<PAGE>   1



                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                          ----------------------------

                                  FORM 10-KSB

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

For the fiscal year ended December 31, 1996     Commission file number 0-28238

                   GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)


                Delaware                                54-1521616
        (STATE OR OTHER JURISDICTION              (I.R.S. EMPLOYER
      OF INCORPORATION OR ORGANIZATION)           IDENTIFICATION NO.)

      22570 Markey Court, Dulles, Virginia              20166
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)          (ZIP CODE)

      Issuer's telephone number:                      703-444-7931


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
                                Class A Warrants
                                (Title of Class)

     Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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-B contained in this form, 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. [X]

     Issuer's revenues for its most recent fiscal year were $1,475,577.

     The aggregate market value of the voting stock held by non-affiliates as
of April 10, 1997 was approximately $1,850,000 based on the average bid and
asked prices of such stock.

     The number of shares outstanding of issuer's Common Stock, $.001 par
value, as of March 31, 1997 was 3,342,483.


                      DOCUMENTS INCORPORATED BY REFERENCE:

                                      NONE

Transitional Small Business Disclosure Format (check one)
Yes____  No  x

<PAGE>   2

                                     PART I

ITEM 1                       DESCRIPTION OF BUSINESS

GENERAL

     Guardian Technologies International, Inc. (referred to as the Company) was
originally incorporated in 1989 in the Commonwealth of Virginia, and commenced
full production of its products in December, 1990.  In 1996, the Company was
reincorporated in the State of Delaware. The Company manufactures its products
under its own label at its facility in Dulles, Virginia.  The Company currently
employs 21 people.


OPERATIONS

     The Company manufactures and distributes ballistic protective equipment,
including equipment commonly referred to as body armor.

     The Company's product lines include four basic types of ballistic
protective vests, ballistic protective shields, K-9 ballistic protective vests,
aircraft ballistic protective equipment, and assorted other ballistic
protective devices, such as ballistic protective blankets and seat cover
liners.

     The Company's four main product lines of ballistic protective vests are
manufactured in six styles, each providing varying degrees of protection and
certified under guidelines established by the National Institute of Justice
(the "NIJ").  All of the Company's body armor products are certified under the
NIJ's Standard 0101.03 for Police Armor.

PRODUCTS

     The Company's life-saving products are manufactured primarily with
AlliedSignal's High Performance Materials which are Spectra(R) 1000 woven
fabric, and non-woven composite ballistic materials Spectra Shield(R), Spectra
Flex(TM), Gold Shield(TM) and Gold Flex(TM). Based on studies and testing
performed at H.P. White Laboratory, Inc., an independent testing laboratory,
tests prepared by AlliedSignal and the Company's own test experience, the
Company believes that protective vests and equipment manufactured with
AlliedSignal High Performance Materials provide, pound for pound, greater
ballistic protection and reduced blunt trauma to the wearer, at higher
projectile velocities and with longer durability than similar equipment made
with other forms of ballistic resistant materials.

     The Company has been assigned rights to U.S. patents numbered 5,327,811;
5,448,938; and 5,377,577 for, respectively, a Lightweight Ballistic Protective
Device, a Removable Ballistic Resistant Armor Seat Cover and Floor Mat, and a
Ballistic Shield.  These patents include related production techniques. The
Company also acquired the rights to manufacture and distribute two other
patented products: a two-panel set of thin, lightweight rigid bullet-resistant
armor for police patrol bicycles, and a prisoner restraint device for improved
security when transporting a prisoner. For the latter device, the Company was
granted the trademark MAXI-MITT(TM).




                                     - 2 -
<PAGE>   3

MANUFACTURING

     The Company manufactures substantially all of its products.  The Company
manufactures its products under its own label at its facility in Dulles,
Virginia.

