PinPoint system or be slower to accept it than we expect.  The U.S. healthcare community may resist our FlowPoint system in favor of more widely deployed systems or larger, better capitalized competitors.  Revenues from the licensing of both of our products may be delayed or costs may be higher than expected, which may result in the Company requiring additional funding.



Competitive Risks.While the market for imaging and radiology technology is highly fragmented, we face competition from other companies that 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.



Acquisition Strategy Risks.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. It is the intent of management to use a portion of available working capital to fund certain acquisitions of companies with complementary technologies. Any such acquisition, investment, strategic alliance or related effort will be accompanied by the risks commonly encountered in such transactions.



Key Personnel Risks.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.



Regulatory Risks.The United States Food and Drug Administration has promulgated a draft policy for the regulation of computer software products as medical devices under the 1976 Medical Device Amendments to the Federal Food,



29





Drug and Cosmetic Act. To the extent that computer software is a medical device under the policy, Guardian, as a manufacturer of such products, could be required, depending on the product, to:  (i) register and list its products with the FDA; (ii) notify the FDA and demonstrate substantial equivalence to other products on the market before marketing such products; or (iii) obtain FDA approval by demonstrating safety and effectiveness before marketing a product.



Depending on the intended use of a device, the FDA could require Guardian to obtain extensive data from clinical studies to demonstrate safety or effectiveness, or substantial equivalence. If the FDA requires this data, Guardian 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. Guardian 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, Guardian expects 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.



Security Product Certification Risks.  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.



International Market Risks. 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.  In addition, international sales of our PinPoint and/or related technologies may require a Department of Commerce export license, which may not be available in certain geographic markets.

RESULTS OF OPERATIONS

Net Revenues.  For Fiscal 2004 the Companys net revenues from operations were $100,988.  Revenues were derived from the initial sale of the Companys DEVision compression software and software maintenance fees realized for the five months of ownership of Wise Systems Ltd.  There were no revenues recognized in Fiscal 2003.



Cost of Sales.  Fiscal 2004 cost of sales was $2,468,955, the companys first year of revenue.  There was no cost of sales for 2003.  Fiscal 2004 costs included: (i) partial year amortization expense for the July, 2004 purchase of the Wise intangible asset for developed software of $197,278, (ii) purchased equipment for customers of $11,296, (iii) amortization of the DEVision intangible asset purchased software of $761,650, and (iv) impairment write-off for the balance of the DEVision software of $1,498,731.



Selling, General and Administrative Expenses.The Companys SG&A expenses for Fiscal 2004 were $25,844,553, as compared to $6,501,018 for Fiscal 2003, an increase of $19,343,535 or 297.5%.  Salaries and other salary-related expenses were $2,114,831 in Fiscal 2004 and $1,229,193 in Fiscal 2003, an increase of $885,638, or 72.1%.  The increase is due to increases in staffing numbers from the acquisition of Wise Systems, Ltd. and to meet the technical work demands as the Company expands.  Professional fees, including consulting services, were $1,057,071 in Fiscal 2004, as compared to $329,720 in Fiscal 2003, an increase of $727,351, or 220.6%.  The major categories of increases are: (i) accounting and audit fees increased $60,401 due to a full year of services; (ii) legal fees increased $242,175 associated with the Companys SEC filings and costs related to defending against two lawsuits; and (iii) $349,028 of increase due to the Companys extensive use of outside consultants, with expertise in specific areas, to augment its internal technical staff.  Research and development expenses for Fiscal 2004 were $740,566 as compared to $287,414 for Fiscal 2003, an increase of $453,152 or 157.7%.  The Companys research and development expenditures were comprised of staff and consultancy costs expensed primarily on the development of PinPoint.  Rental expense increased to $187,291 in Fiscal 2004 from $64,920 in Fiscal 2003, an increase of $122,371 or



30





188.5%, due to expansion of existing office space during 2004 to accommodate the increased staff as the company expanded.  Other operating expenses were $415,475 and $285,795 in Fiscal 2004 and 2003, respectively, an increase of $129,680, or 45.4%, due to: (i) full year business and professional liability insurance representing a $50,723 increase; (ii) increased marketing and tradeshows expense of $80,491; and (iii) $44,924 increased travel and entertainment as the company expanded domestically.



Depreciation and amortization charge for Fiscal 2004 was $31,572, as compared to $26,734 in Fiscal 2003, an increase of $4,838 or 18.2%.  Included in the Fiscal 2004 depreciation expense is five months of depreciation of the assets acquired in the Wise Systems Ltd. acquisition which occurred in July 2004.



The Company has adopted an Amended and Restated 2003 Stock Incentive Plan to provide an incentive for employee performance and to align employee compensation with the success of the Company.  During Fiscal 2004 and Fiscal 2003, the Company recognized $5,708,956 and $1,285,944, respectively, of employee compensation expense an increase of $4,423,012 or 344.0%.  Fiscal 2004 represents a full year amortization for stock based compensation to employees initiated in the second, third, and fourth quarters of 2003, as well as additional options granted during the first quarter 2004, and generally had a 24 month vesting period.  In addition, as a strategy for maximizing working capital, the Company has elected to compensate some outside consultants in common stock rather than cash.  At the end of each reporting period, the Company remeasures the unearned portion of the stock compensation.  The amortization of the value of the stock compensation to outside consultants was $15,588,791 in Fiscal 2004, as compared to $2,991,298 in Fiscal 2003, an increase of $12,597,493 or 421.1%.  Fiscal 2004 represents a full year amortization for stock based compensation for outside consultant contracts initiated in the second and third quarters of 2003, and generally had a 24 month vesting period.



Interest Expense. Interest and note discount expense for Fiscal 2004 was $1,027,560, compared to Fiscal 2003 of $80,629, an increase of $946,931.  Interest and note discount expense related to the December, 2003 bridge note was $1,013,397 in Fiscal 2004 and $77,629 in Fiscal 2003.  The bridge note was converted to the Companys common stock on April 28, 2004. The balance of the interest expense in Fiscal 2004 of $14,163 was related to the acquisition of Wise Systems in July, 2004.



Net Loss and Net Loss per Share.Net loss was $29,220,176 for Fiscal 2004, compared to a net loss of $6,581,647 for Fiscal 2003, an increase of $22,638,529, or 344.0%.  Net loss per share for Fiscal 2004 was $1.45, based on weighted average shares outstanding of 20,086,795, compared to a net loss per share of $0.79 for Fiscal 2003, and based on weighted average shares outstanding of 8,314,785.  The increase in net loss in Fiscal 2004 is due to the increases in operating expenses, amortization expense of the DEVision intangible asset purchased software of $761,650, interest expense as outlined above, and impairment losses as outlined below.  The major categories of increases in operating expenses are associated with increases in amortization of employee stock-based compensation of $4,423,012 (344.0%), increases in amortization of stock-based compensation to consultants of $12,597,493 (421.1%), increases in professional fees of $727,351 (220.6%), staff increases of $885,638 (72.1%), and increased research and development expense of $453,152 (157.7%).



Impairment Losses.For Fiscal 2003, the Company incurred an impairment loss on acquired software licenses of $140,000 relating to the impairment in carrying value of MCubix licenses acquired from Diagnos, Inc.  The Company terminated an exclusive distributorship agreement with Diagnos in Fiscal 2003 and ceased the use of the MCubix software.  Based on the circumstances, the investment was permanently impaired and the Company recorded impairment for the full carrying value.



On September 18, 2003, we entered into an Alliance Partner Agreement with Telinks Canada Ltd. (Telinks) to jointly provide a broad range of intelligent systems solutions to the existing and future clients of Telinks and Telinks affiliated companies.  The Alliance Partner Agreement provided Guardian with a minimum guarantee of $2 million in revenues.  The sole owner of Telinks was granted a warrant to acquire 200,000 shares of common stock at an exercise price of $2.00 per share.  The fair value of the warrants on the date of grant was used to value the other long-term asset, which was to be expensed to stock compensation on a pro rata basis as the $2 million in guaranteed revenues were recognized.  However, as it became evident the revenues were not materializing, the Company determined that the warrants would not be issued.  This resulted in the reversal of the $145,684 deferred cost as of December 31, 2004.



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.



31





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, the Company determined, based on estimated net intangible value calculations that the asset is impaired and the Company wrote-off $1,498,731 to cost of sales.



Contractual Obligations and Commitments.The Company has entered into a property lease for the corporate headquarters located in Herndon, Virginia.  The future minimum obligations under the lease are as follows:



|                                |  |                     
|------------------------------- |  | --------------------
|For the year ending December 31 |  | Property Leases     
|2005                            |  | $            215,882
|2006                            |  | 287,647             
|2007                            |  | 294,473             
|2008                            |  | 301,451             
|2009                            |  | 382,254             
|Thereafter                      |  | 123,682             
|Total                           |  | $         1,605,389 

LIQUIDITY AND CAPITAL RESOURCES

Working Capital Information as of December 31 (Restated):



|                          |             |  |               |  |               
|------------------------- | ----------- |  | ------------- |  | --------------
|                          | 2004        |  | 2003          |  | 2002          
|Cash and cash equivalents | $   925,999 |  | $     319,229 |  | $           89
|Current assets            | $1,010,798  |  | $     319,429 |  | $           89
|Current liabilities       | 470,301     |  | 2,517,078     |  | 101,317       
|Working capital (deficit) | $   540,497 |  | $(2,197,649)  |  | $(101,228)    



Net Cash and Cash Equivalents.During the year ended December 31, 2004, the Companys cash and cash equivalents increased by $606,770 to $925,999.  This increase was the result of $7,894,334 of cash flows received from the private placement of the Companys common stock and warrants, and proceeds from the exercise of employee stock options, offset by the cash used in operating activities and for the purchase of equipment and Wise Systems Ltd.  The Company used $4,932,402 in operating activities, $115,124 for the purchase of equipment and development of patents, and $2,229,783 in the acquisition of Wise Systems Ltd.



During the year ended December 31, 2003, the Companys cash and cash equivalents increased by $319,140 to $319,229.  This increase was the result of $2,029,895 of cash flows received from the private placement of the Companys common and preferred stock and convertible bridge notes, offset by the cash used in operating activities and for the purchase of equipment, software licenses, and the acquisition of DEVision technology.  The Company used $1,358,585 in operating activities, $37,170 for the purchase of equipment, $140,000 for the purchase of software licenses, and $25,000 as cash consideration for the acquisition of the DEVision technology.  Additionally, the Company paid $150,000 in earnest money on the Wise acquisition.



Net Cash Used in Operations. In Fiscal 2004, the Company had net cash used in operations of $5,082,402.  This increase was of $3,723,817 or approximately 274.1% over Fiscal 2003, and is the result of increased expenditure on salaries due to increased staffing of $885,638, or approximately 72.1%, an increase in fees paid to technical consultants and professional service costs of $727,351, or approximately 220.6%.  Non-cash adjustments to reconcile net loss to net cash used in operations were $982,034 of depreciation and amortization expense, $21,297,748 of amortized stock compensation expense to employees and consultants, $1,498,731 of asset impairment write offs, $1,013,397 of non-cash interest expense and note discount, and unrealized gain of $13,262 on foreign currency transactions.Operating assets were reduced by $9,093 and provided cash from operations.  Cash was used to reduce operating liabilities by $649,867.



In Fiscal 2003, we used net cash in operating activities of $1,358,585.  During the period, we experienced a net loss of $6,581,647 which was offset by non-cash charges of $4,521,606.  The non-cash charges were approximately $4,277,242 of expenses associated with the use of stock-based compensation in lieu of cash compensation to consultants and employees, $26,734 of depreciation and amortization expense, and $77,630 non-cash interest expense and note discount.  Additionally, we paid $140,000 in royalty payments to Diagnos Corporation under an



32





exclusive distribution agreement, which we have subsequently terminated.  The royalty payments were carried on our accounting records as an asset since the royalty payments were intended to be offset against the resale of seven software licenses of the Diagnos product.  As a result of the termination of the agreement with Diagnos, we have recognized and appropriately written-off the software licenses, as impaired assets, which resulted in a further non-cash charge to earnings.   During the year we made a $7,900 security deposit under terms of our office lease agreement.  In addition to cash generated through financing activities, we offset operating expenses by increasing vendor payables by $182,480 and by deferring payroll of $527,076.  The outstanding payroll represents earned salary due to four executives of the Company.



Net Cash Used in Investing Activities.In Fiscal 2004, the Company used $115,124 for the purchase of equipment and the development of patents, and $2,079,783 to acquire the net assets, net of cash, of Wise Systems Ltd.



In Fiscal 2003, the Company used net cash in investing activities of $352,170 for the purchase of $37,170 of equipment, $25,000 of software, $140,000 to acquire seven distributable licenses (royalty payment discussed above) of the Diagnos software, and $150,000 as a good faith deposit at the signing of the letter of intent for the acquisition of Wise Systems, Ltd..



Net Cash Provided by Financing Activities.In Fiscal 2004, the Company had a net cash inflow from financing activities of $7,894,334.  The funds received in the year ended December 31, 2004, comprised $7,188,634 from a private placement of the Companys common stock, $548,200 from another private placement of the Companys common stock, and $157,500 from the exercise of employee options to purchase common stock.



In Fiscal 2003, the Company had a net cash inflow from financing activities of $2,029,895.  Net cash during 2003 was provided from investing activities through the sale of common stock, the sale of preferred stock, and through convertible bridge notes.  At the date of the reverse acquisition, we issued 1,000,000 shares of common stock for net cash proceeds of $500,000.  During August and September of 2003, we issued 133.3 shares of Series C Convertible Preferred Stock to an employee of the Company for net cash proceeds of $200,000.  During October and November of 2003, we issued 545 shares of its Series C Convertible Preferred Stock to investors, in a private placement through Berthel Fisher & Company Financial Services, Inc., for net cash proceeds after placement agent and escrow fees of $629,895.  During December 2003, we entered into a series of convertible bridge notes for cash proceeds of $700,000.



Additional Capital.The Company will require additional capital during its fiscal year ending December 31, 2005, to implement its business and growth strategies, including cash for (i) additional personnel  increase in operating expenses, (ii) investment in acquisitions as part of the Companys growth and technology development plans, and (iii) working capital requirements to implement the Companys business strategies.  Such additional capital may be raised through additional public or private financings, borrowings, or other available resources.



On March 25 and May 15, 2004, the Company accepted direct investments from two investors of $64,000 and $23,200, respectively, on the same terms and conditions as the private placement offering.  The investors were allowed to invest outside the private placement offering as a result of their prior affiliation with the Company.  The investors received 40,000 and 14,500 shares of common stock, as well as, 10,000 and 3,625 stock purchase warrants at a price of $2.65 per share, expiring eighteen months from the date of issuance.



On April 28, 2004, all holders of the convertible bridge financing notes elected to convert their outstanding principal and accrued interest into equity, on the same terms and conditions as the private placement.  At that time, the note holders converted $700,000 in outstanding principal and $99,184 of accrued interest into 499,480 shares of Guardian common stock (converted at $1.60 per share) and 124,870 stock purchase warrants ($2.65 per share expiring eighteen [18] months from date of issue).



During April and May 2004, the Company closed a $7,992,015 private placement of 4,995,010 shares and 1,248,752 warrants.  The securities were placed by Berthel Fisher.  The offering generated net proceeds of $7,188,634 after deducting commissions, investment banking fees, and expenses of $803,381.



On November 8, 2004, the Company accepted direct investments from two investors of $416,000 and $45,000, respectively, on the same terms and conditions as the private placement offering.  The investors received 260,000 and 28,125 shares of common stock, as well as, 65,000 and 7,031 stock purchase warrants at a price of $2.65 per share, expiring eighteen months from the date of issuance.





33





In January 2005, the Company received proceeds of approximately $1,000,000 from a private placement to certain accredited investors of 500,000 shares of common stock.



To the extent that additional capital is raised through the sale of equity or equity-related securities of the Company or its subsidiaries, the issuance of such securities could result in dilution to the Companys stockholders.  No assurance can be given that the Company will have access to the capital markets in the future, or that financing will be available on acceptable terms to satisfy the Companys cash requirements or to implement its 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.  Therefore, 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.As of December 31, 2004, 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 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 capital, and the success of its future operations.



The Company is currently seeking additional funding to expand marketing efforts and product development. There can be no assurance that such funds will be available to the Company or that the marketing and product development efforts will be successful.



The Companys ability to continue as a going concern and meet its obligations as they come due is dependent upon its ability to raise sufficient cash as discussed above.  The existing cash balance, at December 31, 2004, of $925,999 and the approximately $1,000,000 of proceeds from a stock subscription agreement the Company received during January 2005, is expected to provide working capital for operations through May 31, 2005.  The Company, in May 2005, entered into a placement agent agreement with an investment bank to offer a private placement financing on a best efforts basis up to $10,000,000.  Management is confident that the entire $10,000,000 will be raised prior to the expiration of the placement agent agreement.  The Company anticipates 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.  Should the Company be unable to raise sufficient cash to continue operations at a level necessary to achieve commercially viable sales levels, the liquidation value of the Companys non-current assets may be substantially less than the balances reflected in the financial statements and the Company may be unable to pay its creditors.



Subsequent Events.In December 2004, the Company received a subscription for approximately $1,000,000 for the purchase 500,000 shares of common stock.  The proceeds from the subscription transaction were received in January 2005.



On January 20, 2005, the Company entered into an agency agreement, effective January 14, 2005, with an investment bank to act as the Companys non-exclusive placement agent with regard to sales of the Companys securities in a private placement of up to $20 million in equity, equity-related or debt securities.  The private placement is to be effected in reliance upon the exemption from the registration requirements set forth in Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder and such securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.



The Company has agreed to pay to the investment bank upon closing cash compensation in the amount of 8% of the aggregate gross proceeds of the securities sold in the private placement and issue warrants equal to 15% of the shares of common stock sold or issued in the offering or upon conversion of any convertible securities issued in the offering.  The terms of the warrants issuable to the investment bank shall be identical to the warrants issued in the private placement.  If no warrants are issued in the offering, the placement agents warrants will be exercisable at a price of 130% of the price of any stock sold in the offering to investors or the conversion price of any convertible securities sold in the offering, shall have a cashless exercise provision commencing one year after issuance, a five year term, a piggyback registration right, and other customary provisions.



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The agency agreement was for a term of forty-five days but would terminate automatically upon completion of the offering.  The Agreement contains certain confidentiality and indemnification provisions, and provides for arbitration in the event of certain disputes between the parties.  The agency agreement terminated on March 6, 2005.



On January 26, 2005, the Company entered into a placement agreement with an investment bank to act as the Companys non-exclusive placement agent with regard to sales of the Companys securities in a private placement of up to $20 million in equity securities.  The private placement is to be effected in reliance upon the exemption from the registration requirements set forth in Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder and such securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.  The private placement will be made exclusively to certain accredited investors who are also institutional investors or who have a net worth of more than $5 million. The terms of the securities have not been determined as of the date of this Report and are subject to the negotiation of definitive purchase agreements between the Company and the investors.



As compensation for the placement agents services, the Company has agreed to pay to the investment bank upon closing of the private placement a commission equal to 7% of the aggregate gross proceeds of the securities sold in the private placement, a non-accountable expense allowance of 1% of the aggregate gross proceeds of the securities sold in the private placement, and issue warrants equal to 15% of the shares of common stock sold or issued in the private placement (excluding stock underlying any warrants issued to investors).  The placement agents warrants will be exercisable at any time during the five year period from the date of issuance.  The exercise price and other terms of the placement agents warrants shall be identical to the warrants issued to investors in the private placement.  If no warrants are issued to investors, the placement agents warrants will be exercisable at a price of 130% of the price of any stock sold in the private placement to investors or if no such warrants are issued to investors, both the Company and the placement agent will negotiate the exercise price of the warrants in good faith. The placement agents warrants shall have a cashless exercise provision and a one-time piggyback registration right.