RESEARCH AND DEVELOPMENT

     The Company has concluded research and development on a new line of
ballistic protective vests, now being marketed as the Thin Blue Line (TBL). The
TBL vests, made with the new AlliedSignal High Performance Materials, Gold
Flex(TM) and Gold Shield(TM), are light, flexible and cost less to produce. The
TBL products are more competitively priced than Guardian's other four lines and
should be attractive to the price conscious consumer. The Company believes that
the TBL products should broaden the customer base, generating sales to those
law enforcement agencies and military organizations which were beyond reach
because of cost.

     The Company also introduced a two-panel set of thin and very lightweight
rigid armor which can be easily installed on police patrol bicycles.  The
introduction of this product followed the introductions of a newly designed
ballistic-protective vest for police dogs and a restraint device used when
prisoners are being transported.

RAW MATERIALS, SOURCES AND AVAILABILITY

     The Company is dependent upon a single supplier for its raw materials
which are available only from AlliedSignal, which holds the patent for the
unidirectional fiber/resin process incorporating Spectra(R) ultra high
molecular weight polyethylene fibers or aramid fibers. AlliedSignal also
controls the proprietary thermoplastic process used to manufacture its Shield
and Flex materials.

CUSTOMERS

     The Company has set a goal of a 10% increase in sales over the total sales
obtained in 1996. The focus of this sales goal will be in foreign sales and in
contract work for the Department of Defense  as well as overall sales to U.S.
government agencies.

     In 1996, 21% of Guardian's total sales were made to foreign police and
military organizations which represented a significant increase over 1995's
foreign sales. The Company is pursuing opportunities in several nations of the
Pacific Rim, in Central and South America, in Eastern and Central Europe, and
the Middle East.

     Government contract work and sales to U.S. military organizations
represented 23% of total sales in 1996. The Company intends to team with
manufacturers of compatible armor products and/or materials to obtain contracts
by bringing together expertise, production know-how and capabilities. A teaming
arrangement in 1996 resulted in a significant contract award which is
continuing into 1997.


     The Company's relationship with Government Micro-Resources, Inc. (GMR), a
supplier to the General Services Administration (GSA) - the federal
government's principal procurement channel - ended in mid-1996 when GMR's
contract with GSA was terminated. The Company immediately initiated




                                     - 3 -
<PAGE>   4

negotiations to establish a new contract with GSA which enables the Company to
sell all its products directly to GSA. The new four-year contract was recently
signed and becomes effective on June 1, 1997.


     In 1996, the Company's planned expansion of its regional domestic law
enforcement distribution network through dealer sales did not achieve the
expected goals. Only a limited number of dealers provided the high standard of
customer service which the Company expects.  Therefore, the Company modified
the sales plan in order to emphasize a larger effort in direct Company sales
backed with strong customer service while continuing to strongly support sales
generated by selected dealers. This modification eliminated some costs in
dealing with middlemen and resulted in improved sales and customer relations.
The Company's sales representatives, in the field and at the Company offices,
are making intensive efforts to make direct contact with key procurement
personnel in small and medium size law enforcement agencies as well as
responding to agency and department solicitations for bids and proposals.

     The Company maintains ties to two large police fraternal organizations
which resulted in sales in 1996 and are expected to result in additional sales
in 1997.

MARKETING AND DISTRIBUTION

     The Company's products are marketed directly by the Company and through
local dealers of police equipment to local, state, and federal agencies,
private security companies, and private individuals with legitimate security
needs. Marketing methods include personal sales presentations, advertising in
magazines and periodicals aimed at the law enforcement profession, direct mail
information dissemination, participation by the Company sales personnel at
selected trade shows and conferences,

     The Company entered the Internet universe with its own home page
(www.guardiantech.com) and E-Mail (gti@interramp.com) which are developing into
resources for marketing its products in the United States and around the world.

     The Company also subscribes to two other marketing services: BidNet and
FACNet. BidNet tracks bids and solicitations for proposals from local and state
jurisdictions throughout the United States. FACNet provides information on
federal procurements and is a required on-line service for GSA contract
suppliers seeking to sell to the U.S. Department of Defense (DOD).

     In order to respond to DOD solicitation opportunities, the Company seeks
out manufacturers of compatible products and/or materials with which the
Company can match its expertise, production know-how, and capabilities.

     The Company plans to gradually expand the number of sales representatives
who will work on a commission-only basis. Generally, the Company has found that
retired law enforcement officers are suited for these positions for two primary
reasons: close relations are often maintained with former colleagues who are
still working, and their retirement annuity and benefits provide a financial
safety net.



                                     - 4 -
<PAGE>   5


BACKLOG

     At December 31, 1996, the Company's estimated backlog of sales  was
$80,000.  A year earlier, at December 31, 1995, the Company's estimated backlog
of sales was $505,934, including approximately $345,600 in an order to the U.S.
Government under a sub-contract.  However, production on that order did not
commence until early June 1996 because the Company discovered design flaws in
the Government drawings and specifications which required substantial
modifications and changes.

COMPETITION

     The ballistic resistant equipment business is highly competitive. In the
domestic law enforcement, federal government and military markets, the Company
has at least five major competitors.  Financial information is not available on
the most important of these competitors because they are privately held
companies.  The Company believes that the principal elements of competition in
the sale of ballistic protective vests are 1) materials used in construction,
2) style and design of the vest, and 3) price.  In the law enforcement and
military markets, the Company frequently bids for orders in response to
invitations for bidding which set forth product performance specifications.
Although the Company's products are priced slightly higher than the
competition's products, the Company believes its higher prices are justified by
better craftsmanship, higher ballistic capability of materials, more body area
coverage, and a longer warranty.  In the international market, the Company's
competition consists of several American competitors and a few international
companies. In certain international markets, the Company's ability to be
competitive is adversely affected by foreign companies which do not have to
abide by the U.S. Foreign Corrupt Practices Act.

ITEM 2 DESCRIPTION OF PROPERTY

     Throughout 1996, the Company's executive offices and manufacturing
facilities were located at 45472 Holiday Drive, Sterling, Virginia. The Company
occupied approximately 12,000 square feet at this location pursuant to a seven
(7) month extension to its lease and a lease. The lease extension and lease
expired in June, 1996 had a base rent of approximately $14,000 per month. From
July through December, 1996, the Company occupied the premises on a monthly     
basis at the rental rate of approximately $17,000 while the Company's new
facility was under construction. The Company left the leased premises to occupy
its new facility on January 23, 1997.

ITEM 3                        LEGAL PROCEEDINGS

     There are no material legal proceedings in which the Company is involved.

ITEM 4     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


     There were no matters submitted to a vote of security holders during the
last quarter of year ended December 31, 1996.





                                     - 5 -
<PAGE>   6

                                    PART II

ITEM 5    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The common stock of the Company is traded on the NASDAQ Stock Market under
the symbol GRDN. The prices listed below are the high and low sales for common
shares since the initial public offering on May 14, 1996.


<TABLE>
<CAPTION>
                                            Price
                                     --------------------
            Quarter Ended               Low       High
            -------------            -------- -----------
             <S>                    <C>         <C>        
               6/30/96               $ 5.75      $ 12.75
               9/30/96               $ 0.9375    $ 6.50
              12/31/96               $ 0.40625   $ 1.46875
</TABLE>


     The common stock purchase warrants of the Company are traded on the NASDAQ
Stock Market under the symbol GRDNW. The prices listed below are the high and
low sales prices for common share warrants since the initial public offering on
May 14, 1966.


<TABLE>
<CAPTION>
                                            Price
                                     --------------------
              Quarter Ended             Low        High
              -------------          --------  ----------
               <S>                  <C>         <C>     
                 6/30/96             $ 4.25      $ 11.50
                 9/30/96             $ 0.3125    $ 5.25
                12/31/96             $ 0.0625    $ 0.96875
</TABLE>


     There have been no dividends declared since inception.

     The Company did not sell any equity securities during the year ended
December 31, 1996 without registering the securities under the Securities Act.