The placement agreement was for a term of thirty days but would terminate automatically upon completion of the sales of the Companys securities to investors in the private placement.  The Company may terminate the placement agreement at any time.  The placement agreement also contains certain confidentiality and indemnification provisions.  On February 28, 2005, the Company extended this placement agreement for an additional sixty (60) days.



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 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 element 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



35





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 of a detail program design, completion of a working model.  Thereafter, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value, unless a high-risk development issue exists.  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, and high-risk development issues are addressed.



Valuation of Long-Lived Assets Including Acquired Intangibles.  We test long-lived assets, including other intangible assets, under the guidance of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate that the carrying value of such an asset or group of assets may not be recoverable.  Events or circumstances that might indicate an impairment of carrying value include:

·

a significant decrease in the market value of the asset or asset group

·

a significant adverse change in the extent or manner in which the asset or asset group is used or in its physical condition

·

a significant adverse change in legal factors or in the business climate that could affect the value of the asset or asset group, including an adverse action or assessment by a regulator

·

an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of the asset or asset group

·

a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of the asset or asset group.



When the need for such a test is indicated, we consider such factors as whether the amortization of the carrying values for these assets can be recovered through forecasted undiscounted cash flows over their remaining economic life.



Issuance of Stock for Non-Cash Consideration.Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), defines 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 considers the following facts in determining the measurement date of each transaction: forfeit ability of the equity awards, existence of performance commitments, and existence of vesting requirements.





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Impairment of Excess of Purchase Price Over Net Assets Acquired.  The Company has 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.



RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which addresses the accounting for share-based compensation transactions.  SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted and recognized in the statement of operations based on their fair value. SFAS No. 123(R) will be effective for public companies that file as small business issuers as of the first interim or annual reporting period that begins after December 15, 2005. The Company is evaluating the provisions of this standard.  Depending upon the number and terms of options that may be granted in future periods, the implementation of this standard could have a material impact on the Company's financial position and results of operations.



In November 2004, the FASB issued SFAS No. 151, "Inventory Costs. This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing" to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) In addition, this Statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement will be effective for the Company beginning in 2005.  This pronouncement is not expected to have a material impact on the Companys financial position or results of operations.



In December 2004, FASB issued SFAS NO. 152, Accounting for Real Estate Time-Sharing Transactions  an Amendment of FASB Statements No. 66 and 67.This statement amends FASB Statement No. 66, Accounting for Sales of Real Estate,to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions.  This statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (i) incidental operations and (ii) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions.  The accounting for the operations and costs is subject to the guidance in SOP 04-2.  This statement is effective for financial statements for fiscal years beginning after June 15, 2005.  This pronouncement is not expected to have a material impact on the Companys financial position or results of operations.



In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-Monetary Assets, an Amendment of Accounting Principles Board ("APB") No. 29. This statement amends APB Opinion No. 29, "Accounting for Non-Monetary Transactions.  Earlier guidance had been based on the principle that exchanges of non-monetary assets should be based on the fair value of the assets exchanged and APB No. 29 included certain exceptions to this principle.  However, FASB 153 eliminated the specific exceptions for non-monetary exchanges with a general exception rule for all exchanges of non-monetary assets that do not have commercial and economic substance.  A non-monetary exchange has commercial substance only if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for non-monetary exchanges occurring in fiscal periods beginning after June 15, 2005.  This pronouncement is not expected to have a material impact on the Companys financial position or results of operations.



ITEM 7.  FINANCIAL STATEMENTS

The Consolidated Financial Statements and supplementary data are included in this Annual Report on Form 10-KSB/A as of December 31, 2004 (Restated) beginning on page 57.



ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

The following disclosure has been updated solely for the purpose of disclosing changes that occurred during fiscal year 2005 and during the fiscal year 2006 through the date of the filing of this Amendment.



Fiscal Year 2003



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Effective July 9, 2003, Guardian dismissed its principal independent accountants, Schumacher & Associates, Inc.  Schumacher & Associates, Inc. had been engaged by Guardian as the principal independent accountants to audit the financial statements of Guardian for the fiscal year ended December 31, 2002.  Schumacher & Associates, Inc.s reports on the financial statements of Guardian filed with the Securities and Exchange Commission with regard to the fiscal year ended December 31, 2002, contained no adverse or disclaimer of opinion; however, its report did contain a going concern explanatory paragraph.



The action to dismiss Schumacher & Associates, Inc., as Guardians principal independent accountants has been taken primarily as a result of the change of control of Guardian arising from the reverse acquisition of Guardian by RJL Marketing Services Inc. (RJL), on June 26, 2003.  As a condition of the acquisition, the previous executive officers and members of the board of directors of Guardian resigned effective as of the closing of the acquisition and were replaced by officers and directors designated by RJL.  The new board of directors of Guardian has decided to engage the independent public accountants of RJL to audit the financial statements of Guardian for the fiscal year ended December 31, 2003.



The decision to change accountants was recommended and approved by the board of directors of Guardian.



In connection with the audit of Guardian's financial statements for the fiscal year ended December 31, 2002, and in connection with the subsequent interim period up to the date of dismissal, there were no disagreements with Schumacher & Associates, Inc., on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Schumacher & Associates, Inc., would have caused Schumacher & Associates, Inc., to make reference to the subject matter of the disagreements in its report.



Effective July 10, 2003, Guardian's  Board of Director's  approved the engagement of Aronson & Company to serve as Guardian's independent public  accountants and to be the principal  accountants to conduct the audit of Guardian's  financial  statements  for the fiscal year ending December 31, 2003, replacing  the firm of  Schumacher & Associates, Inc.



During Guardian's  two most recent  fiscal years ended December 31, 2001 and 2002, Guardian did not consult with  Aronson & Company regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-B.  However, Aronson & Company were engaged by RJL to audit RJLs financial statements for the period ended December 31, 2002.



There were no disagreements with our accountants on accounting and financial disclosure in 2003.



Fiscal Year 2005

Effective July 19, 2005, Guardian dismissed its principal 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 to serve as Guardian's registered public accountants and to be the principal 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.





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During Guardian's  two most recent  fiscal years ended December 31, 2003 and 2004, Guardian did not consult with  Goodman & Company regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-B.



Fiscal 2006

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



ITEM 8A.   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 information 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 these evaluations, on May 15, 2006, the Certifying Officers determined that, for the reasons discussed below, the Companys disclosure controls were not effective as of the end of the period covered by this Report. The Certifying Officers had previously concluded that the Companys disclosure controls and procedures were effective as of the end of the period covered by this Report.



In February 2006, the Companys management and the Audit Committee of the Companys Board of Directors concluded that the Company needed to restate certain of the Companys consolidated financial statements to correct errors in the application of accounting principles with respect to the accounting for: (1) the beneficial conversion feature embedded in convertible notes issued by the Company in 2003; (2) the fair value calculation of warrants issued to placement agents and convertible note holders issued by the Company in 2003 and 2004; and (3) the contractual redemption value of common stock issue by the Company in 2003 as compensation in an asset purchase transaction.  Managements decision, with the concurrence of the Audit Committee of the Companys Board of Directors, to effect the restatement was made in response to comments received from the staff of the SEC as part of the staffs periodic review of our filings as well as following consultation with our former independent registered public accountants, Aronson & Company, and our current independent registered public accountants, Goodman & Company, L.L.P.  As a result, the Company has restated its historical consolidated financial statements for the fiscal years ended December 31, 2004 and 2003, and will amend its consolidated financial statements for the fiscal quarters ended March 31, June 30, and September 30, 2005.



The above restatements are described in more detail in Note 2 to our consolidated financial statements included in this Form 10-KSB/A.



Controls over the application of accounting policies are within the scope of disclosure controls.  Therefore, management has concluded that there were weaknesses in the Companys internal controls over financial reporting as of the end of the periods under restatement.  Management of the Company and the Audit Committee considered what changes, if any, were necessary to the Companys disclosure controls and procedures to ensure that the errors described above would not re-occur and to provide that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Companys disclosure obligations under the Exchange Act, and the rules and regulations promulgated thereunder.  In its review, management and the Audit Committee noted that (i) during the fourth quarter of 2005, the Company adopted revised disclosure controls and procedures, and (ii) the errors described above did not result from the failure of the Companys disclosure controls and procedures to make known to management (including the Certifying Officers) and the Companys auditors the facts concerning the Companys issuances of certain stock with certain redemption rights that required certain balances to be reclassified out of permanent equity on the Companys balance sheet, certain embedded conversion features to be reclassified as derivative liabilities, and certain financial instruments to be



39





revalued to appropriate fair market value on the appropriate measurement date.  Rather, the Audit Committee determined that these matters may be best addressed by: (a) reviewing accounting literature and other technical materials with the Companys independent 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 staff on new and existing accounting pronouncements and their application, 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.  These steps will be implemented by the Company in the second quarter of 2006 and will be ongoing.



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 8B.   OTHER INFORMATION

The Company plans to hold its next Annual Meeting of Stockholders on Thursday, June 16, 2005, in Herndon, Virginia.  If a stockholder wishes to submit a proposal for the Companys 2005 Annual Meeting, the deadline for submitting such proposals to the Company is April 17, 2005.





PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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



|                    |     |                                                                         
|------------------- | --- | ------------------------------------------------------------------------
|Name                | Age | Title                                                                   
|Michael W. Trudnak  | 52  | Chairman of the Board, Chief Executive Officer, Secretary, and Treasurer
|Robert A. Dishaw    | 58  | President, Chief Operating Officer, and Director                        
|Sean W. Kennedy     | 55  | Director                                                                
|M. Riley Repko      | 47  | Director                                                                
|Charles T. Nash     | 55  | Director                                                                
|William J. Donovan  | 53  | Chief Financial Officer                                                 
|Darrell E. Hill     | 51  | Vice President                                                          
|Steven V. Lancaster | 50  | Vice President                                                          



Guardians certificate of incorporation provides that the board of directors shall be divided into three classes and that, if the board consists of five directors, that the first class shall consist of two directors who shall hold office for a term of one year from the date of ratification of their election by stockholders at the next annual meeting held to consider such matter, the second class shall consist of one director who shall hold office for a term of two years from the date of the ratification of his election by stockholders at the next annual 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 ratification of their election by stockholders at the next annual meeting of stockholders held to consider such matter.  At each succeeding annual meeting of stockholders, the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting.  Mr. Nash and Mr. Repko have been designated as Class I directors and, at our 2004 annual meeting of stockholders, were elected for terms that should expire in 2007.  Mr. Kennedy has been designated as a Class II director and his current term should expire at the next annual meeting of stockholders.  Messrs. Dishaw and Trudnak have been designated as Class III directors and their current terms should expire in 2006.  The Company does not currently pay cash compensation to its directors; however, directors receive non-qualified stock options for services rendered as a director.  Officers are elected by the Board of Directors and hold office until their successors are chosen and qualified, until their death or until they resign or are terminated from office.  All corporate officers serve at the discretion of the Board of Directors.  There are no family relationships between any director or executive officer and any other director or executive officer of the Company.



Biographical information with respect to the present executive officers and directors of Guardian are set forth below.



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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 designated as a Class III director of Guardian effective June, 2003.    From March 2003 and until the present, 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.



Robert A. Dishaw, President, Chief Operating Officer and Director.

Mr. Dishaw was appointed President and Chief Operating Officer and designated as a Class III director of Guardian effective as of June, 2003.  FromOctober 2002 and until the present, Mr. Dishaw has been President and a director of RJL. From December 2000 to April 2002, Mr. Dishaw was the Executive Vice President and General Manager of Diagnos Inc., a publicly held Canadian company, which has developed and markets certain knowledge extraction software technology. From June 1999 to November 2000, Mr. Dishaw was a management consultant to certain public and private companies in the U.S. and Canada, providing capital raising, operational, sales and marketing services to such companies. From April 1997 to January 1999, Mr. Dishaw was President of HDB Communications, Inc., a private corporation that provided installation services for Canadian digital satellite providers. Mr. Dishaw served for more than seven years in the U.S. Air Force and for ten years in the U.S. Diplomatic Service serving as a Second Secretary for Administration/Political reporting at U.S. Embassies in Brazil, Guyana, Zaire, Burma and Czechoslovakia.



Sean W. Kennedy, Director.

Mr. Kennedy was designated as a Class II director of Guardian effective in July, 2003 to fill a vacancy on the board of directors created by increasing the board of directors to five members.  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 telecommunication 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.



M. Riley Repko, Director.

Mr. Repko was designated as a Class I director of Guardian effective as of October 1, 2003.  Mr. Repko was elected Chairman of the Board of Directors of IQBiometrix in June 2003, a public company. From June 2001 through April 2003, Mr. Repko served as Vice President - Sales & Business Development for TRW Systems, Inc., Global IT Division. From December 1998 through June 2001, Mr. Repko served as Managing Director, Asia-Pacific Channels for Siebel Systems, Inc.   Since June 1994, Mr. Repko has been a principal of The Repko Group, a business consulting firm. Mr. Repko's academic credentials include attending the Senior Military School at the National Defense University; an MS from the U.S. Air Force's Air War College; an M.B.A. (summa cum laude) from St. Mary's University, Texas in Operations Management; a B.S. in Electrical Engineering from the Air Force Institute of Technology, Ohio; and a B.S. in Physics/Math (cum laude) from St. Bonaventure University, New York.



Charles T. Nash, Director.

Mr. Nash joined the Board of Guardian to fill the vacancy created by the resignation of Mr. Walter Ludwig.  Mr. Nash comes to Guardians Board with 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 the high level technologies developed by small commercial companies inserted quickly, efficiently and inexpensively into applications/tools for



41





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 the Emerging Technology Group of Santa Barbara Applied Research, Inc, a privately held defense consulting and emerging technology marketing firm.  Prior to that, Mr. Nash served in various strategic military leadership roles, including:  head of the 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 $18B; executive assistant to the Deputy Commander in Chief, US Naval Forces Europe; and executive and commanding officer, Strike Fighter Squadron 137.  Retiring in 1998 at the rank of Captain USN.  Mr. Nash is a frequent guest military and aviation analyst for FOX News Channel, WABC Talk Radioand several regional radio stations.  Mr. Nash earned a BS Aeronautics degree in 1973 from Parks College of Aeronautical Technology, Saint Louis University; Cahokia, IL.



William J. Donovan, Chief Financial Officer.

Mr. Donovan has been Chief Financial Officer of Guardian since August 18, 2003.  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 the CFO, Secretary, Treasurer and a Director at Riparius Corporation, a privately held 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 has been on the Advisory Board for Nogika Corporation, a privately held software company since 2001.



Darrell E. Hill, Vice President.

Mr. Hill was hired as Vice President of Guardian Technologies in May 2003.  From December 2000 to January 2002 Mr. Hill served as Director of Network Services for Global One Telecommunications, an international telecommunications company.  From October 1998 until December 2000 Mr. Hill was Head of Program Management for the United States, Canada and Latin America for Global One. From 1993 until October 1998 Mr. Hill was Sr. Group Manager of Partnership Marketing for Sprint International in Reston, VA.  From 1979 to 1993, Mr. Hill held various positions within Sprint International, including management positions within Marketing, Systems Development, Customer Service, Order Fulfillment and Billing. Mr. Hill has developed a wide breadth of experience as a business executive responsible for large project management, operations support and IT development in his 23 years in the telecommunications industry.



Steven V. Lancaster, Vice President.

Mr. Lancaster was hired as Vice President of Guardian Technologies in May 2003.  From February 2001 to December 2002 Mr. Lancaster served as Assistant Vice President Global Large Account Sales for Global One Telecommunications, an international telecommunications company.  From November 1997 until February 2001 Mr. Lancaster was Executive Director Multinational Sales Management for the US, Asia, Europe and Latin America regions or Global One. From 1990 until November 1997 Mr. Lancaster was Group Manager, Global Account Management for Sprint International in Reston, VA.  From 1981 to 1990, Mr. Lancaster held various Engineering, Marketing and Sales positions with GTE, British Telecom and Sprint International. Mr. Lancaster has developed a wide breadth of experience as a business executive responsible for international business development, marketing, large account sales and management in his 22 years in the telecommunications industry.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Under the securities laws of the United States, the Companys directors, its executive officers, and any person holding more than ten percent 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.





42





Except as set forth below, based solely upon a review of Forms 3 and 4 submitted to us pursuant to Rule 16a-3 under the Exchange Act, during our most recent fiscal year and Forms 5 with respect to our most recent fiscal year, the number of (1) late reports, (2) transactions that were not reported on a timely basis during the fiscal year ended December 31, 2003, and (3) any known failure to file a required report by officers, directors, and beneficial owners of more than 10% of our common stock is as follows:  based upon information provided to Guardian from Reporting Persons, M. Riley Repko failed to timely file Forms 3 and 5 with respect to the year ended December 31, 2003.

AUDIT COMMITTEE EXPERT

The Companys Board of Directors has determined that the Company does not have an audit committee financial expert, as defined in Regulation S-K promulgated under the Securities and Exchange Act of 1934, serving on its audit committee.  We have actively pursued qualified candidates for this board position, however, as of this date we have been unable to identify an individual with the necessary qualifications to meet the requirements of this position.  We are committed to identifying a qualified individual by third quarter 2005.

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 is filed as an exhibit to this report and has been posted to our website.  Our website address is www.guardiantechintl.com.





ITEM 10.  EXECUTIVE COMPENSATION

The following table sets forth the aggregate cash compensation paid for services rendered during the last three years by each person serving as our Chief Executive Officer and each of our four most highly compensated executive officers (collectively, the Named Executive Officers).  The information provided for Mr. Moorer is relevant to his role as the former President and Chief Executive Officer of Guardian, prior to the reverse acquisition, effective June 26, 2003.  On that date Mr. Moorer resigned his positions with the Company.



SUMMARY COMPENSATION TABLE

|                                               |  |                     |  |                        |  |           |  |                                   |  |                                   |  |                           
|---------------------------------------------- |  | ------------------- |  | ---------------------- |  | --------- |  | --------------------------------- |  | --------------------------------- |  | --------------------------
|                                               |  | Annual Compensation |  | Long-Term Compensation |  |          
|Name and Principal Position                    |  | Year                |  | Salary
($)             |  | Bonus
($) |  | Other Annual Compensation ($) (7) |  | Securities Underlying Options
(#) |  | All Other Compensation ($)
|J. Andrew Moorer (1)
President & CEO           |  | 2004
2003
2002      |  | -
72,600
75,000        |  | -
-
-     |  | -
-
-                             |  | -
-
-                             |  | -
33,814
45,000           
|Michael W. Trudnak (2)
Chief Executive Officer |  | 2004
2003           |  | 275,000
275,000        |  | -
-       |  | 6,000
6,000                       |  | 60,000
400,000                    |  | -
-                       
|Robert A. Dishaw (3)
President & COO           |  | 2004
2003
2002      |  | 275,000
275,000
70,865 |  | -
-
-     |  | 6,000
6,000
1,546                 |  | 210,000
-
-                       |  | -
-
-                     
|William J. Donovan (4)
Chief Financial Officer |  | 2004
2003           |  | 150,000
57,560         |  | -
-       |  | -
-                               |  | 610,000
200,000                   |  | -
-                       
|Darrell E. Hill (5)
Vice President             |  | 2004
2003           |  | 125,000
76,923         |  | -
-       |  | -
-                               |  | 610,000
200,000                   |  | -
-                       
|Steven V. Lancaster (6)
Vice President         |  | 2004
2003           |  | 125,000
76,923         |  | -
-       |  | -
-                               |  | 610,000
200,000                   |  | -
-                       



(1)

Mr. Moorer compensation reflects cash compensation paid towards his base salary, as well as, other compensation which reflects stock grants in lieu of salary and bonuses.  Mr. Moorer accepted a reduction in his base salary in exchange for stock grants.