ITEM 6   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

     YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

     Net sales for 1996 were $1,475,577 compared to $838,121 in 1995, an
increase of $637,456 or 76%.  The increase in sales is attributable to an
increase in sales to foreign governments and agencies (from nil in 1995 to
$314,850 or 21% of sales in 1996), and a $345,600 sale to the US Government
under a subcontract which amounted to 23% of sales, while maintaining domestic
sales at their previous levels.

     The Company's 1996 gross profit was $156,836 or 10.8% of sales compared to
$844 in 1995.  The improvement in the Company's gross profit margin for the
year ended December 31, 1996 as compared to 1995 resulted from production
efficiencies achieved on large orders and volume discounts on purchases of raw
materials in bulk quantities. The Company's gross profit margin for the year
ended 



                                     - 6 -

<PAGE>   7




December 31, 1995 was adversely affected by the Company's inability to
purchase raw materials in bulk and decreased direct sales which have a higher
gross margin than sales through dealer/distributors. However, cost of goods
sold increased 57.5% from $837,277 in 1995 to $1,318,741 in 1996, primarily due
to increased direct labor costs as the number of employees increased during the
first nine months of the year and an increase in indirect costs.

     Total operating expenses were $1,202,238 for 1996 compared to $486,326 for
1995.  General and administrative costs increased $426,887 from $372,190 in
1995 to $799,077 in 1996. This increase was primarily attributable to increases
in professional fees of $93,000, fees of $26,000 related to maintenance of
public company status, insurance premiums of $11,000, consulting fees of
$146,000, and salary increases for officers in accordance with employment
agreements.  Selling expenses increased from $114,136 in 1995 to $403,160 in
1996. This increase was due to reorganization of the sales function, additional
salesmen which resulted in $32,000 increase in sales salaries, $146,000 in
sales consulting fees, and $36,000 increase in commissions.  Advertising costs
and conference and exhibits costs increased by $60,000.  The Company has
terminated certain consulting agreements and expects advertising and other
promotional costs to decrease during 1997.

The 1996 non-operating interest income for the Company increased significantly
over the 1995 total because proceeds from the May, 1996 public offering are
invested in US Government agency debt securities.  These securities serve as
collateral for a line of credit with a broker.  The Company has used the line
of credit borrowings to pay off outstanding loans, finance the construction of
its production and headquarters facility and to provide for working capital
needs.  Interest capitalized in connection with the construction of the new
facility amounted to $21,509 for 1996. The net loss for 1996 was $953,683
compared to $512,716 for 1995.

In addition, the Company completed development and certification of a new
ballistic vest line in 1996, which will be offered for sale in 1997.  The new
line is constructed of improved ballistic materials which the Company purchased
in bulk during late 1996 at a substantial savings.  At December 31, 1996, the
Company's estimated backlog of sales was $80,000. At December 31, 1995, the
Company's estimated backlog of sales was $505,934, including approximately
$345,600 in an order to the U.S. Government under a sub-contract.

Accounts receivable as of December 31, 1996 were $60,998 as compared to
$100,244 at December 31, 1995.  This decrease was directly attributable to
decreased sales in the fourth quarter of 1996.  Sales for the first nine months
of 1996 averaged $139,000 per month; sales for the fourth quarter averaged
$73,000 per month. The decrease in fourth quarter sales is attributed to the
early completion of the U.S. Government contract, and the normal disruption
which occurred in connection with the move to the new administrative offices
and production facility. Accounts payable as of December 31, 1996 were $867,623
as compared to $147,323 at December 31, 1995. Included in accounts payable at
December 31, 1996, were fourth quarter purchases of approximately $277,000 (or
32% of accounts payable)of raw materials from Allied-Signal, Inc., the
Company's primary supplier of ballistic materials. At December 31, 1995, the
Company owed Allied-Signal, Inc. approximately $83,000 for ballistic materials.
In addition, included in accounts payable at December 31, 1996, is
approximately $383,000 (or 44% of payables)of construction and facility related
costs for the building which was completed and occupied on January 23, 1997.
At December 31, 1996, as compared to December 31, 1995, raw materials inventory
was significantly higher because of the fourth quarter bulk purchases of
ballistic materials and higher indirect costs.


                                     - 7 -

<PAGE>   8

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

     Net sales for 1995 were $838,121 compared to $966,410 in 1994.  The
decrease in sales is attributable to the Company cutting back its work force
and marketing efforts because of lack of working capital and lack of
international sales and international sales presence.  The Company's 1995 gross
profit was $844 compared to $424 in 1994.  The gross profit percentages are
comparable year-to-year.  The Company's gross profit margins for the years
ended December 31, 1995 and 1994 were adversely affected by the Company's
inability to purchase raw materials in bulk and decreased direct sales which
have a higher gross margin than sales through dealer/distributors.  Accounts
receivable as of December 31, 1995 were $100,244 as compared to $59,744 at
December 31, 1994.  This increase was attributable to increased sales in the
fourth quarter of 1995 as compared to the fourth quarter of 1994.  Accounts
payable as of December 31, 1995 were $147,323 as compared to $250,973 at
December 31, 1994.  This decrease was attributable to payments made by the
Company from proceeds received in the Company's December 1995 private offering.
Total operating expenses were $486,326 for 1995 compared to $523,809 for 1994.
The decrease in expenses ($37,483) is attributable to management tightening
control over expenses.  During 1995, the Company's cost of product liability
insurance decreased significantly occasioned by a statistical reexamination by
the Company's insurance carrier.  This decrease was offset by a comparable
increase in leasehold expenses.  Additionally, professional fees increased
significantly from 1994 to 1995.  At December 31, 1995, as compared to December
31, 1994, inventory of raw materials was significantly higher based upon the
Company's purchase of such raw materials utilizing funds received in the
December 1995 private offering.  At December 31, 1995, the Company's estimated
backlog of sales was $505,934.  Management was able to decrease salary expenses
and related payroll taxes between 1994 and 1995 by cutting back on
administrative support personnel.  The 1995 non-operating interest expense for
the Company increased significantly over 1994's total due to the significant
increase in short-term borrowings.  The net loss for 1995 was $512,716 of which
$497,760 was reclassified to paid in capital upon termination of the S
corporation election on December 7, 1995.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's principal sources of working capital during 1996 were a
public offering of securities, borrowings against the Company's investment
portfolio and trade credit. In May, 1996, the Company completed a public
offering of 977,500 shares of common stock and 977,500 common stock purchase
warrants, which were sold as units consisting of one share of common stock and
one common stock purchase warrant, for $5.10 per unit. Proceeds of $3,594,613,
after deducting costs of the offering, have been used to provide working
capital, pay off $264,600 in notes and related party payables and purchase
land, while the remainder has been invested in US Government Agency bonds
pending implementation of the Company's business plan.

     During 1996, the Company purchased land and entered into contracts for the
design and construction of a manufacturing and office facility in Dulles,
Virginia.  Total cost of the facility is approximately $2,700,000.  The
purchase of the land was paid for out of the proceeds of the public offering
and construction costs have been financed by borrowings against the Company's
portfolio of US Government Agency bonds.  The total borrowed under the margin
agreement was $1,850,600 at December 31, 1996.

     The Company intends to occupy approximately half of the facility while
leasing the remainder. During the first quarter of 1997, the Company signed
leases with three tenants for 3,600 square feet under seven year leases with
annual base rents totaling approximately $45,000, plus common area 


                                     - 8 -


<PAGE>   9




maintenance charges.  A lease for 4,800 square feet is under negotiation. 
Signed tenant leases provide for 3% annual increases in base rent.  If the
Company is able to lease the entire portion of its facility that the Company is
not occupying, annual rental income would be approximately $125,000.
        
     The ability of the Company to fund future operations and to implement its
expansion plan is dependent on achieving profitable operations through cost
reductions and expanded sales, the successful leasing of excess space in its
office headquarters and its ability to obtain permanent financing for the newly
constructed facility in Dulles, Virgina.