(2)

Mr. Trudnak became the Chief Executive Officer of RJL on January 1, 2003.  Mr. Trudnak earned $44,352.60 of salary during 2004, which is accrued and unpaid as of December 31, 2004.



43





(3)

Mr. Dishaw, the founder of RJL Marketing Services, Inc. earned $44,352.60 of salary during 2004, which is accrued and unpaid as of December 31, 2004.

(4)

Mr. Donovan became an executive officer on August 18, 2003.

(5)

Mr. Hill became an executive officer on May 19, 2003.

(6)

Mr. Lancaster became an executive officer on May 19, 2003.

(7)

Represents automobile allowance payments.

OPTION GRANTS IN THE LAST FISCAL YEAR

|                    |  |                                                            |  |                                                        |  |                                  |  |                   |  |            |  |           
|------------------- |  | ---------------------------------------------------------- |  | ------------------------------------------------------ |  | -------------------------------- |  | ----------------- |  | ---------- |  | ----------
|                    |  | Individual Grants                                          |  | Appreciation for Option Term (3)                      
|Name                |  | Number of Securities Underlying Options Granted (1)(2) (#) |  | % of Total Options Granted to Employees In Fiscal Year |  | Exercise or Base Price ($/Share) |  | Expiration Date   |  | 5%         |  | 10%       
|Michael W. Trudnak  |  | 60,000                                                     |  | 1.9%                                                   |  | $0.91                            |  | February 13, 2014 |  | $150,150   |  | $159,600  
|Robert A. Dishaw    |  | 210,000                                                    |  | 6.8%                                                   |  | 0.43                             |  | February 13, 2014 |  | $625,800   |  | $659,400  
|William J. Donovan  |  | 610,000                                                    |  | 19.6%                                                  |  | 0.52                             |  | February 13, 2014 |  | $1,762,900 |  | $1,860,500
|Darrell E. Hill     |  | 610,000                                                    |  | 19.6%                                                  |  | 0.52                             |  | February 13, 2014 |  | $1,762,900 |  | $1,860,500
|Steven V. Lancaster |  | 610,000                                                    |  | 19.6%                                                  |  | 0.52                             |  | February 13, 2014 |  | $1,762,900 |  | $1,860,500



(1)

Included for each individual were 10,000 qualified options to acquire shares of common stock.  These options vested immediately and were exercisable for ten years.

(2)

Non-qualified, ten-year exercisable options were granted to each individual:  Trudnak (50,000), Dishaw (200,000), Donovan (600,000), Hill (600,000), and Lancaster (600,000).  The options granted to Messrs. Trudnak and Dishaw vested immediately upon grant.  The options granted to Messrs. Donovan, Hill and Lancaster vest on their two year anniversary of employment.

(3)

Potential realizable values are based on the fair market value per share on the date of the grant and represent the hypothetical gains that could be achieved for the respective options if exercised and sold at the end of the option term for the appreciated price.  The dollar amounts set forth in these columns are the result of calculations at the five percent and ten percent rates of appreciation set by the SEC, and are not intended to forecast possible future appreciation, if any, of Guardians Common Stock price.  There can be no assurance that such potential realizable values will not be more or less than indicated in the table above.

AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

The number of unexercised options held by each of the Named Executive Officers who held options as of December 31, 2004 and the value of unexercised in-the-money options as of December 31, 2004, are indicated in the table below.

|                    |  |                             |  |                |  |                                                                        |  |                                                                                 |  |                |  |              
|------------------- |  | --------------------------- |  | -------------- |  | ---------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | -------------- |  | -------------
|                    |  |                             |  |                |  | Number of Securities Underlying Unexercised Options at Fiscal Year End |  | Value of Unexercised In-The-Money Options at Fiscal Year End                (1)
|Name                |  | Shares Acquired on Exercise |  | Value Realized |  | Exercisable                                                            |  | Unexercisable                                                                   |  | Exercisable    |  | Unexercisable
|Michael W. Trudnak  |  | -                           |  | -              |  | 460,000                                                                |  | -                                                                               |  | $   1,940,500  |  | $        -   
|Robert A. Dishaw    |  | -                           |  | -              |  | 210,000                                                                |  | -                                                                               |  | $      868,000 |  | $        -   
|William J. Donovan  |  | -                           |  | -              |  | 210,000                                                                |  | 600,000                                                                         |  | $      871,500 |  | $   2,490,000
|Darrell E. Hill     |  | 70,000                      |  | $  227,500     |  | 140,000                                                                |  | 600,000                                                                         |  | $      581,000 |  | $   2,490,000
|Steven V. Lancaster |  | 40,000                      |  | $ 134,000      |  | 170,000                                                                |  | 600,000                                                                         |  | $      705,000 |  | $   2,490,000





(1)

Calculated on the basis of the fair market value of $4.65 of the Common Stock on December 31, 2004, minus the per share exercise price.





44





EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS

We entered into employment agreements with Mr. Dishaw and Mr. Trudnak.  Mr. Dishaws employment agreement commenced on October 23, 2002, and Mr. Trudnaks employment agreement commenced on January 1, 2003.  We amended those agreements effective December 10, 2004. The amended agreements are for a three year term commencing June 26, 2003, and are renewable for one year terms.  The employment agreements provide for annual compensation to Messrs. Dishaw and Trudnak of $275,000.  The agreements provide 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 agreements may be terminated upon the death or disability of the employee or for cause.  In the event the agreements are 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. Each 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.



We have also entered into employment agreements with Mr. Darrell E. Hill, Vice President, Program Management, and Mr. Steve Lancaster, Vice President, Business Development which we amended December 10, 2004.  The amended agreements are essentially the same as the agreements with Messrs. Dishaw and Trudnak, except that the agreements provide for base salaries of $125,000 per annum.



We have also entered into an employment agreement with Mr. Donovan, Chief Financial Officer of Guardian.  Mr. Donovans employment agreement is essentially the same as the agreements with Messrs. Dishaw and Trudnak, except that Mr. Donovans agreement provides for a base salary of $150,000 per annum.  Further, if Mr. Donovan terminates his employment agreement by reason of: a change in the location of his workplace beyond a 50 mile radius of Guardians principal address; a material reduction in his responsibilities or number of persons reporting to him; a material demotion; or an adverse change in his title, Mr. Donovan is entitled to be paid his base salary for one year following any such termination.  Also, in the event of a change in control of Guardian and, within 12 months of such change of control, his employment is terminated by the acquirer or one of the events in the immediately preceding sentence occurs, Mr. Donovan is entitled to be paid his base salary for eighteen months from the date of such termination or event.  A change of control would include the occurrence of one of the following events:

·

the approval of the shareholders 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 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, 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 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.



Effective as of December 19, 2003, we entered into employment agreements with Walter Ludwig, a director of Guardian, and Victor T. Hamilton in connection with the acquisition of certain assets of Difference Engines Corporation by Guardian.  The employment agreements are essentially similar to the employment agreements with Mr. Dishaw and Mr. Trudnak, except that they provide for an annual base salary of $120,000 for Mr. Ludwig and $90,000 for Mr. Hamilton. The agreements also include a change of control provision similar to that contained in Mr. Donovans employment agreement, except that Guardian is obligated to pay the annual base salary for twelve (12) months following the change of control termination.  Mr. Ludwig resigned as a director, officer and employee of Guardian on May 18, 2004 and his employment agreement terminated as of such date.



45







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 $.50 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.

AMENDED AND RESTATED 2003 STOCK INCENTIVE PLAN

On August 29, 2003, our board of directors adopted our 2003 Stock Incentive Plan and amended and restated the plan on December 2, 2003 (Plan).  The Plan was approved by stockholders at the special meeting of our stockholders that was held on February 13, 2004.



The Plan is intended to foster the success of Guardian and its subsidiaries by providing incentives to Eligible Employees, directors and consultants to promote the long-term financial success of Guardian.  The Plan is designed to provide flexibility to Guardian in our ability to motivate, attract, and retain the services of Eligible Employees, directors and consultants upon whose judgment, interest, and special effort the successful conduct of our operation is largely dependent.  The Plan applies to all grants of stock options granted on or after the date the Plan is approved or adopted by our directors unless otherwise indicated.   As of December 31, 2004, the market value of the 30,000,000 shares underlying the options issuable under the Plan was $139,500,000.



The Plan is administered by the Compensation Committee (Committee) of the board of directors and awards are made by the Committee.  The Committee has all powers necessary or desirable to administer the Plan.  The Committee has the power to determine the terms and conditions upon which awards may be made, interpret the Plan, accelerate the exercisability of any award, establish, amend or waive rules or regulations for the Plans administration, and make all other determinations and take all other actions necessary or advisable for the administration of the Plan in its sole judgment and discretion.  The Committee has the authority to grant awards to employees, directors and consultants selected by it, which awards are to be evidenced by an agreement.



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, $.001 par value per share. 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 a committee thereof may determine from time to time.



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 Committee. The Plan also provides for the Incentive Options available to any officer or other employee of Guardian or its subsidi­aries as selected by the Committee.



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 the 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 (10%) of the total combined voting power of all classes of stock of



46





his employer corporation or of its parent or subsidiary corporation, not less than one hundred ten percent (110%) of the fair market 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.



Awards may be made to approximately twenty-three employees and former employees of Guardian, our three non-employee directors, and to consultants to Guardian.  Because awards under the Plan are determined by the board, we cannot determine the benefits or amounts of awards that will be received or granted in the future under the Plan.  As of December 31, 2004, 5,190,000 options had been granted under the Plan.  The Plan is the only plan pursuant to which options and shares may be granted or issued.



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.  The participant will recognize ordinary income upon the exercise of the option in an amount equal to the excess of the fair market value of the option shares on the exercise date over the option price.  Such income will be treated as compensation to the participant subject to applicable withholding tax requirements.  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.  Any appreciation in value after the time of exercise will be taxable to the participant as capital gain 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 a tax preference item for purposes of determining the alternative minimum tax liability, if any, of the participant in the year of exercise.  Guardian will not be entitled to a deduction with respect to any item of tax preference.



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 nor 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 short 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.





ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information with respect to the beneficial ownership of our common stock owned as of as of March 19, 2004, and before by:

·

Each person known by the Company to be the beneficial owner of more than 5% of the outstanding common stock;

·

each person serving as an executive officer or director of the Company; and



47





·

all of our executive officers and directors of the Company as a group.



Percentage of beneficial ownership is based on 28,555,956 shares of Common Stock issued and outstanding as of March 15, 2005.



|                                                             |                                         |                                              
|------------------------------------------------------------ | --------------------------------------- | ---------------------------------------------
|Name Beneficial Owner                                        | Number of Shares
Beneficially Owned (1) | Percentage of Common Stock Beneficially Owned
|Robert A. Dishaw                                             | 5,367,500 (2)                           | 18.80%                                       
|Michael W. Trudnak                                           | 5,311,000 (3)                           | 18.60%                                       
|Sean W. Kennedy                                              | 33,000                                  | *                                            
|M. Riley Repko                                               | 9,000                                   | *                                            
|Charles T. Nash                                              | 8,000                                   | *                                            
|William J. Donovan                                           | 810,000 (4)                             | 2.84%                                        
|Steven V. Lancaster                                          | 970,000 (5)                             | 3.40%                                        
|Darrell E. Hill                                              | 940,000 (6)                             | 3.29%                                        
|Tobin Family Trust                                           | 2,538,761 (7)                           | 8.89%                                        
|**All executive officers and directors as a group (8 people) | 13,448,500                              | 47.10%                                       



(1)

Beneficial ownership is determined in accordance with Rule 13d-3 under the Exchange Act.  In general, a person who has voting power and/or investment power with respect to securities is treated as a beneficial owner of those securities.  For purposes of this table, shares subject to outstanding warrants and options exercisable within sixty (60) days of the date of this Annual Report are considered as beneficially owned by the person holding such securities.  To our knowledge, except as set forth in this table, we believe that the persons named in this table have sole voting and investment power with respect to the shares shown.  Except as otherwise indicated, the address of each of the directors, executive officers and 5% shareholders in this table is as follows:  Guardian Technologies International, Inc., 516 Herndon Parkway, Suite A, Herndon, Virginia  20170.

(2)

Includes 210,000 shares underlying options which are currently exercisable.

(3)

Includes 460,000 shares underlying options which are currently exercisable.

(4)

Includes 210,000 shares underlying options which are currently exercisable.

(5)

Includes 170,000 shares underlying options which are currently exercisable.

(6)

Includes 140,000 shares underlying options which are currently exercisable.

(7)

Morrie Tobin and Gale Tobin are the sole trustees of the Tobin Family Trust and have shared voting and dispositive power with regard to such shares.  The address for the trust is 40 Bassano Road, Toronto, Ontario.  The number of shares owned by the trust and the foregoing information is based solely upon information contained in an amended Schedule 13G filed by Mr. and Mrs. Tobin and the trust with the SEC on January 10, 2005.



*

Less than 1%.

**

Included in this group are Messrs. Dishaw, Trudnak, Kennedy, Repko, Nash, Donovan, Lancaster, and Hill.





ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The following disclosures are based upon information furnished to us by management of Guardian prior to the date of the Reverse Acquisition:

·

During 2002, Mr. Moorer exercised 2,700 options to purchase common stock at $5.00 per share.

·

At December 31, 2002, Mr. Moorer had outstanding advances from the Company of approximately $23,500.

·

During the fiscal years ended December 31, 2002 and 2001, Mr. Moorer received a cash salary of $75,000 per year, rather than his $120,000 per year entitlement under his employment agreement. Mr. Moorer was granted shares of common stock totaling 270,000 shares for fiscal 2002 and 83,299 shares for fiscal 2001, such shares having a fair market value on the date of issuance of $45,000 in each instance, representing the difference between Mr. Moorers entitlement under his employment agreement and the cash salary actually paid.

·

In May 2003, we made an exchange offer to all of the investors who purchased units in our prior January 2000 private offering described above. Pursuant to the exchange offer, all investors who purchased units were given



48





the right to exchange all of the warrants received as part of those units for shares of our common stock. The exchange offer consisted of one share of common stock for each unit purchased in the private offering conducted in January 2000. Messrs. Houtz and Stevens, two of our directors, purchased 10,000 units and 2,000 units, respectively, in the offering and those persons accepted the exchange offer.

The following disclosures relate to transactions to which RJL (and Guardian Technologies International, Inc. post Reverse Acquisition) and its directors, executive officers, nominees for election as a director, or any five percent beneficial owner is or was a party.

·

On October 3, 2002, Mr. Dishaw acquired 1,500 shares of common stock of RJL for nominal cash consideration.

·

On March 21, 2003, RJL entered into a consulting agreement, as amended, with ten brokers in connection with services to be provided in connection with locating and negotiating the proposed Reverse Acquisition between RJL, its stockholders and Guardian.  RJL agreed to issue, at closing of the acquisition, an aggregate of 2,000,000 shares of Guardian for such services.  Such shares were issued by Guardian during July 2003.

·

On April 3, 2003, as part of the initial capitalization of Guardian, Mr. Dishaw and Mr. Trudnak acquired 3,326 and 4,279 shares of common stock of RJL, respectively, for nominal cash consideration.

·

On May 19, 2003, RJL entered into a consulting agreement with Mr. Tobin pursuant to which Mr. Tobin agreed to provide consulting services in connection with strategic selling related to our business, marketing and market development in the bio-medical industry in North America and Europe, business continuity, finance and accounting.  The consulting agreement is for a term that ends on May 1, 2005, and may be terminated by Guardian in the event a material misrepresentation by Mr. Tobin or the commencement of any action by the SEC against Mr. Tobin or any entity owned or controlled by Mr. Tobin; or by either party on not less than 30 days prior written notice.  As compensation for his services under the agreement, Mr. Tobin is entitled to receive an aggregate of 1,820,000 shares of common stock, 1,430 shares of Series A Convertible Preferred Stock, and 480 shares of Series B Convertible Preferred Stock of Guardian.  The shares of Series B Convertible Preferred Stock were issued to Mr. Tobin during August 2003 and the shares of Common Stock and Series B Convertible Preferred Stock were issued on November 19, 2003.  On February 13, 2004, the stockholders of the Company voted in the affirmative to increase the authorized common stock from 15,000,000 to 200,000,000 shares.  Upon such increase, Mr. Tobins shares of Series B Convertible Preferred Stock were converted into 460,000 shares of our common stock.  Mr. Tobins shares of Series A Convertible Preferred Stock automatically converted into 1,430,000 shares of common stock effective November 30, 2004.

·

Upon the closing of the Reverse Acquisition and effective June 26, 2003, we issued to Mr. Dishaw 2,945,500 shares of our common stock and 2,212 shares of our Series A Convertible Preferred Stock and we issued to Mr. Trudnak 2,566,000 shares of our common stock and 1,885 shares of our Series A Convertible Preferred Stock, in exchange for all of their stock in RJL.  Also effective as of June 26, 2003, Mr. Trudnak purchased 400,000 shares of our common stock for cash consideration of $200,000 in a private placement conducted by us.

·

On July 30, 2003, Guardian entered into a consulting agreement with Mr. Moorer, the former President and Chief Financial Officer of Guardian to provide consulting services in connection with, among other things, business continuity, finance and accounting, strategic planning, market development, and related services.  The agreement terminated on July 1, 2004.  As compensation for such services, Guardian issued to Mr. Moorer 150,000 shares of common stock.

·

On August 4, 2003, Guardian entered into an employment agreement with Ruth Taylor pursuant to which Mrs. Taylor is employed as an accountant.  Mrs. Taylor is the adult daughter of Mr. Robert A. Dishaw, President, Chief Operating Officer, a director and principal stockholder of Guardian.  The employment agreement provides 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 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.  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 not to disclose confidential information regarding Guardian, agreed that proprietary rights



49





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 23, 2003, Guardian entered into an agreement with Difference Engines Corporation, a Maryland corporation, pursuant to which Guardian agreed to purchase certain intellectual property owned by Difference Engines, including certain compression software technology. The transaction closed on December 19, 2003. Mr. Ludwig, a director of Guardian, is also the president, a director and a principal stockholder of Difference Engines. Guardian issued 587,000 shares of its common stock as consideration for the purchase of the intellectual property and cancelled a convertible note that Difference Engines had issued to Guardian in the amount of approximately $25,000 representing advances Guardian made to Difference Engines.  The 587,000 shares of common stock will be subject to a two (2) year lock up.  Guardian has granted Difference Engines piggy-back registration rights for a period of three (3) years commencing on the date of the expiration of the lock up period with regard to the shares to be issued in the transaction.  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 20 consecutive business days ending on the day prior to the date of the exercise of the holders right of redemption.  The founders of Difference Engines, including Messrs. Ludwig and Hamilton, provided certain releases to the Company related to their contribution of the technology to Difference Engines.  The closing of the acquisition of the software was subject to certain conditions, including a requirement that Difference Engines obtain approval of its stockholders for the transaction and that Messrs Ludwig and Hamilton enter into two (2) year and one (1) year employment agreements, respectively, with Guardian at base salaries of $120,000 and $90,000 per annum, respectively. Other material terms of the employment agreements are described under Item 10. Executive Compensation - Employment Agreements, above.

·

On November 23, 2004, our stockholders approved an amendment to the Certificate of Designations, Preferences and Rights of our Series A Convertible Preferred Stock pursuant to which each outstanding share of Series A Convertible Preferred Stock automatically converted into 1,000 shares of common stock.  Effective November 30, 2004, and without further action of the board or such stockholders, Mr. Dishaw received, upon conversion of all of the shares of Series A Convertible Preferred Stock owned beneficially and of record by him as of that date, an aggregate of 2,212,000 shares of common stock of Guardian, and Mr. Trudnak received, upon conversion of all of the shares of Series A Convertible Preferred Stock owned beneficially and of record by him as of that date, an aggregate of 1,885,000 shares of common stock of Guardian.



ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

a)  The following documents are filed as part of this report:



1.

Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheet as of December 31, 2004 (Restated)

Consolidated Statements of Operations for the Years Ended December 31, 2004 and 2003 (Restated)

Consolidated Statements of Changes in Stockholders Deficit for the Years Ended December 31, 2004 and 2003 (Restated)

Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 and 2003 (Restated)

Notes to the Restated Consolidated Financial Statements (Restated)



2.

Exhibits



|            |                                                                                                                                                                                                       |                           |             |               
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ----------- | --------------
|            |                                                                                                                                                                                                       | Incorporated by Reference |            
|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                       | 06/26/2003  |               



50







|      |                                                                                                                                                                      |        |            | 
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ | ---------- | 
|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., Wise Systems Ltd., 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., Wise Systems Ltd., Martin Richards, and Susan Richards.. | 8-K    | 07/30/2004 | 
|2.6   | Employment Agreement, dated July 27, 2004, between Wise Systems Ltd. and Martin Richards.                                                                            | 8-K    | 07/30/2004 | 
|2.7   | Deed of Covenant (Non-Competition Agreement), dated July 27, 2004, between the Company and Martin Richards.                                                          | 8-K    | 07/30/2004 | 
|2.8   | Deed of Covenant (Non-Competition Agreement), dated July 27, 2004 between the Company 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 Rights and Preferences 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                   | 10-KSB | 05/15/2005 | 
|3.8   | By-Laws                                                                                                                                                              | 10-KSB | 04/15/2004 | 
|4.1   | Form of Common Stock Certificate                                                                                                                                     | SB-2   | 03/22/96   | 
|10.1  | Settlement Agreement, dated June 26, 2003, between the Registrant and J. Andrew Moorer.                                                                              | 10-QSB | 08/15/2003 | 
|10.2  | Exclusive Distribution Agreement, dated June 26, 2003, between RJL Marketing Services, Inc. and Diagnos, Inc.                                                        | 8-K/A  | 08/26/2003 | 
|10.3  | Consulting Agreement, dated May 19, 2003, between RJL Marketing Services, Inc. and Max Tobin.                                                                        | 8-K/A  | 08/26/2003 | 
|10.4  | Consulting Agreement, dated July 30, 2003, between RJL Marketing Services, Inc. and J. Andrew Moorer.                                                                | 8-K/A  | 08/26/2003 | 
|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 | 
|10.7  | Consulting Agreement, dated August 20, 2003, between the Registrant and Berthel Fisher & Company Financial Services, Inc.                                            | 10-QSB | 11/14/2003 | 
|10.8  | Consulting Agreement, dated September 11, 2003, between the Registrant and Clifford Neuman.                                                                          | S-8    | 10/09/2003 | 
|10.9  | Consulting Agreement, dated September 25, 2003, between the Registrant and Barry Davis.                                                                              | S-8    | 10/09/2003 | 
|10.10 | Consulting Agreement, dated September 30, 2003, between the Registrant and A.B. Goldberg.                                                                            | S-8    | 10/09/2003 | 
|10.11 | Consulting Agreement, dated July 28, 2003, between the Registrant and Redwood Consultants LLC.                                                                       | 10-QSB | 11/14/2003 | 
|10.12 | Consulting Agreement, dated July 4, 2003, between the Registrant and Tosh Consulting.                                                                                | 10-QSB | 11/14/2003 | 
|10.13 | Placement Agents Warrants, dated October 14, 2003, between the Registrant and Berthel Fisher &Company Financial Services, Inc.                                       | 10-QSB | 11/14/2003 | 
|10.14 | Alliance Partner Agreement, dated September 17, 2003, between the Registrant and Telinks Canada Ltd.                                                                 | 10-QSB | 11/14/2003 | 



51







|      |                                                                                                                                                                                                                                     |        |            | 
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ | ---------- | 
|10.15 | Compensation Agreement, dated September 18, 2003, between the Registrant and Telinks Canada Ltd.                                                                                                                                    | 10-QSB | 11/14/2003 | 
|10.16 | Asset Purchase Agreement, dated October 23, 2003, among the Registrant, Difference Engines Corporation.                                                                                                                             | 10-QSB | 11/14/2003 | 
|10.17 | Amendment Agreement, dated September 22, 2003, between the Registrant and Berthel Fisher & Company Financial Services, Inc.                                                                                                         | 10-QSB | 11/14/2003 | 
|10.18 | Settlement Agreement dated March 16, 2004 between the Registrant and Cappello Capital Corporation.                                                                                                                                  | 10-KSB | 04/15/2005 | 
|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 | 04/15/2005 | 
|10.20 | Convertible Promissory Note, dated December 11, 2003 between the Registrant and Charles T. Bell.                                                                                                                                    | 10-KSB | 04/15/2005 | 
|10.21 | Common Stock Warrant Agreement, dated December 11, 2003, between the Registrant and Charles T. Bell.                                                                                                                                | 10-KSB | 04/15/2005 | 
|10.22 | Supplemental Common Stock Warrant Agreement, dated December 11, 2003, between the Registrant and Charles T. Bell.                                                                                                                   | 10-KSB | 04/15/2005 | 
|10.23 | Convertible Promissory Note, dated December 19, 2003 between the Registrant and Daniel Denardis.                                                                                                                                    | 10-KSB | 04/15/2005 | 
|10.24 | Common Stock Warrant Agreement, dated December 19, 2003, between the Registrant and Daniel Denardis.                                                                                                                                | 10-KSB | 04/15/2005 | 
|10.25 | Supplemental Common Stock Warrant Agreement, dated December 19, 2003, between the Registrant and Daniel Denardis.                                                                                                                   | 10-KSB | 04/15/2005 | 
|10.26 | Convertible Promissory Note, dated December 19, 2003 between the Registrant and Scott Porter.                                                                                                                                       | 10-KSB | 04/15/2005 | 
|10.27 | Common Stock Warrant Agreement, dated December 19, 2003, between the Registrant and Scott Porter.                                                                                                                                   | 10-KSB | 04/15/2005 | 
|10.28 | Supplemental Common Stock Warrant Agreement, dated December 19, 2003, between the Registrant and Scott Porter.                                                                                                                      | 10-KSB | 04/15/2005 | 
|10.29 | Convertible Promissory Note, dated December 8, 2003 between the Registrant and Alan Stamper.                                                                                                                                        | 10-KSB | 04/15/2005 | 
|10.30 | Common Stock Warrant Agreement, dated December 8, 2003, between the Registrant and Alan Stamper.                                                                                                                                    | 10-KSB | 04/15/2005 | 
|10.31 | Supplemental Common Stock Warrant Agreement, dated December 8, 2003, between the Registrant and Alan Stamper.                                                                                                                       | 10-KSB | 04/15/2005 | 
|10.32 | Convertible Promissory Note, dated December 8, 2003 between the Registrant and Edward D. Tschiggfrie.                                                                                                                               | 10-KSB | 04/15/2005 | 
|10.33 | Common Stock Warrant Agreement, dated December 8, 2003, between the Registrant and Edward D. Tschiggfrie.                                                                                                                           | 10-KSB | 04/15/2005 | 
|10.34 | Supplemental Common Stock Warrant Agreement, dated December 8, 2003, between the Registrant and Edward D. Tschiggfrie.                                                                                                              | 10-KSB | 04/15/2005 | 
|10.35 | Convertible Promissory Note, dated December 19, 2003 between the Registrant and Edward D. Tschiggfrie.                                                                                                                              | 10-KSB | 04/15/2005 | 
|10.36 | Common Stock Warrant Agreement, dated December 19, 2003, between the Registrant and Edward D. Tschiggfrie.                                                                                                                          | 10-KSB | 04/15/2005 | 
|10.37 | Supplemental Common Stock Warrant Agreement, dated December 19, 2003, between the Registrant and Edward D. Tschiggfrie.                                                                                                             | 10-KSB | 04/15/2005 | 
|10.38 | Convertible Promissory Note, dated December 8, 2003 between the Registrant and Bret Williams.                                                                                                                                       | 10-KSB | 04/15/2005 | 
|10.39 | Common Stock Warrant Agreement, dated December 8, 2003, between the Registrant and Bret Williams.                                                                                                                                   | 10-KSB | 04/15/2005 | 
|10.40 | Supplemental Common Stock Warrant Agreement, dated December 8, 2003, between the Registrant and Bret Williams.                                                                                                                      | 10-KSB | 04/15/2005 | 
|10.41 | Amended And Restated 2003 Stock Incentive Plan.                                                                                                                                                                                     | 10-KSB | 04/15/2005 | 
|10.42 | Employment Agreement, dated December 3, 2003, between the Registrant and Walter Ludwig.                                                                                                                                             | 8-K    | 01/30/2004 | 



52







|      |                                                                                                                                                    |        |            |  
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------- | ------ | ---------- | -
|10.43 | Employment Agreement, dated December 3, 2003, between the Registrant and Victor Hamilton.                                                          | 8-K    | 01/30/2004 |  
|10.44 | Amended Employment Agreement, dated December 20, 2004, between the Registrant and Michael W. Trudnak                                               | 8-K    | 12/20/2004 |  
|10.45 | Amended Employment Agreement, dated December 20, 2004, between the Registrant and Robert A. Dishaw                                                 | 8-K    | 12/20/2004 |  
|10.46 | Amended Employment Agreement, dated December 20, 2004, between the Registrant and Darrell E. Hill                                                  | 8-K    | 12/20/2004 |  
|10.47 | Amended Employment Agreement, dated December 20, 2004, between the Registrant and Steven V. 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 |  
|10.49 | Agency Agreement, dated January 26, 2005, between the Registrant and The Shemano Group                                                             | 8-K    | 02/02/2005 |  
|14.1  | Code of Ethics of the Company for Chief Executive Officer and Senior Financial Officers                                                            | 10-KSB | 04/15/2004 |  
|21    | List of Subsidiaries                                                                                                                               | 10-KSB | 04/15/2005 |  
|23.1  | Consent of Independent Registered Public Accounting Firm                                                                                           |        |            | X
|31.1  | Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer                                                                                |        |            | X
|31.2  | Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer                                                                                |        |            | X
|32.1  | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |        |            | X
|32.2  | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |        |            | X



REPORTS FILED ON FORM 8-K

December 20, 2004  Guardian reported the voting results of its 2004 Annual Meeting of Stockholders and amendments to the Employment Agreements with Messrs. Trudnak, Dishaw, Hill and Lancaster.



December 22, 2004 - Guardian reported that it has entered into a three-year teaming agreement with Lockheed Martin Systems Integration-Owego d/b/a Lockheed Martin Distribution Technologies, a business unit of Lockheed Martin Corporation.





ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

During the last two fiscal years ended December 31, 2004 and 2003, respectively, the aggregate fees billed by Aronson & Company for the professional services rendered for the audit of the Companys annual financial statements and for the reviews of the financial statements included in the Companys Form 10-QSB were approximately $72,480 and $41,516, respectively.

AUDIT-RELATED FEES

Audit-related fees include assurance and related services reasonably related to the performance of the audit or review of the Companys financial statements, such as review of SEC filings, merger and acquisition due diligence and related services. The aggregate fees billed by Aronson & Company for services related to the performance of their audit and review of financial statements that are not included in audit fees above were approximately $14,859 and $14,599 for the fiscal years ended December 31, 2004 and 2003, respectively.



During the fiscal year ended December 31, 2003, we paid audit related fees of $700 to Schumacher & Associates, the Companys previous auditors.

TAX FEES



53





Tax fees include the aggregate fees billed for tax-related services, such as tax return review, preparation and compliance, as well as strategic tax planning services, and structuring of acquisitions. The aggregate fees billed by Aronson & Company for these services were approximately $3,224 and $2,436 for the fiscal years ended December 31, 2004 and 2003, respectively.

ALL OTHER FEES

During the last two fiscal years ended December 31, 2004 and 2003, respectively, there were no fees billed by Aronson & Company for professional services other than those described above.  None of such services were approved pursuant to the de minimis exemption provided in Rule 2-01(7)(i)(C) of Regulation S-X.

AUDIT COMMITTEES PRE-APPROVAL PRACTICE

Section 10A(i) of the Securities Exchange Act of 1934 prohibits our auditors from performing audit services for us as well as any services not considered to be audit services unless such services are pre-approved by the audit committee of the Board of Directors, or unless the services meet certainde minimis standards. The audit committee has pre-approved Aronsons audit and audit-related services for fiscal 2005.





54





SIGNATURES



In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned duly authorized.





| |                                                        |                                                       |                       
| | ------------------------------------------------------ | ----------------------------------------------------- | ----------------------
| |                                                        | GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.            
| |                                                        | By:                                                   | /s/ Michael W. Trudnak
| |                                                        | Chief Executive Officer (Principal Executive Officer)
| |                                                        | By:                                                   | / s/ Gregory E. Hare  
| | Chief Financial Officer (Principal Accounting Officer)

Dated:  August 31, 2006



In accordance with the Exchange Act, 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                                                                                                          
|/s/ Michael W. Trudnak
Michael W. Trudnak
Date:  August 31, 2006   |  | Chairman of the Board, Chief Executive Officer, Treasurer, Secretary and Director (Principal Executive Officer)
|/s/ William J. Donovan

William J. Donovan
Date:  August 31, 2006  |  | President, Director                                                                                            
|/s/ Gregory E. Hare

Gregory E. Hare
Date:  August 31, 2006        |  | Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer)                         
|/s/ Charles T. Nash

Charles T. Nash
Date:  August 31, 2006        |  | Director                                                                                                       
|/s/ Sean W. Kennedy

Sean W. Kennedy
Date:  August 31, 2006        |  | Director                                                                                                       
|/s/  Mark A. Zorko

Mark A. Zorko
Date:  August 31, 2006           |  | Director                                                                                                       
|/s/  Gina Marie Lindsey

Gina Marie Lindsey
Date:  August 31, 2006 |  | Director                                                                                                       



55









REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM













Board of Directors and Stockholders

Guardian Technologies International, Inc.





We have audited the accompanying consolidated balance sheet of Guardian Technologies International, Inc. and Subsidiaries as of December 31, 2004, and the related consolidated statements of operations, stockholders equity and comprehensive loss, and cash flows for each of the two years in the period ended December 31, 2004.  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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the 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 Subsidiariesas of December 31, 2004, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2004, 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 raise 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 are also described in Note 1.  The financial statements do not include any adjustments that might arise from the outcome of this uncertainty.



As further disclosed in Note 2 to the consolidated financial statements, the consolidated balance sheet as of December 31, 2004, and the related consolidated statements of operations,  stockholders equity and comprehensive loss, and cash flows for each of the two years in the period ended December 31, 2004, have been restated.





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







Norfolk, Virginia

May 12, 2006











56





Consolidated Balance Sheet

|                                                                    |  |                                     
|------------------------------------------------------------------- |  | ------------------------------------
|GUARDIAN TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARIES         
|CONSOLIDATED BALANCE SHEET                                         
|                                                                    |  |                                     
|                                                                    |  |                                     
|ASSETS                                                              |  | RESTATED                            
|                                                                    |  | DECEMBER 31, 2004                   
|Current assets:                                                     |  |                                     
|Cash and cash equivalents                                           |  | $                            925,999
|Accounts receivable                                                 |  | 59,312                              
|Other current assets                                                |  | 25,184                              
|Prepaid expenses                                                    |  | 303                                 
|Total current assets                                                |  | 1,010,798                           
|                                                                    |  |                                     
|Equipment, net                                                      |  | 132,772                             
|                                                                    |  |                                     
|Other assets:                                                       |  |                                     
|Deposits                                                            |  | 8,881                               
|Goodwill                                                            |  | 126,472                             
|Intangible assets, net                                              |  | 2,250,152                           
|Total assets                                                        |  | $                         3,529,075 
|                                                                    |  |                                     
|LIABILITIES AND STOCKHOLDERS' EQUITY                                |  |                                     
|                                                                    |  |                                     
|Current liabilities:                                                |  |                                     
|Accounts payable                                                    |  | $                            278,439
|Accrued expenses                                                    |  | 132,306                             
|Deferred revenue                                                    |  | 59,556                              
|Total current liabilities                                           |  | 470,301                             
|                                                                    |  |                                     
|Common shares subject to repurchase; stated at estimated redemption |  |                                     
|value - 587,000 shares issued and outstanding at December 31, 2004  |  | 2,044,228                           
|                                                                    |  |                                     
|Commitments and contingencies                                       |  |                                     
|                                                                    |  |                                     
|Stockholders' Equity:                                               |  |                                     
|Convertible preferred stock, $0.20 par value -                      |  |                                     
|Authorized - 1,000,000 shares                                       |  |                                     
|Issued and outstanding - none                                       |  | -                                   
|Common stock, $0.001 par value -                                    |  |                                     
|Authorized - 200,000,000 shares                                     |  |                                     
|Issued and outstanding - 28,042,320                                 |  | 28,043                              
|Stock subscription receivable                                       |  | (999,638)                           
|Accumulated comprehensive income                                    |  | 111,628                             
|Deferred stock compensation - employees                             |  | (1,511,250)                         
|Deferred stock compensation - non-employees                         |  | (3,517,866)                         
|Additional paid-in capital                                          |  | 42,806,680                          
|Deficit accumulated                                                 |  | (35,903,051)                        
|Total stockholders' equity                                          |  | 1,014,546                           
|                                                                    |  |                                     
|Total liabilities and stockholders' equity                          |  | $                         3,529,075 
|                                                                    |  |                                     
|                                                                    |  |                                     
|See notes to Consolidated Financial Statements.                     |  |                                     



57







| |  | 
| |  | 



Consolidated Statements of Operations

|                                                           |  |                          |  |                        
|---------------------------------------------------------- |  | ------------------------ |  | -----------------------
|GUARDIAN TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARIES
|CONSOLIDATED STATEMENTS OF OPERATIONS                     
|                                                           |  |                          |  |                        
|                                                           |  |                          |  |                        
|                                                           |  |                          |  |                        
|                                                           |  |                          |  |                        
|                                                           |  | RESTATED                
|                                                           |  | YEARS ENDED DECEMBER 31,
|                                                           |  | 2004                     |  | 2003                   
|                                                           |  |                          |  |                        
|Net revenues                                               |  | $             100,988    |  | $                     -
|                                                           |  |                          |  |                        
|Cost of sales                                              |  | 2,468,955                |  | -                      
|                                                           |  |                          |  |                        
|Gross profit (loss)                                        |  | (2,367,967)              |  | -                      
|                                                           |  |                          |  |                        
|Selling, general and administrative expense                |  | 25,844,553               |  | 6,501,018              
|                                                           |  |                          |  |                        
|Operating loss                                             |  | (28,212,520)             |  | (6,501,018)            
|                                                           |  |                          |  |                        
|Other income (expense):                                    |  |                          |  |                        
|Interest income                                            |  | 19,904                   |  | -                      
|Interest expense                                           |  | (1,027,560)              |  | (80,629)               
|Total other income (expense)                               |  | (1,007,656)              |  | (80,629)               
|                                                           |  |                          |  |                        
|                                                           |  |                          |  |                        
|Net loss                                                   |  | $     (29,220,176)       |  | $     (6,581,647)      
|                                                           |  |                          |  |                        
|                                                           |  |                          |  |                        
|Loss per common share:                                     |  |                          |  |                        
|Basic and diluted                                          |  | $               (1.45)   |  | $             (0.79)   
|                                                           |  |                          |  |                        
|Weighted average number of shares used in                  |  |                          |  |                        
|computing basic and diluted net loss per share             |  | 20,086,795               |  | 8,314,785              
|                                                           |  |                          |  |                        
|                                                           |  |                          |  |                        
|                                                           |  |                          |  |                        
|See notes to Consolidated Financial Statements.            |  |                          |  |                        



