     Since its inception, the Company has satisfied its capital requirements
through the sale of common stock to investors, loans from affiliated lenders
and security holders, and notes payable personally guaranteed by officers and
principal security holders of the Company.  In addition, the Company has issued
common stock in lieu of cash for services rendered.  At December 31, 1996, the
Company's accumulated deficit was $968,640. Cash used in operations in 1996 was
$520,716.  The Company financed the loss for the year and the cash used in
operations by borrowing $1,993,804, consisting of borrowings against the
securities portfolio, draws on a line of credit, insurance premium financing
and funds obtained in the public offering.

     In 1995, the Company incurred losses of $512,716 of which $497,760 was
reclassified to paid in capital in connection with termination of the S
corporation election.  At December 31, 1995, the Company's accumulated losses
were $14,956 and $2,320,227 which was reclassified as paid in capital upon
termination of the S corporation election. Cash used in operations in 1995 is
$549,239.  The Company financed the loss for the year and cash used in
operations through significant borrowings and/or stock transactions in 1995.
In February, 1995, the Company raised $15,000 by the private sale of stock.
The Company borrowed $580,391, including: $175,000 borrowed on October 12,
1995; $190,000 short term borrowing from a bank; $55,391 through six different
advances from stockholders and related parties; and three other short term
notes totaling $160,000 from unrelated individual lenders.

     On December 12, 1995, the Company completed a private placement stock
offering.  The Company issued 732,835 shares of common stock with two warrants
attached to each share.  The gross proceeds from the sale totaled $1,099,252
and the Company received net proceeds of $878,729 after deducting commission
fees and other costs of the sale.  Additionally, in 1995, the Company sold
304,588 shares to three investors including securities counsel.  The Company
received $165,000 for services rendered by counsel for 110,000 of these shares
($1.50 per share) and $33,045 notes receivable for 194,588 of these shares
($.17) per share.  Upon completion of the private placement offering, the
Company repaid the October 12, 1995 short term $175,000 note.  In addition, in
1995, the Company repaid $487,342 in other short term borrowings, including the
$190,000 from the bank.  After successful completion  of the private placement
offering and at December 31, 1995, the Company had working capital of $289,563.

     The Company's ability to generate meaningful research and development
leading to the improvement of existing products and the creation of new
products has been limited historically by the Company's lack of funds for such
purposes.  Planned expanded research and development will be dependent on
availability of funds from operations.

     Since the Company's major customers change from year to year, the Company
is not dependent, prospectively, on any key customer for its future sales.  The
Company sells its products to its customers pursuant to purchase contracts
which include negotiated terms of payment.


                                     - 9 -
<PAGE>   10




     Messrs. North and Fernandez agreed to enter into four year employment
contracts with the Company commencing May 30, 1996.  These agreements
established an annual base salary of $150,000 for the first year of employment.
Effective January 1, 1997, these agreements were amended to reduce the base
salary to $77,900 each for the calendar year ended December 31, 1997.

     Because of the foregoing, the Company's independent auditors' report on
the financial statements as of and for the years ended December 31, 1996 and
1995 include a statement to the effect that there is substantial doubt about
the Company's ability to continue as a going concern.  Management intends to
address these conditions by taking appropriate action to increase domestic and
international sales as well as the implementation of a new contract with the
General Services Administration for sales to the federal government.  In
addition, the Company is also taking measures to reduce salaries, outside
consultant fees and other costs.  New production facilities were occupied in
January, 1997.  Reorganization of production is expected to result in improved
margins in the near future.  The Company has appointed four new members to the
Board of Directors and  arranged for interim financing of working capital needs
in order to pursue the goals set forth above.  For these reasons, management
believes that no adjustments or reclassifications of recorded assets and
liabilities is necessary at this time. There can be no assurances, however,
that the Company will be successful in these plans.


     There are no other known trends, demands, or commitments that will impact
the Company's results of operations, liquidity and/or capital resources, except
as described above.