58





Consolidated Statements of Stockholders Deficit and Comprehensive Loss

|                                                                                               |              |            |                 |         |                            |                                           |                                       |                               |                                                    |                     |                                      |                                |                    |                    
|---------------------------------------------------------------------------------------------- | ------------ | ---------- | --------------- | ------- | -------------------------- | ----------------------------------------- | ------------------------------------- | ----------------------------- | -------------------------------------------------- | ------------------- | ------------------------------------ | ------------------------------ | ------------------ | -------------------
|GUARDIAN TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARIES                                    
|CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS                         
|                                                                                               |              |            |                 |         |                            |                                           |                                       |                               |                                                    |                     |                                      |                                |                    |                    
|                                                                                               | Common Stock |            | Preferred Stock |         | Additional Paid-In Capital | Deferred Stock Compensation Non-employees | Deferred Stock Compensation Employees | Stock Subscription Receivable | Cumulative Foreign Currency Translation Adjustment | Accumulated Deficit | Total Stockholders' Equity (Deficit) | Accumulated Comprehensive Loss
|                                                                                               | Shares       | Amount     |                 | Shares  | Amount                     |                                          
|Balance, December 31, 2002                                                                     | 907,950      | $      908 |                 | -       | $     -                    |                                           | $           (908)                     | $                   -         | $                   -                              | $                 - | $                  -                 | $      (101,228)               | $        (101,228) | $         (101,228)
|Stock issued to founders                                                                       | 4,603,550    | 4,604      |                 | 4,097   | 819                        |                                           | (5,423)                               | -                             | -                                                  | -                   | -                                    | -                              | -                  | -                  
|Stock issued to former shareholders at reverse acquisition                                     | 2,150,000    | 2,150      |                 | -       | -                          |                                           | (2,150)                               | -                             | -                                                  | -                   | -                                    | -                              | -                  | -                  
|Stock issued for consulting services                                                           | 4,250,000    | 4,250      |                 | 2,600   | 520                        |                                           | 5,216,030                             | (4,560,801)                   | -                                                  | -                   | -                                    | -                              | 659,999            | -                  
|Stock issued to placement agent                                                                | 25,000       | 25         |                 | -       | -                          |                                           | 93,725                                | -                             | -                                                  | -                   | -                                    | -                              | 93,750             | -                  
|Stock issued to acquire software technology                                                    | 587,000      | 587        |                 | -       | -                          |                                           | 2,259,363                             | -                             | -                                                  | -                   | -                                    | -                              | 2,259,950          | -                  
|Proceeds from sale of stock for cash, net                                                      | 1,000,000    | 1,000      |                 | 678     | 136                        |                                           | 1,328,759                             | -                             | -                                                  | -                   | -                                    | -                              | 1,329,895          | -                  
|Warrants for the purchase of common stock (Restated)                                           | -            | -          |                 | -       | -                          |                                           | 1,058,326                             | -                             | -                                                  | -                   | -                                    | -                              | 1,058,326          | -                  
|Common stock options granted                                                                   | -            | -          |                 | -       | -                          |                                           | 3,268,476                             | -                             | (3,268,476)                                        | -                   | -                                    | -                              | -                  | -                  
|Stock compensation remeasurement                                                               | -            | -          |                 | -       | -                          |                                           | 8,951,582                             | (8,951,582)                   | -                                                  | -                   | -                                    | -                              | -                  | -                  
|Amortization of deferred compensation expense                                                  | -            | -          |                 | -       | -                          |                                           | -                                     | 1,621,496                     | 1,285,945                                          | -                   | -                                    | -                              | 2,907,441          | -                  
|Reclassification of warrants to derivative liabilities (Restated)                              | -            | -          |                 | -       | -                          |                                           | (1,131,415)                           | -                             | -                                                  | -                   | -                                    | -                              | (1,131,415)        | -                  
|Reclassification of common stock subject to repurchase (Restated)                              | -            | -          |                 | -       | -                          |                                           | (2,044,228)                           | -                             | -                                                  | -                   | -                                    | -                              | (2,044,228)        | -                  
|Net loss (Restated)                                                                            | -            | -          |                 | -       | -                          |                                           | -                                     | -                             | -                                                  | -                   | -                                    | (6,581,746)                    | (6,581,746)        | (6,581,746)        
|Comprehensive loss                                                                             | -            | -          |                 | -       | -                          |                                           | -                                     | -                             | -                                                  | -                   | -                                    | -                              | -                  | (6,581,746)        
|Balance, December 31, 2003 (Restated)                                                          | 13,523,500   | $ 13,524   |                 | 7,375   | $ 1,475                    |                                           | $ 18,992,137                          | $     (11,890,887)            | $      (1,982,531)                                 | $                 - | $                  -                 | $   (6,682,974)                | $     (1,549,256)  | $      (6,682,974) 
|Stock issued for consulting services (Restated)                                                | 325,000      | 325        |                 | -       | -                          |                                           | 2,310,175                             | (248,000)                     | -                                                  | -                   | -                                    | -                              | 2,062,500          | -                  
|Cancel issuance of common shares (Restated)                                                    | (80,000)     | (80)       |                 | -       | -                          |                                           | 80                                    | -                             | -                                                  | -                   | -                                    | -                              | -                  | -                  
|Stock issued in settlement of claim                                                            | 287,500      | 288        |                 | -       | -                          |                                           | 3,075,962                             | -                             | -                                                  | -                   | -                                    | -                              | 3,076,250          | -                  
|Common stock options granted                                                                   | -            | -          |                 | -       | -                          |                                           | 6,434,650                             | -                             | (6,434,650)                                        | -                   | -                                    | -                              | -                  | -                  
|Stock issued to placement agent                                                                | 199,800      | 200        |                 | -       | -                          |                                           | (200)                                 | -                             | -                                                  | -                   | -                                    | -                              | -                  | -                  
|Proceeds from sale of common stock for cash, net                                               | 5,337,603    | 5,338      |                 | -       | -                          |                                           | 7,637,746                             | -                             | -                                                  | -                   | -                                    | -                              | 7,643,084          | -                  
|Subscription agreement for the sale of common stock                                            | -            | -          |                 | -       | -                          |                                           | 999,638                               | -                             | -                                                  | (999,638)           | -                                    | -                              | -                  | -                  
|Cashless exercise of stock purchase warrants                                                   | 197,368      | 197        |                 | -       | -                          |                                           | (197)                                 | -                             | -                                                  | -                   | -                                    | -                              | -                  | -                  
|Contingent, performance-based stock held in escrow under terms of the Wise Systems acquisition | 106,739      | 107        |                 | -       | -                          |                                           | (107)                                 | -                             | -                                                  | -                   | -                                    | -                              | -                  | -                  
|Employee stock options exercised                                                               | 270,000      | 270        |                 | -       | -                          |                                           | 157,230                               | -                             | -                                                  | -                   | -                                    | -                              | 157,500            | -                  
|Conversion of preferred stock to common stock                                                  | 7,375,330    | 7,375      |                 | (7,375) | (1,475)                    |                                           | (5,900)                               | -                             | -                                                  | -                   | -                                    | -                              | -                  | -                  
|Conversion of notes payable to common stock                                                    | 499,480      | 499        |                 | -       | -                          |                                           | 798,787                               | -                             | -                                                  | -                   | -                                    | -                              | 799,286            | -                  



59







|                                                                                        |            |          |  |   |         |  |              |                    |                    |                   |                    |                |                   |                  
|--------------------------------------------------------------------------------------- | ---------- | -------- |  | - | ------- |  | ------------ | ------------------ | ------------------ | ----------------- | ------------------ | -------------- | ----------------- | -----------------
|Forfeiture of employee stock options                                                    | -          | -        |  | - | -       |  | (1,370,500)  | -                  | 1,370,500          | -                 | -                  | -              | -                 | -                
|Stock compensation remeasurement                                                        | -          | -        |  | - | -       |  | 1,159,748    | (1,159,748)        | -                  | -                 | -                  | -              | -                 | -                
|Amortization of deferred compensation expense                                           | -          | -        |  | - | -       |  | -            | 10,096,669         | 5,535,431          | -                 | -                  | -              | 15,632,100        | -                
|Warrants issued for extension bridge loan (Restated)                                    | -          | -        |  | - | -       |  | 789,300      | -                  | -                  | -                 | -                  | -              | 789,300           |                  
|Revaluation of warrants issued to consultant (Restated)                                 | -          | -        |  | - | -       |  | 842,400      | (315,900)          | -                  | -                 | -                  | -              | 526,500           | -                
|Reclassification of warrants to permanent equity from derivative liabilities (Restated) | -          | -        |  | - | -       |  | 1,131,415    | -                  | -                  | -                 | -                  | -              | 1,131,415         | -                
|Cancel recordation of unissued warrants (Restated)                                      | -          | -        |  | - | -       |  | (145,684)    | -                  | -                  | -                 | -                  | -              | (145,684)         | -                
|Foreign currency translation                                                            | -          | -        |  | - | -       |  | -            | -                  | -                  | -                 | 111,628            | -              | 111,628           | 111,628          
|Net loss (Restated)                                                                     | -          | -        |  | - | -       |  | -            | -                  | -                  | -                 | -                  | (29,220,176)   | (29,220,176)      | (29,220,176)     
|Comprehensive loss                                                                      | -          | -        |  | - | -       |  | -            | -                  | -                  | -                 | -                  | -              | -                 | (29,108,548)     
|Balance, December 31, 2004 (Restated)                                                   | 28,042,320 | $ 28,043 |  | - | $     - |  | $ 42,806,680 | $      (3,517,866) | $      (1,511,250) | $       (999,638) | $          111,628 | $ (35,903,150) | $       1,014,447 | $    (35,791,522)
|                                                                                        |            |          |  |   |         |  |              |                    |                    |                   |                    |                |                   |                  
|                                                                                        |            |          |  |   |         |  |              |                    |                    |                   |                    |                |                   |                  
|See notes to Consolidated Financial Statements.                                         |            |          |  |   |         |  |              |                    |                    |                   |                    |                |                   |                  









































































60





Consolidated Statements of Cash Flows

|                                                                            |  |                         |  |                
|--------------------------------------------------------------------------- |  | ----------------------- |  | ---------------
|GUARDIAN TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARIES                 
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                      
|                                                                            |  |                         |  |                
|                                                                            |  | RESTATED               
|                                                                            |  | YEARS ENDED DECEMBER 31
|                                                                            |  | 2004                    |  | 2003           
|                                                                            |  |                         |  |                
|OPERATING ACTIVITIES:                                                       |  |                         |  |                
|Net loss                                                                    |  | $   (29,220,176)        |  | $  (6,581,647) 
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                         |  |                
|Depreciation and amortization                                               |  | 982,034                 |  | 26,734         
|Stock-based compensation expense                                            |  | 21,297,748              |  | 4,277,242      
|Impairment of software licenses                                             |  | -                       |  | 140,000        
|Impairment of acquired intangible assets                                    |  | 1,498,731               |  | -              
|Non-cash interest expense                                                   |  | 1,013,397               |  | 77,630         
|Foreign currency translation adjustment                                     |  | (13,262)                |  | -              
|Changes in operating assets and liabilities:                                |  |                         |  |                
|Accounts receivable                                                         |  | 34,522                  |  | -              
|Other current assets                                                        |  | (24,445)                |  | -              
|Prepaids                                                                    |  | (103)                   |  | (200)          
|Deposits                                                                    |  | 149,019                 |  | (7,900)        
|Accounts payable                                                            |  | (128,281)               |  | 182,480        
|Accrued expenses                                                            |  | (472,614)               |  | 527,076        
|Deferred revenue                                                            |  | (48,972)                |  | -              
|Net cash used in operating activities                                       |  | (4,932,402)             |  | (1,358,585)    
|                                                                            |  |                         |  |                
|                                                                            |  |                         |  |                
|INVESTING ACTIVITIES:                                                       |  |                         |  |                
|Purchase of equipment                                                       |  | (105,791)               |  | (37,170)       
|Purchase of software licenses                                               |  | -                       |  | (140,000)      
|Acquisition of software                                                     |  | -                       |  | (25,000)       
|Acquisition, earnest money deposit                                          |  | -                       |  | (150,000)      
|Acquistion, net of cash received                                            |  | (2,229,783)             |  | -              
|Investment in patents                                                       |  | (9,333)                 |  | -              
|Net cash used in investing activities                                       |  | (2,344,907)             |  | (352,170)      
|                                                                            |  |                         |  |                
|                                                                            |  |                         |  |                
|FINANCING ACTIVITIES:                                                       |  |                         |  |                
|Proceeds from issuance of common stock                                      |  | 7,736,834               |  | 500,000        
|Proceeds from issuance of preferred stock                                   |  | -                       |  | 829,895        
|Proceeds from issuance of bridge notes                                      |  | -                       |  | 700,000        
|Proceeds from exercise of employee stock options                            |  | 157,500                 |  | -              
|Net cash provided by financing activities                                   |  | 7,894,334               |  | 2,029,895      
|                                                                            |  |                         |  |                
|Effect of exchange rate changes on cash and cash equivalents                |  | (10,255)                |  | -              
|                                                                            |  |                         |  |                
|Net increase in cash and cash equivalents                                   |  | 606,770                 |  | 319,140        
|                                                                            |  |                         |  |                
|Cash and cash equivalents at the beginning of the period                    |  | 319,229                 |  | 89             
|                                                                            |  |                         |  |                
|Cash and cash equivalents at the end of the period                          |  | $          925,999      |  | $       319,229
|                                                                            |  |                         |  |                
|See notes to Consolidated Financial Statements.                             |  |                         |  |                











61







|                                                            |  |                         |  |                   
|----------------------------------------------------------- |  | ----------------------- |  | ------------------
|                                                            |  | RESTATED               
|                                                            |  | YEARS ENDED DECEMBER 31
|                                                            |  | 2004                    |  | 2003              
|Supplemental schedule of cash flow information:             |  |                         |  |                   
|Cash paid for interest                                      |  | $            14,163     |  | $            3,000
|Common stock issued to founders                             |  | 261                     |  | 4,604             
|Class A preferred issued to founders                        |  | (1,105)                 |  | 819               
|Common stock issued:                                        |  |                         |  |                   
|In acquisition of software                                  |  | -                       |  | 2,259,950         
|To placement agent for future financing                     |  | -                       |  | 93,750            
|Note forgiven in acquisition of software                    |  | -                       |  | 25,000            
|Warrants issued to agents for common stock offerings        |  | 2,323,589               |  | 25,139            
|Warrants issued to agent for convertible notes              |  | -                       |  | 250,789           
|Warrants issued as settlement of placement agreement        |  | -                       |  | 709,803           
|Warrants issued (cancelled) for Alliance Partner Agreement  |  | (145,684)               |  | 145,684           
|Conversion of bridge note principal balance to common stock |  | 700,000                 |  | -                 
|Conversion of bridge note accrued interest to common stock  |  | 99,185                  |  | -                 
|Reclassification of common stock subject to repurchase      |  | -                       |  | 2,044,228         
|Discount on issuance of convertible notes payable           |  | -                       |  | 202,841           
|                                                            |  |                         |  |                   
|                                                            |  |                         |  |                   
|See notes to Consolidated Financial Statements.             |  |                         |  |                   



























































62





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1.  BASIS OF PRESENTATION

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



The Company is a developer of intelligent imaging informatics technology focused on the U.S. Government and healthcare (radiology) markets.  The Companys business objective is to deliver state-of-the-art imaging products for the analysis, knowledge mining, and detection of image anomalies.



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 reference able client base, and an entrée to the healthcare marketplace for the Companys intelligent imaging technologies.



Prior to this Annual Report of Form 10KSB, the Company reported its financial information in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Companies.The Company has commenced its intended operations and is no longer devoting substantial efforts solely to the establishment of the business.



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, 2004, the Companys revenue generating activities have not produced sufficient funds for profitable operations, and the Company has incurred operating losses since inception of $35,903,051.  In view of these matters, realization of certain of the assets in the accompanying 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 capital, and the success of its future operations.



The Company is currently seeking additional funding to expand marketing efforts and product development. There can be no assurance that such funds will be available to the Company or that the marketing and product development efforts will be successful.



Guardian has incurred operating losses since inception.  In view of these matters, realization of certain of the assets in the accompanying 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 capital, and the success of its future operations.



The Companys ability to continue as a going concern and meet its obligations as they come due is dependent upon its ability to raise sufficient cash as discussed above.  The existing cash balance, at December 31, 2004, of $925,999 and the approximately $1,000,000 of proceeds from a stock subscription agreement (details of the transaction are disclosed in Footnote 7 below) the Company received during January 2005, is expected to provide working capital for operations through May 31, 2005.  The Company, in May 2005, entered into a placement agent agreement with an investment bank to offer a private placement financing on a best efforts basis up to $10,000,000.  Management is confident that the entire $10,000,000 will be raised prior to the expiration of the placement agent agreement.  The Company anticipates 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.  Should the Company be unable to raise sufficient cash to continue operations at a level necessary to achieve commercially viable sales levels, the liquidation value of the Companys noncurrent assets may be substantially less than the balances reflected in the financial statements and the Company may be unable to pay its creditors.







63





NOTE 2.  RESTATEMENT OF FINANCIAL STATEMENTS

The Company has restated its consolidated financial statements for 2004 and 2003 (the Restatements), and certain disclosures in notes to the consolidated financial statements have been restated to reflect the Restatement adjustments.  In the Restatement, the Company has:



Reclassified from Permanent Equity to Temporary Equity the Contractual Redemption Value of Common Shares Issued in Conjunction with an Asset Acquisition Agreement that Contained Redemption Rights

Under the terms of an asset purchase agreement, dated December 19, 2003, Guardian issued 587,000 shares of its common stock as consideration for the purchase of the intellectual property from Difference Engines Corporation.  The 587,000 shares of common stock are subject to a two (2) year lockup.  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.  Contractually, the redemption price is, 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 conditionally redeemable financial instruments should, be classified as temporary equity and measured at the estimated fair value of the redemption right if redemption is not solely within the control of the issuer.  The Company calculated the contractual redemption value of the common stock issued in the Difference Engines asset purchase and reclassified from permanent equity to temporary equity the contractual redemption value of $2,044,228.  No recalculation of the redemption value was performed in fiscal year 2004 as the redemption rights, granted under the terms of the Asset Purchase Agreement, could not be exercised due to the two-year lockup of the issued shares of common stock.



Reclassified from Permanent Equity to Derivative Liabilities, Warrants Issued to a Placement Agent and Convertible Note Holders and Others, Resulting from Insufficient Authorized and Unissued Shares of Common Stock

During the year ended December 31, 2003, the Company issued to its placement agent, to note holders, and certain non-employee service providers warrants for the purchase of common stock.  Under the guidelines of EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, public companies that are required, or that could be required, to deliver cash in exchange for their own shares as part of physical settlement under a freestanding financial instrument are required to report an amount equal to the estimated cash redemption value as a liability.  As sufficient authorized shares did not exist to accommodate these warrants from date of issuance to February 13, 2004 (date stockholders approved an increase in authorized shares), as required by EITF 00-19, these warrants are treated as derivative liabilities as of December 31, 2003.  Accordingly, the Company estimated the fair value of each derivative instrument, and recorded $1,131,415 as a derivative liability on the consolidated balance sheet as of December 31, 2003.   As a result of an increase in shares authorized on February 13, 2004, warrants issued to the Companys placement agent, note holders, and non-employee service providers were classified thereafter as permanent equity.



On February 13, 2004, at a Special Meeting of Stockholders of the Company, the Companys stockholders voted to increase the number of shares of Common Stock from 15,000,000 to 200,000,000.  Such increase provided sufficient authorized and unissued shares to settle all contracts under commitment.  Appropriately, the Company reversed the prior entry and reduced derivative liabilities by $1,131,415.  Reversing the entry returns this amount to permanent equity.  Also, as a result of an increase in authorized shares on February 13, 2004, and the note holders converting the bridge loan to common stock on April 28, 2004, the $497,159 derivative liability related to convertible notes, was appropriately classified thereafter as permanent equity.



Increased Deferred Compensation  Consultants and Stock-Based Compensation to Reflect the Revaluation of Warrants Issued to a Consultant for Services

On May 20, 2004, the Company issued 250,000 stock purchase warrants to an outside consultant for services to be rendered in the succeeding twelve month period of time.  Assumptions made in the calculation of the fair value of the warrants using the Black-Scholes Model proved to be incorrect.  In 2004, certain warrants were issued to non-employees for services and were re-measured to conform to the updated Black-Scholes assumptions for 2004.  Previously, the Company used Black-Scholes assumptions for 2003 to measure the stock compensation expense related to warrants issued and services rendered from May 2004 through May 2005. Based on the revised assumptions, Guardian increased its deferred compensation 



64





consultants balance by $842,400 and amortized from that balance, $526,500 of stock-based compensation expense in 2004, resulting in $315,900 increase in deferred stock compensation.  This resulted in an increase in selling, general and administrative expenses of $526,500, and corresponding increase in net loss of $526,500 for 2004.





Revalued the Components of a Convertible Debt Instrument that Contained an Embedded Derivative

During December 2003, Guardian entered into a series of purchase agreements under which convertible promissory notes in the aggregate amount of $700,000 and warrants to purchase 311,250 shares of the Companys common stock were issued.  The notes bore interest at 10% and were repayable sixty days after the date of issuance (maturity date).  The outstanding principal and interest are convertible into equity securities based on the terms of a future financing.   Absent a future financing, the outstanding principal and interest are convertible into equity securities at a price of $1.50 per share.  Guardian analyzed the transaction and the associated embedded conversion features and determined that all three criteria for bifurcating an embedded conversion feature, and measuring at fair value, as detailed in SFAS 133, Accounting for Derivative Instruments and Hedging Activities, have been met.  Based on this finding the Company bifurcated the components of the hybrid instrument (the convertible debt) into: (1) the host contract (an interest-bearing note) and (2) the embedded derivative (a put option on the Companys stock).  SFAS 133 requires that a bifurcated embedded derivative be separated from the host contract and measured at fair value.  Guardian estimated the fair value of the host contract by subtracting the fair value of the embedded put option from the fair value of the convertible note.   The Company increased its interest expense by $57,212 for 2003, and allocated the fair value of the hybrid instrument ($700,000) as follows: (1) $202,841 to the host contract and (2) $497,159 to derivative liability  embedded conversion feature.



During the year ended December 31, 2004, and as a result of the recalculation of the embedded put option, the Company beneficially adjusted previously recorded interest expense of $1,043,321, by $15,761, to a total expense of $1,027,560.  Further, on April 28, 2004, all holders of the convertible bridge financing notes elected to convert their outstanding principal and accrued interest into equity, on the same terms and conditions as the private placement, at a price of $1.60 per share.



Cancellation of Warrants Never Issued

During 2004, the Company reversed a warrant transaction in the amount of $145,684 that was recorded but subsequently voided.  During 2004, the Company recorded an impairment of assets acquired with the stock warrants, believing that the transaction had been completed, and then terminated.  Since the entire transaction had been correctly accounted for in 2003, the entry was a duplication of the 2003 entry.  The Company reversed the incorrect 2004 entry which resulted in a decrease in operating net loss for the year.



Reclassification of Stock-Based Compensation to Selling, General and Administrative

The previously reported statements of operations segregated on a separate line stock-based compensation expense from selling, general and administrative expense.  With this Restatement of the consolidated financial statements for the years ended December 31, 2004 and 2003, the Company added the stock-based compensation expense of $21,297,748 and $4,277,242, respectively, to selling, general and administrative expense for presentation purposes.



Reclassification of Depreciation Expense to Selling, General and Administrative

The previously reported statements of operations segregated depreciation expense from selling, general and administrative expense.  With this Restatement of the consolidated financial statements for the years ended December 31, 2004 and 2003, the Company added the depreciation expense of $31,572 and $26,734, respectively, to selling, general and administrative expense for presentation purposes.



Reclassification of Impairment of Software Technology and the Amortization of Intangible Assets to the Cost of Sales

The previously reported statements of operations included the impairment of software technology and the amortization of intangible assets in selling, general and administrative expense.  With this Restatement of the consolidated financial statements for the year ended December 31, 2004, the Company added the impairment of software technology expense of $1,498,731 and the amortization of intangible assets expense of $761,650 to the cost of sales for presentation purposes.



65





The following table presents the effect of the Restatement on the consolidated financial statements for December 31, 2004 and 2003.



|                                                                                                                                       |               |                   |              |            |               |                  
|-------------------------------------------------------------------------------------------------------------------------------------- | ------------- | ----------------- | ------------ | ---------- | ------------- | -----------------
|                                                                                                                                       |               | AS PREVIOUSLY     |              |            |               |                  
|                                                                                                                                       |               | REPORTED          |              |            |               | RESTATED         
|                                                                                                                                       |               | DECEMBER 31, 2004 |              | ADJUSTMENT |               | DECEMBER 31, 2004
|                                                                                                                                       |               |                   |              |            |               |                  
|Consolidated Balance Sheet                                                                                                            
|Common shares subject to repurchase; stated at estimated redemption value - 587,000 shares issued and outstanding at December 31, 2004 | $-            |                   | $2,044,228   |            | $2,044,228   
|                                                                                                                                       |               |                   |              |            |               |                  
|                                                                                                                                       |               |                   |              |            |               |                  
|Consolidated Statement of Operations                                                                                                  
|Cost of sales                                                                                                                          | $208,574      |                   | $-           |            | $208,574     
|Impairment of software technology                                                                                                      | -             |                   | 1,498,731    |            | 1,498,731    
|Amortization of intangibles                                                                                                            | -             |                   | 761,650      |            | 761,650      
|Cost of sales                                                                                                                          | 208,574       |                   | 2,260,381    |            | 2,468,955    
|                                                                                                                                       |               |                   |              |            |               |                  
|Operating expenses:                                                                                                                   
|Selling, general and administrative                                                                                                    | $4,447,943    |                   | $21,396,610  |            | $25,844,553  
|Impairment of software technology                                                                                                      | 1,498,731     |                   | (1,498,731)  |            | -            
|Depreciation                                                                                                                           | 31,572        |                   | (31,572)     |            | -            
|Amortization of intangibles                                                                                                            | 974,624       |                   | (974,624)    |            | -            
|Amortization of stock compensation                                                                                                     | 20,771,248    |                   | (20,771,248) |            | -            
|Total operating expenses                                                                                                               | 27,724,118    |                   | (1,879,565)  |            | 25,844,553   
|                                                                                                                                       |               |                   |              |            |               |                  
|Interest expense                                                                                                                       | 1,043,321     |                   | (15,761)     |            | 1,027,560    
|                                                                                                                                       |               |                   |              |            |               |                  
|Net loss                                                                                                                               | $(28,855,121) |                   | $(365,055)   |            | $(29,220,176)
|Earnings per share - basic and diluted                                                                                                 | $(1.44)       |                   | $(0.01)      |            | $(1.45)      
|                                                                                                                                       |               |                   |              |            |               |                  
|Consolidated Statement of Cash Flow                                                                                                   
|Operating Activities:                                                                                                                 
|Net loss                                                                                                                               | $(28,855,121) |                   | $(365,055)   |            | $(29,220,176)
|Adjustment to reconcile net loss - reversal of impairment of stock warrants                                                            | 145,684       |                   | (145,684)    |            | -            
|Adjustment to reconcile net loss - stock-based compensation expense                                                                    | 20,771,248    |                   | 526,500      |            | 21,297,748   
|Adjustment to reconcile net loss - non-cash interest expense                                                                           | 1,029,158     |                   | (15,761)     |            | 1,013,397    
|                                                                                                                                       |               |                   |              |            |               |                  
|Consolidated Statement of Stockholders' Equity                                                                                        
|Deferred stock compensation - consultants                                                                                              | $(3,201,966)  |                   | $(315,900)   |            | $(3,517,866) 
|Additional paid-in capital                                                                                                             | 44,112,739    |                   | (1,306,059)  |            | 42,806,680   
|Deficit accumulated                                                                                                                    | (35,480,783)  |                   | (422,268)    |            | (35,903,051) 







66







|                                                        |              |                        |              |            |              |                  
|------------------------------------------------------- | ------------ | ---------------------- | ------------ | ---------- | ------------ | -----------------
|                                                        |              | AS PREVIOUSLY REPORTED |              |            |              | RESTATED         
|                                                        |              | DECEMBER 31, 2003      |              | ADJUSTMENT |              | DECEMBER 31, 2003
|                                                        |              |                        |              |            |              |                  
|Consolidated Statements of Operations                  
|Operating expenses:                                    
|Selling, general and administrative                     | $2,197,042   |                        | $4,303,976   |            | $6,501,018  
|Depreciation                                            | 26,734       |                        | (26,734)     |            | -           
|Amortization of stock compensation                      | 4,277,242    |                        | (4,277,242)  |            | -           
|Total operating expenses                                | 6,501,018    |                        | -            |            | 6,501,018   
|                                                        |              |                        |              |            |              |                  
|Interest expense                                        | 23,417       |                        | 57,212       |            | 80,629      
|Net loss                                                | $(6,524,435) |                        | $(57,212)    |            | $(6,581,647)
|Earnings per share - basic and diluted                  | $(0.78)      |                        | $(0.01)      |            | $(0.79)     
|                                                        |              |                        |              |            |              |                  
|Consolidated Statements of Cash Flow                   
|Operating Activities:                                  
|Net loss                                                | $(6,524,435) |                        | $(57,212)    |            | $(6,581,647)
|Adjustment to reconcile net loss - bridge note discount | 20,417       |                        | 57,212       |            | 77,629      
|                                                        |              |                        |              |            |              |                  
|Consolidated Statements of Stockholders' Equity        
|Stock warrants outstanding                              | $1,031,424   |                        | $(1,031,424) |            | $-          
|Additional paid-in capital                              | 21,084,315   |                        | (2,092,178)  |            | 18,992,137  
|Deficit accumulated                                     | (6,625,663)  |                        | (57,212)     |            | (6,682,875) 







NOTE 3.  SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation  The 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 are eliminated in consolidation.



Cash Equivalents -Cash and cash equivalents are stated at cost, which approximates market, 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 are stated at cost less any allowance for doubtful accounts.  The Company records an allowance for doubtful accounts based on specifically identified amounts that the Company believes to be uncollectible.  At December 31, 2004, the Company considered all receivables currently due and collectible and recorded no allowance for doubtful accounts.



Property and Equipment - Property and equipment are stated at cost less accumulated depreciation and amortization.  Guardian provides for depreciation and amortization by charges to operations on a straight-line basis, in amounts estimated to allocate the cost of the assets over their estimated useful lives, as follows:



67









|                                |  |             
|------------------------------- |  | ------------
|Asset Classification            |  | Useful Lives
|Computer equipment and software |  | 3 years     
|Furniture and fixtures          |  | 5 years     



Intangible Assets Intangible assets consist of acquired software and patents.  The acquired software is being amortized on a straight-line basis 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 warrant revised estimates of useful lives.



Excess of Purchase Price over Net Assets Acquired 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 assigned to identifiable intangible assets.  Effective January 1, 2002, with the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, goodwill is no longer to be amortized.  Goodwill from the acquisition of Wise Systems Ltd. is $126,472.



Impairment of Excess Purchase Price over Net Assets Acquired The Company has adopted SFAS No. 142.  Under this standard, goodwill will be tested for impairment on an annual basis or whenever indicators of impairment arise.  The Company recognized no impairment as of December 31, 2004.



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 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.  During 2003, the Company determined that its entire investment in MCubix software licenses was impaired.  The Company wrote-off the $140,000 investment.



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 was accounted for as an asset acquisition.  The purchase price for these assets was allocated to acquired intangible assets (software).  However, based on a net realizable value analysis as of December 31, 2004, it was determined that the asset is impaired and the Company has taken a $1,498,731 write off, in accordance with the relevant provisions of SFAS 86 Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.



Foreign Currency Translation The accounts of the Companys foreign subsidiaries are maintained using the local currency as the functional currency.  For subsidiaries, 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.



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 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.  The Company allocates 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



68





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 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.



Issuance of Stock for Noncash Consideration

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", defines a fair value-based method of accounting for stock options and other equity instruments.  This method 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 3 of EITF 96-18 to determine the measurement date and the fair value remeasurement principles to be applied.  The Company determined that the unamortized portion of the stock compensation could be remeasured on each interim reporting date and proportionately amortized to stock-based compensation expense for the succeeding interim reporting periods.



Stock-Based Compensation

The Company measures compensation expense for its employee stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.  The Company applies the disclosure provisions of Statement of Financial Accounting Standards (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.  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.



As required under SFAS No. 123, 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 options vesting period.  The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, to stock-based employee compensation.





69







|                                                                                                              |               |                          |              |     
|------------------------------------------------------------------------------------------------------------- | ------------- | ------------------------ | ------------ | ----
|                                                                                                              |               | RESTATED                
|                                                                                                              |               | YEARS ENDED DECEMBER 31,
|                                                                                                              |               | 2004                     |              | 2003
|                                                                                                              |               |                          |              |     
|Restated net loss - as reported                                                                               | $(29,220,176) |                          | $(6,581,647)
|Add: stock-based employee compensation expense included in reported net loss                                  | 5,708,956     |                          | 1,285,944   
|Deduct: stock-based employee compensation expense determined under the fair value based method for all awards | (4,290,731)   |                          | (685,451)   
|Restated pro forma net loss                                                                                   | $(27,801,951) |                          | $(5,981,154)
|                                                                                                              |               |                          |              |     
|Restated net loss per common share - basic and diluted                                                        | $(1.45)       |                          | $(0.79)     
|                                                                                                              |               |                          |              |     
|Restated pro forma loss per common share - basic and diluted                                                  | $(1.38)       |                          | $(0.72)     





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, 2004 and 2003:



|                        |         |  |         
|----------------------- | ------- |  | --------
|                        | 2004    |  | 2003    
|Risk-free interest rate | 4.0%    |  | 2.0%    
|Expected volatility     | 133.0%  |  | 5.0%    
|Dividend yield          | 0.0%    |  | 0.0%    
|Expected life           | 6 years |  | 10 years



Research and Development - 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 of a detail program design, completion of a working model.  Thereafter, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value, unless a high-risk development issue exists  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, and high-risk development issues are addressed.  During the years ended December 31, 2004 and 2003, Guardian expensed $740,566 and $287,414, respectively.  No amounts were capitalized in either year.



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.



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.



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 are particularly sensitive to change in the near term, and include estimates of net realizable value for intangible assets and of the valuation allocation for deferred tax assets.





70





Fair Value of Financial Instruments -The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates fair value based on the liquidity of these financial instruments and their short-term nature.



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 expected 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 making operating decisions and assessing financial performance.  The entity level financial information is identical to the information presented in the accompanying statements of operations.  For 2004, the Company only had one group of similar products and services.  Therefore, the Company has determined that it operates in a single operating segment: radiology information and picture archiving and communication systems.



The Company operates in North America and Europe.  In general, revenues are attributed to the country in which the contract originates.





|                             |                              |  | 
|---------------------------- | ---------------------------- |  | 
|Geographic Information      
|                             | Year ended December 31, 2004
|Revenues:                   
|North America:              
|Software licenses            | $20,000                      | 
|Maintenance and support fees | -                            | 
|Total North America          | $20,000                      | 
|                             |                              |  | 
|United Kingdom:             
|Software licenses            | $-                           | 
|Maintenance and support fees | 80,988                       | 
|Total United Kingdom         | $80,988                      | 
|Total                        | $100,988                     | 
|                             |                              |  | 
|                             |                              |  | 
|                             | December 31, 2004           
|Long-lived assets:          
|Corporate                    | $2,201,825                   | 
|North America                | 129,165                      | 
|United Kingdom               | 187,287                      | 
|Total                        | $2,518,277                   | 





Long-lived assets consist primarily of goodwill, software, patents, and property and equipment.  Corporate assets represent those assets generating software license revenue in the Americas and the United Kingdom.



Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which addresses the accounting for share-based compensation transactions.  SFAS No. 123(R) eliminates the ability to account



71





for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted and recognized in the statement of operations based on their fair value. SFAS No. 123(R) will be effective for public companies that file as small business issuers as of the first interim or annual reporting period that begins after December 15, 2005. The Company is evaluating the provisions of this standard.  Depending upon the number and terms of options that may be granted in future periods, the implementation of this standard could have a material impact on the Company's financial position and results of operations.  The pro forma effect on prior years is disclosed above.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs. This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing" to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) In addition, this Statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement will be effective for the Company beginning in 2005.  This pronouncement is not expected to have a material impact on the Companys financial position or results of operations.



In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-Monetary Assets, an Amendment of Accounting Principles Board ("APB") No. 29. This statement amends APB Opinion No. 29, "Accounting for Non-Monetary Transactions.  Earlier guidance had been based on the principle that exchanges of non-monetary assets should be based on the fair value of the assets exchanged and APB No. 29 included certain exceptions to this principle.  However, FASB 153 eliminated the specific exceptions for non-monetary exchanges with a general exception rule for all exchanges of non-monetary assets that do not have commercial and economic substance.  A non-monetary exchange has commercial substance only if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for non-monetary exchanges occurring in fiscal periods beginning after June 15, 2005.  This pronouncement is not expected to have a material impact on the Companys financial position or results of operations.



NOTE 4.  FINANCING ARRANGEMENTS

Beginning December 8, 2003, and concluding December 19, 2003, the Company entered into a series of purchase agreements with eight individuals under which convertible promissory notes in the aggregate amount of $700,000 and warrants to purchase 311,250 shares of our common stock were issued.  200,000 of the warrants are exercisable during the eighteen (18) month period commencing on the date of issuance at a price of $2.50 per share.  The remaining warrants are exercisable as follows:  (i) 80,000 warrants exercisable during the twenty-four (24) month period commencing on the date of issuance at a price of $2.50 per share, and (ii) 31,250 warrants exercisable during the sixty (60) month period commencing on the date of issuance at a price of $5.00 per share.  The proceeds of the sale of the notes were used by the Company for working capital purposes.  The notes bore interest at 10% per annum and were repayable sixty (60) 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, subdivision or our capital stock, capital reorganization, consolidation or merger of Guardian.  The warrants also contain piggy-back registration rights.  The unpaid notes and interest, which were extended for 120 days beyond the maturity date, bore interest at the rate of 18% per annum.  The face amount of the notes was reduced by the relative fair value of the warrants of $202,841 as described above.  This discount was amortized to interest expense over the 60-day term of the notes.  The bridge notes matured during February 2004 and were extended by the note holders for an additional 120 days.  In consideration of the extension of the maturity date of the bridge notes, the Company issued each note holder an additional warrant, on the same terms and conditions as the original warrants, for each of the original 311,250 warrants.  The fair value of the warrants was calculated using the Black-Scholes Model, and the Company recorded $789,300 as an increase in interest expense and additional paid-in capital in 2004.  On April 28, 2004, all holders of the convertible bridge financing notes elected to convert their outstanding principal and accrued interest into equity, on the same terms and conditions as a contemporaneous private placement.  At that time, the note holders converted $700,000 in outstanding principal and $99,185 of accrued interest into 499,480 shares of Guardian common stock (converted at $1.60 per share) and 124,870 stock purchase warrants ($2.65 per share expiring twenty-four [24] months from date of issue).