                                     - 10 -
<PAGE>   11

ITEM 7   FINANCIAL STATEMENTS

                   GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                                FINANCIAL REPORT
                     YEARS ENDED DECEMBER 31, 1996 AND 1995




                                    CONTENTS


                                                             Page


INDEPENDENT AUDITOR'S REPORT ON THE
  FINANCIAL STATEMENTS                                        12

FINANCIAL STATEMENTS

  Balance Sheets                                              13

  Statements of Operations                                    15

  Statements of Stockholders' Equity                          16

  Statements of Cash Flows                                    17

 Notes to Financial Statements                                19













                                     - 11 -
<PAGE>   12



                  GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.





                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors
Guardian Technologies International, Inc.
Sterling, Virginia


     We have audited the accompanying balance sheets of Guardian Technologies
International, Inc. as of December 31, 1996 and 1995, and the related
statements of operations, stockholders' equity, and cash flows for the years
then ended.  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 generally accepted auditing
standards.  Those standards require that we plan and perform the audits 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 financial position of Guardian Technologies
International, Inc. as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.

     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 2 to the
financial statements, the Company has suffered continued losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.


                                             THOMPSON, GREENSPON & CO., P.C.


Fairfax, Virginia
March 12, 1997, except for Note 15, as to which the date is April 10, 1997





                                     - 12 -
<PAGE>   13


                   GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.


                                 BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995




<TABLE>
<CAPTION>
                                                      1996       1995
                                                   ----------  ---------
        
                  ASSETS
      <S>                                          <C>         <C>        
       CURRENT ASSETS
         Cash and cash equivalents                 $  119,703  $ 376,307
         Trade accounts receivable                     60,998    100,244
         Accrued interest receivable                   60,448          -
         Inventories                                  585,582    237,023
         Prepaid assets and fees                       75,365     28,961
         Securities available for sale              2,501,753          -
                                                   ----------  ---------
                  Total Current Assets              3,403,849    742,535
                                                   ----------  ---------

       PROPERTY AND EQUIPMENT
         Land                                         237,339          -
         Construction in progress                   2,306,527          -
         Leasehold improvements                       115,394    114,494
         Manufacturing equipment                       63,477     44,234
         Office furniture and equipment                85,213     38,416
                                                   ----------  ---------
                  Total Cost                        2,807,950    197,144
         Less accumulated depreciation              (197,778)  (172,148)
                                                   ----------  ---------
                  Net Property and Equipment        2,610,172     24,996
                                                   ----------  ---------

       OTHER ASSETS
         Deposits                                      26,697      4,025
         Certification costs, net of amortization      27,870     10,187
         Deferred offering costs                            -     82,948
                                                   ----------  ---------
                  Total Other Assets                   54,567     97,160
                                                   ----------  ---------




       TOTAL ASSETS                                $6,068,588  $ 864,691
                                                   ==========  =========
</TABLE>



THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.

 
                                     - 13 -
<PAGE>   14


                   GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.


                                 BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995
                                  (continued)



<TABLE>
<CAPTION>
                                                             1996      1995
                                                          ----------  --------
 <S>                                                    <C>          <C>
  LIABILITIES AND STOCKHOLDERS' EQUITY

  CURRENT LIABILITIES
    Line of credit payable                                $1,850,554  $      -
    Current portion of other notes payable                    57,016   122,291
    Notes payable - related parties                                -   101,200
    Trade accounts payable                                   867,623   147,323
    Accrued expenses                                          49,946    24,087
    Customer deposits                                          3,999    58,071
                                                          ----------  --------
            Total Current Liabilities                      2,829,138   452,972

  LONG TERM PORTION OF NOTES PAYABLE                          88,816         -
                                                          ----------  --------
            Total Liabilities                              2,917,954   452,972
                                                          ----------  --------