For the year ended December 31, 2003, the Company analyzed the provisions of the convertible note host contracts in accordance with EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock.  Because the convertible notes contain variable payment terms (at inception the number of shares and/or the equivalent cash settlement were not fixed), and as a result of the Company not having sufficient authorized and unissued shares of common stock to settle the



72





contracts (after considering all other commitments that may require the issuance of stock during the maximum period the convertible note contracts could remain outstanding), the note contracts do not qualify as conventional convertible debt, and the Company has 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 fair value of the embedded conversion option was determined using the Black-Scholes method for valuing options, but was limited to the proceeds from the note, after allocation of freestanding warrants based on the estimated relative fair value of the notes and freestanding warrants to total proceeds or $700,000.  Therefore, as more fully described in Note 2, the fair value of the embedded conversion option was approximately $497,159 as of December 31, 2003, and was recorded as a derivative liability.



NOTE 5.  PROPERTY AND EQUIPMENT

Property and equipment consists of the following as of December 31:



|                               |          |          |         |        
|------------------------------ | -------- | -------- | ------- | -------
|                               |          | 2004     |         | 2003   
|Computer equipment             | $186,636 |          | $37,170
|Software                       | 61,188   |          | -      
|                               |          | 247,824  |         | 37,170 
|Less: Accumulated depreciation | 115,052  |          | 2,165  
|                               |          | $132,772 |         | $35,005





Depreciation expense for 2004 and 2003 was $25,734 and $26,734, respectively.



NOTE 6.  ACQUISITIONS

Difference Engines Corporation

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 technology (software) and amortized on a straight-line basis over 3 years.



Under the terms of the agreement, Guardian issued 587,000 shares of its common stock as consideration for the purchase of the IP, and cancelled a convertible promissory note that Difference Engines had issued to Guardian in the amount of approximately $25,000, representing advances Guardian made to Difference Engines.  The 587,000 shares of common stock are subject to a two (2) year lock up.  Guardian has granted Difference Engines shareholders piggy-back registration rights for a period of three (3) years commencing on the date of the expiration of the lock up period with regard to the shares to be issued in the transaction. Upon expiration of the two (2) year lock up period, if 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.  The Company reclassified and measured at the estimated contractual redemption value, the 587,000 shares of common stock issued as consideration, from permanent equity to temporary equity.  As shares of common stock are sold by the former shareholders of Difference Engines, and/or the Company registers its outstanding shares of common stock, the then current redemption value of those shares will be reclassified from temporary equity to permanent equity.



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.



Wise Systems, Ltd.

On July 27, 2004, the Company completed the acquisition of Wise Systems Ltd. under the terms of the 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 $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



73





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.  Fair value of the additional contingent consideration will be recognized as an additional purchase price, and appropriately allocated to goodwill, once the contingency has been resolved. The shares of stock are subject to a three year lock-up.  In addition, Guardian repaid as part of the purchase price 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 for a period of two years following closing at a base salary of $210,250 per annum. Also, Mr. Martin Richards and Ms. Susan Richards have 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 of 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 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           
|Less cash acquired                                 | 609                 
|Net cash paid, including $150,000 deposit          | $      2,229,783    
|                                                   |                     

The following unaudited pro forma information has been prepared assuming that the acquisition had taken place at the beginning of the year ended December 31, 2004 and the beginning of the year ended December 31, 2003, respectively.  The pro forma financial information is not necessarily indicative of the combined results that would have occurred had the acquisitions taken place at the beginning of the period, nor is it necessarily indicative of results that may occur in the future.

Pro forma information (unaudited):



|                                            |                                       |  |                                      
|------------------------------------------- | ------------------------------------- |  | -------------------------------------
|                                            | Restated Year ended December 31, 2004 |  | Restated Year ended December 31, 2003
|                                            |                                       |  |                                      
|Revenues                                    | $            326,351                  |  | $            345,603                 
|Net loss                                    | (29,430,103)                          |  | (7,082,424)                          
|Basic and diluted net loss per common share | $               (1.47)                |  | $               (0.85)               
|Weighted average common shares              | 20,086,798                            |  | 8,314,785                            



74







| |  |  | 
| |  |  | 



NOTE 7.  STOCKHOLDERS EQUITY

Unless otherwise indicated, fair value is determined by reference to the price the stock traded at on the measurement date, which may not be the date the equity instrument was issued.  Stock options included in stockholders equity for employees reflect only those issued at an exercise price less than fair value, in accordance with the provisions of APB 25.  Generally, the measurement date for employee stock compensation is the grant date.  In the case of outside consultants, stock-based compensation is measured using the Black Sholes method, and the measurement date is the date at which their performance is complete.  This total 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.  When the measurement date is not the date of grant, the total cost is remeasured at the end of each reporting period based on the estimated 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.





Stock-based compensation was measured under the Black-Scholes method using the following assumptions:

Volatility

133%

Interest Rates

1.38%

Life

as described in the following section.



Common Stock

Pursuant to the terms of a placement agreement, dated December 22, 2003, as amended February 27, 2004, the Company engaged Berthel Fisher & Company Financial Services, Inc. (Berthel Fisher) to act as the Company placement agent in connection with a contemplated private offering of our securities exclusively to certain accredited investors pursuant to Rule 506 of Regulation D under the Securities Act.  Under the terms of the offering, investors received units of securities, each unit consisting of four shares of common stock and one common stock purchase warrant to purchase one share of common stock exercisable at a price of $2.65 per share during an eighteen month period following the initial closing.  The Company paid or issued the following compensation to Berthel Fisher for its services as placement agent in connection with the offering: (i) 199,800 shares of common stock; (ii) placement agents warrants to purchase 10% of the shares issued in the offering (excluding the shares underlying the Class A Warrants) for an aggregate of 499,502 warrants; (iii) investment banking fees, commissions and reimbursable expenses in the aggregate amount of approximately $766,000.  The placement agents warrants are exercisable at a price of $1.92 per share for a period of five years from the date of issuance; contain certain piggyback registration rights and a cashless exercise provision.



During April and May 2004, the Company closed a $7,992,015 private placement of 4,995,010 shares and 1,248,752 warrants.  The securities were placed by Berthel Fisher.  The offering generated net proceeds of $7,188,634 after deducting commissions, investment banking fees, and legal expenses of $803,381.



The table below details the investment transactions that occurred:



|       |  |            |  |           |  |           |  |            |  |          |  |           
|------ |  | ---------- |  | --------- |  | --------- |  | ---------- |  | -------- |  | ----------
|       |  |            |  | Shares    |  | Warrants  |  |            |  | Cash     |  |           
|       |  | Amount     |  | Issued to |  | Issued to |  | FMV of     |  | Paid for |  | Net       
|Date   |  | Invested   |  | Investors |  | Investors |  | Warrants   |  | Expenses |  | Proceeds  
|       |  |            |  |           |  |           |  |            |  |          |  |           
|Mar 24 |  | $195,194   |  | 121,996   |  | 30,499    |  | $37,654    |  | $30,612  |  | $164,582  
|Apr 02 |  | 185,498    |  | 115,936   |  | 28,984    |  | 57,968     |  | 16,725   |  | 168,773   
|Apr 20 |  | 275,072    |  | 171,920   |  | 42,980    |  | 207,593    |  | 34,795   |  | 240,277   
|Apr 27 |  | 656,960    |  | 410,600   |  | 102,650   |  | 896,135    |  | 59,156   |  | 597,804   
|May 3  |  | 2,100,752  |  | 1,312,970 |  | 328,243   |  | 1,716,706  |  | 189,098  |  | 1,911,654 
|May 14 |  | 4,578,540  |  | 2,861,588 |  | 715,397   |  | 1,917,264  |  | 472,995  |  | 4,105,545 
|       |  | $7,992,015 |  | 4,995,010 |  | 1,248,752 |  | $4,833,320 |  | $803,381 |  | $7,188,634



On April 28, 2004, all holders of the convertible bridge financing notes elected to convert their outstanding principal and accrued interest into equity, on the same terms and conditions as the private placement.  At that time, the note holders converted $700,000 in outstanding principal and $99,185 of accrued interest into



75





499,480 shares of Guardian common stock (converted at $1.60 per share) and 124,870 stock purchase warrants ($2.65 per share expiring eighteen [18] months from date of issue).



On March 25 and May 15, 2004, the Company accepted direct investments from two investors of $64,000 and $23,200, respectively, on the same terms and conditions as the private placement offering.  The investors were allowed to invest outside the private placement offering as a result of their prior affiliation with the Company.  The investors received 40,000 and 14,500 shares of common stock, as well as, 10,000 and 3,625 stock purchase warrants at a price of $2.65 per share, expiring eighteen months from the date of issuance.



On April 23, 2004, Guardian issued an aggregate of 287,500 shares of its common stock, with a fair market value of $3,076,250, in settlement of claims by certain brokers who alleged they were entitled to certain equity compensation.  In consideration of the issuance of the shares, the brokers executed a release of all claims against Guardian.  Guardian granted the brokers certain piggyback registration rights in connection with the issuance of the shares.  The shares were issued in reliance upon the exemption set forth in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder and are restricted securities within the meaning of Rule 144(a)(3).



On November 8, 2004, the Company accepted direct investments from two investors of $416,000 and $45,000, respectively, on the same terms and conditions as the private placement offering.  The investors received 260,000 and 28,125 shares of common stock, as well as, 65,000 and 7,031 stock purchase warrants at a price of $2.65 per share, expiring eighteen months from the date of issuance.



On December 8, 2004, the Company entered into a Stock Subscription Agreement with investors totaling approximately $1,000,000. This transaction was recorded in the equity section of the balance sheet as a stock subscription receivable and unissued common stock.  Subsequent to December 31, 2004, the Company issued, under the Stock Subscription Agreement, an aggregate of 500,000 shares of common stock to certain accredited investors for proceeds to the Company of approximately $1,000,000.



During 2004, the Companys employees exercised 270,000 incentive stock options which resulted in the issuance of 270,000 shares of common stock for cash proceeds to the Company of $157,500.



On May 15, 2004, the Company issued 250,000 shares of common stock for the completion of consulting services and recorded an expense of $2,062,250.



On August 30, 2004, the Company issued 50,000 shares of common stock as compensation for services rendered under a consulting services agreement and recorded an expense of $125,000 during 2004.



On December 18, 2004, the Company issued 25,000 shares of common stock to its investor relations firm for services to be rendered under a one year consulting services agreement and recorded a deferred compensation expense of $123,000 which will be expensed during 2005.



Preferred Stock

The Company has the authority to issue 1,000,000 shares of preferred stock.  The Board of Directors has the authority to issue such preferred shares in series and determine the rights and preferences of the shares.



The shareholders of RJL received 4,097 shares of Series A Preferred Stock, $0.20 par value per share (Preferred A) of the Company.  In addition, the Company committed 1,430 shares as compensation under a consulting agreement for the successful targeting and closing of the reverse acquisition.  The shares of Preferred A have a preferential liquidation value of $0.20 per share and each share will be automatically converted into 1,000 shares of common stock of the Company (subject to certain anti-dilution adjustments) upon the Company attaining earnings before income taxes and depreciation and amortization (EBITDA) aggregating $2,500,000 commencing on the date of the reverse acquisition and terminating on June 26, 2005, as evidenced by the Companys financial statements contained in its reports filed with the SEC under the Securities Exchange Act of 1934.  The foregoing shares were issued to the RJL shareholders in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the Act) and set forth in Section 4(2) of the Act and Rule 506 of Regulation D promulgated thereunder and constitute restricted securities within the meaning of Rule 144 (a)(3) under the Act.





76





On November 23, 2004, the stockholders of the Company voted in the affirmative to automatically convert all shares of the Companys Series A Convertible Preferred Stock into shares of Common Stock.  Messrs. Dishaw and Trudnak, are directors, executive officers, and principal stockholders of Guardian, and are interested persons and directly affected by the outcome of this conversion.  Moreover, Mr. Tobin the third holder of the Series A Convertible Preferred Stock, is a principal stockholder of Guardian.  Robert A. Dishaw, the President, the Chief Operating Officer, a director, and a principal stockholder of Guardian, owns beneficially and of record 2,212 shares of Series A Convertible Preferred Stock.  Michael W. Trudnak, the CEO, Chairman, Secretary, a director, and a principal stockholder of Guardian, owns beneficially and of record 1,885 shares of Series A Convertible Preferred Stock.  Effective November 30, 2004, and without further action of the board or such stockholders, Mr. Dishaw received, upon conversion of all of the shares of Series A Convertible Preferred Stock owned beneficially and of record by him as of that date, an aggregate of 2,212,000 shares of common stock of Guardian, and Mr. Trudnak received, upon conversion of all of the shares of Series A Convertible Preferred Stock owned beneficially and of record by him as of that date, an aggregate of 1,885,000 shares of common stock of Guardian.  Mr. Tobin owns beneficially and of record 1,430 shares of Series A Convertible Preferred Stock as of that date and upon conversion received an aggregate of 1,430,000 shares of common stock of Guardian.



The Company also designated an aggregate of 1,170 shares of our preferred stock as Series B Convertible Preferred Stock, $0.20 par value per share (Preferred B).  Holders of Preferred B shares are not entitled to receive dividends, to vote their shares (except as required by Delaware law), or to any preemptive rights.  Holders are entitled to a liquidation preference of $0.20 per share and an automatic conversion of each Preferred B share into 1,000 shares of common stock (subject to certain anti-dilution adjustments) upon the Company obtaining shareholder approval for an increase in the number of common shares authorized.  Shares of Preferred B are not otherwise convertible.  At the date of the reverse acquisition all of the Preferred B shares had been committed to consultants.  The Company issued the Preferred B shares as follows:  (i) 690 shares for investor relations services, and (ii) 480 shares for marketing and sales initiatives within the life sciences market.  These shares were converted to common stock effective February 13, 2004.



On September 3, 2003, the Company executed a Subscription Agreement with an employee of the Company whereby the employee subscribed for and agreed to purchase 133.3 shares of Series B Preferred Stock, $0.20 par value per share, for an aggregate consideration of $200,000 or $1,500.375 per share.  On August 26th and September 12th of 2003, the Company received from the employee the amounts of $50,000 and $150,000, respectively.  On October 23, 2003, the Board of Directors authorized and the Series B Preferred shareholders consented to an increase in the Series B Preferred Stock from 1,170 shares to 6,000 shares.  The employee has been issued 133.3 shares as of this date.



On September 24, 2003, the Company engaged Berthel Fisher & Company Financial Services, Inc. (BFC) to act as its placement agent in connection with a contemplated offering to certain accredited investors pursuant to Rule 506 of Regulation D under the Act.  The Board of Directors authorized the issuance of up to 2,400 shares of a Series C Convertible Preferred Stock, $0.20 par value per share (Preferred C).  Shares of Preferred C carry substantially the same designations and rights as the Preferred B shares.



During October and November, 2003, the Company closed on the sale of an aggregate of 545 shares of Series C Convertible Preferred Stock.  Berthel Fisher acted as the placement agent for the offer and sale of such shares.  The Company received net proceeds from the sale of such shares of $629,895, and issued to Berthel Fisher placement agents warrants to purchase an aggregate of 21,832 shares of our common stock, and to reimburse certain extraordinary expenses of Berthel Fisher.  The placement agents warrants are exercisable at a price of $1.95 per share during the five year period following the issuance thereof and contain piggy back registration rights.



On February 13, 2004, at a Special Meeting of Stockholders of the Company, the Companys stockholders voted to increase the number of shares of Common Stock from 15,000,000 to 200,000,000.  Approval of the increase in common stock initiated the automatic conversion of 1,303.3 shares of Series B Convertible Preferred Stock and 545 shares of Series C Convertible Preferred Stock into 1,303,300 and 545,000 shares of common stock, respectively.



Stock Warrants

In connection with the offer and sale of shares of Series C Convertible Preferred Stock, we issued to Berthel Fisher, on October 14, 2003, warrants to purchase an aggregate of 16,320 shares of common stock and, on November 24, 2003, warrants to purchase an aggregate of 5,480 shares of common stock.  The warrants



77





are exercisable for a period of five years from the issue date at a price of $1.95 per share.  The warrants contain certain anti-dilution provisions in the event of a stock dividend, subdivision of our capital stock, or capital reorganization, consolidation or merger of Guardian.  The warrants also contain a piggy back registration right.



During December 2003, the Company issued an aggregate of 311,250 warrants to purchase our common stock in connection with the issuance of our bridge notes.  The warrants are exercisable at prices ranging from $2.50 to $5.00 per share for a period ranging from eighteen (18) months to five (5) years from the issue date.  The warrants contain certain anti-dilution provisions in the event of a stock dividend, subdivision or our capital stock, capital reorganization, consolidation or merger of Guardian.  The warrants also contain piggy back registration rights.  The bridge notes matured during February 2004 and were extended by the note holders for an additional 120 days.  In consideration of the extension of the maturity date of the bridge notes, the Company issued each note holder an additional warrant, on the same terms and conditions as the original warrants, for each of the original 311,250 warrants.



In October 2003, the Company entered into a placement agent agreement with another investment bank.  Management believed the investment bank failed in its obligations under the agreement.  On March 16, 2004, the Company negotiated a termination of this placement agent agreement and compensated the investment bank through the issuance of 250,000 two-year warrants to purchase our common stock at a price of $1.00 per share, the value of which was charged to operations in the year ended December 31, 2003.  On March 17, 2004, the investment bank exercised its cashless exercise provision and the Company issued 197,368 shares of Rule 144 restricted common stock to the investment bank.



On September 18, 2003, the Company entered into an Alliance Partner Agreement with Telinks Canada Ltd. (Telinks) to jointly provide a broad range of intelligent systems solutions to the existing and future clients of Telinks and Telinks affiliated companies.  The Alliance Partner Agreement provided Guardian with a minimum guarantee of $2 million in revenues.  In addition, the sole owner of Telinks was granted a warrant to acquire 200,000 shares of common stock at an exercise price of $2.00 per share.  The warrants expire September 16, 2005.  To date Telinks has been unsuccessful in generating any revenues for Guardian.  Based on Telinks financial inability to pay Guardian the $2 million guarantee, the parties verbally agreed in September 2004 to terminate the agreement.  The Company has determined that the asset was impaired and the deferred costs were written off.





78





The table below represents all of the Companys outstanding warrants at December 31, 2004.



|                            |              |                 |       |                |           |                                           
|--------------------------- | ------------ | --------------- | ----- | -------------- | --------- | ------------------------------------------
|                            |              | Expiration Date |       | Exercise Price |           | Number of Warrants Granted and Outstanding
|Placement agent             | Oct 14, 2008 |                 | $1.95 |                | 16,320   
|                            |              | Nov 24, 2008    |       | $1.95          |           | 5,480                                     
|                            |              | Mar 23, 2009    |       | $1.92          |           | 12,200                                    
|                            |              | Apr 1, 2009     |       | $1.92          |           | 11,594                                    
|                            |              | Apr 19, 2009    |       | $1.92          |           | 17,192                                    
|                            |              | Apr 26, 2009    |       | $1.92          |           | 41,060                                    
|                            |              | May 2, 2009     |       | $1.92          |           | 131,297                                   
|                            |              | May 13, 2009    |       | $1.92          |           | 286,159                                   
|                            |              |                 |       |                |           | 521,302                                   
|                            |              |                 |       |                |           |                                           
|Bridge noteholders          | Jun 7, 2005  |                 | $2.50 |                | 200,000  
|                            |              | Jun 10, 2005    |       | $2.50          |           | 100,000                                   
|                            |              | Jun 18, 2005    |       | $2.50          |           | 100,000                                   
|                            |              | Dec 18, 2005    |       | $2.50          |           | 160,000                                   
|                            |              | Dec 7, 2008     |       | $5.00          |           | 62,500                                    
|                            |              | Oct 27, 2005    |       | $2.50          |           | 124,870                                   
|                            |              |                 |       |                |           | 747,370                                   
|                            |              |                 |       |                |           |                                           
|Private placement investors | Sep 23, 2005 |                 | $2.65 |                | 1,248,752
|                            |              | Feb 25, 2009    |       | $2.65          |           | 65,000                                    
|                            |              | Sep 25, 2005    |       | $2.65          |           | 17,031                                    
|                            |              | Oct 1, 2005     |       | $2.65          |           | 3,625                                     
|                            |              |                 |       |                |           | 1,334,408                                 
|                            |              |                 |       |                |           |                                           
|Consultant compensation     | May 19, 2007 |                 | $5.00 |                | 250,000  
|                            |              |                 |       |                |           |                                           
|Total outstanding warrants  |              |                 |       |                |           | 2,853,080                                 





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 that 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



79





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 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 (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 market 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.



Stock option activity is as follows:



|                                 |                                 |  |                             
|-------------------------------- | ------------------------------- |  | ----------------------------
|                                 | Weighted Average Exercise Price |  | Number of Options (Restated)
|Outstanding January 1, 2003      | $-                              |  | -                           
|Granted ($.36 - $1.25)           | $0.45                           |  | 2,080,000                   
|Exercised                        | $-                              |  | -                           
|Cancelled                        | $-                              |  | -                           
|Outstanding December 31, 2003    | $0.45                           |  | 2,080,000                   
|                                 |                                 |  |                             
|                                 |                                 |  |                             
|Outstanding January 1, 2004      | $0.45                           |  | 2,080,000                   
|Granted ($2.25 - $4.10)          | $1.38                           |  | 3,222,800                   
|Exercised                        | $0.58                           |  | (270,000)                   
|Cancelled                        | $0.81                           |  | (600,000)                   
|Outstanding December 31, 2004    | $1.24                           |  | 4,432,800                   
|                                 |                                 |  |                             
|                                 |                                 |  |                             
|Exercisable at December 31, 2004 | $0.78                           |  | 1,739,000                   
|Vesting in 2005                  | $1.18                           |  | 2,270,800                   
|Vesting in 2006                  | $3.62                           |  | 423,000                     
|Vesting in 2007                  | $-                              |  | -                           
|Vesting in 2008                  | $-                              |  | -                           
|                                 | $1.24                           |  | 4,432,800                   





























80





The following table summarizes additional information about stock options outstanding at December 31, 2004:



|                         |           |                                |      |                                                   |       |                                 |           |                    |       |                                
|------------------------ | --------- | ------------------------------ | ---- | ------------------------------------------------- | ----- | ------------------------------- | --------- | ------------------ | ----- | -------------------------------
|                         |           | Options Outstanding (Restated) |      | Options Exercisable                              
|Range of Exercise Prices |           | Number of Options              |      | Weighted-Average Remaining Contractual Life (Yrs) |       | Weighted-Average Exercise Price |           | Number Exercisable |       | Weighted-Average Exercise Price
|$0.36 - $0.50            | 3,310,000 |                                | 8.83 |                                                   | $0.47 |                                 | 1,510,000 |                    | $0.44
|$1.25                    |           | 19,000                         |      | 9.13                                              |       | 1.25                            |           | 19,000             |       | 1.25                           
|$3.00 - $4.10            | 1,103,800 |                                | 9.00 |                                                   | 3.56  |                                 | 210,000   |                    | 3.48 
|                         |           | 4,432,800                      |      | 8.87                                              |       | $1.25                           |           | 1,739,000          |       | $0.78                          





Common Shares Reserved At December 31, 2004, shares of common stock reserved for future issuance were as follows:



|                                     |           
|------------------------------------ | ----------
|Outstanding stock options (Restated) | 4,432,800 
|Stock options available for grant    | 25,260,000
|Warrants to purchase common stock    | 2,853,000 
|                                     | 32,545,800





NOTE 8.  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").



The Company acquired intangible assets from Wise consisting of software technology valued at $2,264,630 and goodwill of $119,191 during the year ended December 31, 2004.  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 asset acquired, specifically for sale in the US marketplace, and has concluded that no impairment existed as of December 31, 2004.  Goodwill is a non-amortizing intangible asset subject to ongoing evaluation for impairment.



|                                   |                         |  |                          |  |           
|---------------------------------- | ----------------------- |  | ------------------------ |  | ----------
|                                   | As of December 31, 2004
|                                   | Gross Cost              |  | Accumulated Amortization |  | Net       
|Intangibles with indefinite lives:
|Goodwill                           | $126,472                |  | $-                       |  | $126,472  
|                                   |                         |  |                          |  |           
|Intangibles with finite lives:    
|Software technology                | $2,442,196              |  | $201,123                 |  | $2,241,073
|Patent acquisition costs           | 9,333                   |  | 254                      |  | 9,079     
|                                   | $2,451,529              |  | $201,377                 |  | $2,250,152







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The Companys estimated amortization expense is $488,988 for 2005 through 2008, $287,865 for 2009, and $6,334 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 9.  INCOME TAXES

There is no benefit or provision from 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                           | 2004 Restated     |      | 2003 Restated
|                                                 |                   |      |               |                   |     
|Federal benefit at statutory rate                | $(9,720,541)      | 35%  |               | $(2,237,760)      | 34% 
|Increase (decrease) due to:                      |                   |      |               |                   |     
|State benefits, net of federal benefits          | (1,132,157)       | 4%   |               | (260,633)         | 4%  
|Difference in valuation stock based compensation | 4,247,724         | -15% |               | 345,128           | -5% 
|Stock option exercises                           | 1,890,771         | -7%  |               | 488,144           | -8% 
|Equity in loss of subsidiary                     | 200,294           | -1%  |               | 0                 | 0%  
|Other                                            | 11,199            | 0%   |               | 11,207            | 0%  
|Valuation allowance                              | 4,502,710         | -16% |               | 1,653,914         | -25%
|Provision for income taxes                       | $               - | 0%   |               | $               - | 0%  



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, 2004 are as follows:



|                                                   |                        
|-------------------------------------------------- | -----------------------
|                                                   | 2004 Restated          
|Deferred tax assets:                               |                        
|Accrued salaries                                   | $            33,672    
|Accrued leave                                      | -                      
|Depreciation and amortization                      | 851,054                
|Net operating loss carryforwards, not yet utilized | 5,310,280              
|Total deferred tax assets                          | 6,195,006              
|Valuation allowance for deferred tax assets        | (6,195,006)            
|Net deferred tax assets                            | $                     -



For income tax purposes, the Company has a net operating loss carryforward of approximately $13,989,147 at December 31, 2004 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 10.  CONTINGENCIES

On July 29, 2004, the Company filed a complaint in the Circuit Court for Montgomery County, Maryland, against Difference Engines Corporation (DEC), Mr. Walter Ludwig and Mr. Victor T. Hamilton arising from certain claims asserted by Mr. Thomas Bentsen against the Company in connection with the transfer of certain assets by DEC to the Company pursuant to an Asset Purchase Agreement, dated October 23, 2003 as amended (the Asset Purchase Agreement).  Effective December 17, 2004, the Company, DEC, and Messrs. Ludwig and Hamilton entered into a settlement agreement and release and subsequently filed a stipulation of dismissal in this case. The settlement agreement provided that the defendants are prohibited from distributing or disposing of the 587,000 shares of Company stock that DEC received pursuant to the Asset Purchase Agreement, unless, under certain specified conditions, the defendants shall pay any judgment or settlement arising from certain claims by others against the Company or the Companys assets from the sale of such shares. For the purpose of paying such judgment or settlement, the Company agreed to release



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58,700 of such shares from the two year lock up provision to which such shares are subject under the Asset Purchase Agreement to permit the resale of such shares. The defendants have agreed to indemnify the Company regarding such claims. The Company agreed to pay Mr. Ludwig $22,676 of payments otherwise unpaid under an agreement with Mr. Ludwig. The defendants executed a release in favor of the Company.



Subsequently, on or about January 17, 2005, the Company was served with an amended complaint in the case of Bentsen v. Difference Engines Corporation, Ludwig, Hamilton and Guardian Technologies, Inc.,in the Circuit Court of Montgomery County, Maryland. This case was originally brought against DEC and Mr. Ludwig only on March 3, 2004. The amended complaint added the Company and Victor Hamilton as new defendants in the case. Mr. Bentsen alleged he was a former employee of DEC.  Originally, he had sued DEC and Mr. Ludwig, its president, for, among other things, breach of an alleged employment agreement between Mr. Bentsen and DEC. Mr. Bentsen alleged that, among other things, he developed certain technologies for DEC and was not paid for his services. Mr. Bentsen argued that because he was not paid for his services to develop those technologies, those technologies remain his property. Mr. Bentsen alleged that those technologies were sold by DEC to the Company pursuant to the Asset Purchase Agreement.  On February 23, 2005, a settlement and release agreement was entered into effective as of February 8, 2005, by and between Mr. Bentsen, DEC, Mr. Ludwig, Mr. Hamilton and the Company. In that agreement, the parties agreed to execute a stipulation of dismissal of the lawsuit with prejudice which will be held by a named escrow agent. In settlement, DEC has agreed to pay $90,000 (settlement amount) to the escrow agent for the benefit of Mr. Bentsen within 30 days from the latest date as of which the agreement was executed by all parties or an additional 15 days upon a showing of good cause. Upon payment of this sum, the agreement requires the escrow agent to file the stipulation of dismissal and pay the said sum to Mr. Bentsen. The agreement provides for certain releases by the parties that are effective upon filing of the stipulation and payment of the settlement amount.



On August 18, 2004, we became a defendant in a lawsuit in Minnesota state court entitled VisualGold v. Thomas E. Ramsay, Nancy Goetzinger and Guardian Technologies International, Inc.   VisualGold has alleged that the Company tortuously interfered with its contracts and prospective economic advantage by engaging Thomas Ramsay to work as a consultant, and that Ramsay transferred certain of its trade secrets to the Company.  The Company strenuously denies the allegations, and has asserted counterclaims against VisualGold and other third parties for misappropriation of trade secrets.  The Company is seeking compensatory and punitive damages, attorneys fees and costs.  Ramsay and Goetzinger have also filed counterclaims against VisualGold.  On October 15, 2004, following extensive briefing and a hearing on the matter, Judge Isabel Gomez of Hennepin County District Court denied VisualGold's motion for a temporary injunction against the company in all regards.  Discovery is ongoing; however, based on the advice of counsel, the Company believes that it has substantial defenses to the allegations and that the suit is without merit.  The Company and individual defendants deny the allegations in this complaint and intend to defend themselves vigorously.  It is not possible at this time to predict whether the Company will incur any liability or to estimate the damages, or the range of damages, if any, that the Company might incur in connection with these lawsuits. The ultimate resolution of these lawsuits could have a material adverse effect on the Company's business, results of operations, financial condition and cash flows.



NOTE 11.  EMPLOYMENT AGREEMENTS

The Company entered into employment agreements with Mr. Dishaw and Mr. Trudnak.  Mr. Dishaws employment agreement commenced on October 23, 2002, and Mr. Trudnaks employment agreement commenced on January 1, 2003.  The Company amended those agreements effective December 10, 2004. The amended agreements are for a three year term commencing June 26, 2003, and are renewable for one year terms.  The employment agreements provide for annual compensation to Messrs. Dishaw and Trudnak of $275,000.  The agreements provide 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 agreements may be terminated upon the death or disability of the employee or for cause.  In the event the agreements are 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. Each 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.



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The Company also entered into employment agreements with Mr. Darrell E. Hill, Vice President, Program Management, and Mr. Steve Lancaster, Vice President, Business Development which we amended December 10, 2004.  The amended agreements are essentially the same as the agreements with Messrs. Dishaw and Trudnak, except that the agreements provide for base salaries of $125,000 per annum.



The Company also entered into an employment agreement with Mr. Donovan, Chief Financial Officer of Guardian.  Mr. Donovans employment agreement is essentially the same as the agreements with Messrs. Dishaw and Trudnak, except that Mr. Donovans agreement provides for a base salary of $150,000 per annum.  Further, if Mr. Donovan terminates his employment agreement by reason of: a change in the location of his workplace beyond a 50 mile radius of Guardians principal address; a material reduction in his responsibilities or number of persons reporting to him; a material demotion; or an adverse change in his title, Mr. Donovan is entitled to be paid his base salary for one year following any such termination.  Also, in the event of a change in control of Guardian and, within 12 months of such change of control, his employment is terminated by the acquirer or one of the events in the immediately preceding sentence occurs, Mr. Donovan is entitled to be paid his base salary for eighteen months from the date of such termination or event.  A change of control would include the occurrence of one of the following events:

·

the approval of the shareholders 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 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, 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 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.



Effective as of December 19, 2003, we entered into employment agreements with Walter Ludwig, a director of Guardian, and Victor T. Hamilton in connection with the acquisition of certain assets of Difference Engines Corporation by Guardian.  The employment agreements are essentially similar to the employment agreements with Mr. Dishaw and Mr. Trudnak, except that they provide for an annual base salary of $120,000 for Mr. Ludwig and $90,000 for Mr. Hamilton. The agreements also include a change of control provision similar to that contained in Mr. Donovans employment agreement, except that Guardian is obligated to pay the annual base salary for twelve (12) months following the change of control termination.  Mr. Ludwig resigned as a director, officer and employee of Guardian on May 18, 2004 and his employment agreement terminated as of such date.



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 $.50 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.



NOTE 12.  RELATED PARTY TRANSACTIONS

Issuances of Stock to Directors, Officers and Others

On March 21, 2003, RJL entered into a consulting agreement, as amended, with ten brokers in connection with services to be provided in connection with locating and negotiating the proposed Reverse Acquisition



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between RJL, its stockholders and Guardian.  RJL agreed to issue, at closing of the acquisition, an aggregate of 2,000,000 shares of Guardian for such services.  Such shares were issued by the Company during July 2003.



On April 3, 2003, as part of the initial capitalization of Guardian, Mr. Dishaw and Mr. Trudnak, Company Chief Executive Officer, acquired 3,326 and 4,279 shares of common stock of RJL, respectively, for nominal cash consideration.



On May 19, 2003, RJL entered into a consulting agreement with Mr. Tobin pursuant to which Mr. Tobin agreed to provide consulting services in connection with strategic selling related to our business, marketing and market development in the bio-medical industry in North America and Europe, business continuity, finance and accounting.  The consulting agreement is for a term that ends on May 1, 2005, and may be terminated by Guardian in the event a material misrepresentation by Mr. Tobin or the commencement of any action by the SEC against Mr. Tobin or any entity owned or controlled by Mr. Tobin; or by either party on not less than 30 days prior written notice.  As compensation for his services under the agreement, Mr. Tobin is entitled to receive an aggregate of 1,820,000 shares of common stock, 1,430 shares of Series A Convertible Preferred Stock, and 480 shares of Series B Convertible Preferred Stock of Guardian.  The shares of Series B Convertible Preferred Stock were issued to Mr. Tobin during August 2003 and the shares of Common Stock and Series A Convertible Preferred Stock were issued on November 19, 2003.  On February 13, 2004, Mr. Tobins Series B preferred holdings were converted into 480,000 shares of Common Stock, and on November 23, 2004, the Series A preferred holdings were converted into 1,430,000 shares of Common Stock.



Upon the closing of the Reverse Acquisition and effective June 26, 2003, we issued to Mr. Dishaw 2,945,500 shares of our common stock and 2,212 shares of our Series A Convertible Preferred Stock and we issued to Mr. Trudnak 2,566,000 shares of our common stock and 1,885 shares of our Series A Convertible Preferred Stock, in exchange for all of their stock in RJL.  Also effective as of June 26, 2003, Mr. Trudnak purchased 400,000 shares of our common stock for cash consideration of $200,000 in a private placement conducted by us.  On November 23, 2004, the preferred holdings of Messrs. Trudnak and Dishaw were converted into 1,885,000 and 2,212,000 shares of Common Stock, respectively.



On July 30, 2003, Guardian entered into a consulting agreement with Mr. Moorer, the former President and Chief Financial Officer of Guardian to provide consulting services in connection with, among other things, business continuity, finance and accounting, strategic planning, market development, and related services.  The agreement terminated on July 1, 2004.  As compensation for such services, Guardian issued to Mr. Moorer 150,000 shares of common stock.



On August 4, 2003, Guardian entered into an employment agreement with Ruth Taylor pursuant to which Mrs. Taylor is employed as an accountant.  Mrs. Taylor is the adult daughter of Mr. Robert A. Dishaw, President, Chief Operating Officer, a director and principal stockholder of Guardian.  The employment agreement provides 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 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 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 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 Company 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.





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On October 23, 2003, Guardian entered into an agreement with Difference Engines Corporation, a Maryland corporation, pursuant to which Guardian agreed to purchase certain intellectual property owned by Difference Engines, including certain compression software technology.   Mr. Walter Ludwig, was a Company director at the time of the transaction, is the president, a director, and a principal of Difference Engines.  The transaction closed on December 19, 2003.



On November 23, 2004, the stockholders approved an amendment to the Certificate of Designations, Preferences and Rights of our Series A Convertible Preferred Stock pursuant to which each outstanding share of Series A Convertible Preferred Stock automatically converted into 1,000 shares of common stock.  Effective November 30, 2004, and without further action of the board or such stockholders, Mr. Dishaw received, upon conversion of all of the shares of Series A Convertible Preferred Stock owned beneficially and of record by him as of that date, an aggregate of 2,212,000 shares of common stock of Guardian, and Mr. Trudnak received, upon conversion of all of the shares of Series A Convertible Preferred Stock owned beneficially and of record by him as of that date, an aggregate of 1,885,000 shares of common stock of Guardian.



NOTE 13.  OPERATING LEASES

On February 1, 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 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 grace 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.



The future minimum obligations under these arrangements are as follows:



|                                |  |                    
|------------------------------- |  | -------------------
|For the year ending December 31 |  | Property Leases    
|2005                            |  | $           215,882
|2006                            |  | 287,647            
|2007                            |  | 294,473            
|2008                            |  | 301,451            
|2009                            |  | 382,254            
|Thereafter                      |  | 123,682            
|Total                           |  | $        1,605,389 



Total rental expense included in the accompanying consolidated statements of earnings in 2004 and 2003 was $187,291 and $64,920, respectively.





NOTE 14.  SUBSEQUENT EVENT

In December 2004, the Company received a subscription for approximately $1,000,000 for the purchase of 500,000 common shares.  The proceeds from the subscription transaction were received in January 2005.



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