  STOCKHOLDERS' EQUITY
    Common stock, par value $0.001, 15,000,000
      shares authorized; 3,342,483 shares issued
      and outstanding in 1996; 5,000,000 shares
      authorized; 2,364,983 issued and outstanding
      in 1995                                                  3,343     2,365
    Additional paid-in capital                             4,138,275   457,390
    Less notes receivable for purchase of common stock       (33,080)  (33,080)
    Preferred stock, $0.20 par value, 1,000,000 shares
      authorized; no shares issued and outstanding in
      1996 and 1995                                                -         -
    Net unrealized gain on securities available for sale      10,736         -
    Accumulated deficit since December 7, 1995
      (termination of S corporation status in which a
      deficit of $2,320,227 was applied against
      additional paid-in capital)                           (968,640)  (14,956)
                                                          ----------  --------
            Total Stockholders' Equity                     3,150,634   411,719
                                                          ----------  --------

  TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY              $6,068,588  $864,691
                                                          ==========  ========
</TABLE>




                                     - 14 -
<PAGE>   15

                  GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                            STATEMENTS OF OPERATIONS
                     YEARS ENDED DECEMBER 31, 1996 AND 1995




<TABLE>
<CAPTION>
                                                          1996        1995
                                                      -----------  ----------
  <S>                                                 <C>           <C>    
   SALES                                               $1,475,577   $ 838,121

   COST OF GOODS SOLD                                   1,318,743     837,277
                                                       ----------   ---------

             Gross Profit                                 156,834         844
                                                       ----------   ---------

   GENERAL AND ADMINISTRATIVE EXPENSES                    799,077     372,190

   SELLING EXPENSES                                       403,160     114,136
                                                       ----------   ---------
                                                        1,202,237     486,326
                                                       ----------   ---------

             Operating Loss                            (1,045,403)   (485,482)

   FINANCING INCOME, net, including interest expense
     of $16,531 in 1996 and $29,438 in 1995                91,719     (27,234)
                                                       ----------   ---------

   NET LOSS                                            $ (953,684)  $(512,716)
                                                       ==========   =========

   NET LOSS PER SHARE                                  $     (.32)  $   (0.13)
                                                       ==========   =========

   AVERAGE COMMON AND COMMON EQUIVALENT
     SHARES OUTSTANDING                                 2,983,620   2,837,981
                                                      ===========   =========
</TABLE>




THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                     - 15 -
<PAGE>   16


                   GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1996 AND 1995





<TABLE>
<CAPTION>
                                                                                  Additional                       
                                                                   Common           Paid-in                               
                                                      Shares        Stock           Capital       Notes Receivable 
                                                    ---------  ---------------  ----------------  -----------------
<S>                                               <C>            <C>              <C>             <C>                   



Balance, December 31, 1994                           1,188      $  1,188          $ 1,732,718      $       -             
  Sale of common stock                                   5             5               14,995              -       
  Change par value of stock from $1.00              
   to $.001 per share                                    -       ($1,192)               1,192              -
  Stock split - 300 for 1                          356,707           357                 (357)             -
  Stock split - 3.7 for 1                          966,330           966                 (966)             -
  Employee stock bonus                               3,330             3                  564              -
  Contributed services                                   -             -              100,000              -
  Notes receivable, common stock                   194,588           195               32,885        (33,080)
  Sale of common stock and warrants                842,835           843              896,586              -
  Net loss                                               -             -                    -              -
  Capitalization of accumulated deficit upon  
   termination of S corporation election,     
   December 7, 1995                                      -             -           (2,320,227)             -
                                                ----------      --------          -----------      ---------

Balance, December 31, 1995                       2,364,983         2,365              457,390        (33,080)
  Sale of common stock and warrants                977,500           978            3,593,635              -
  Contributed services                                   -             -               37,500              -
  Stock options issued in exchange for other    
   services                                              -             -               49,750              -
  Net change in unrealized gain on securities   
   available for sale, net of taxes of $2,500            -             -                    -              -
  Net loss                                               -             -                    -              -
                                                ----------      --------          -----------      ---------
Balance, December 31, 1996                       3,342,483      $  3,343          $ 4,138,275      $ (33,080)
                                                ==========      ========          ===========      =========                   
</TABLE>


<TABLE>
<CAPTION>



                                                             Net Unrealized    
                                                             on Securities            Accumulated
                                                             Available for              Deficit              Total
                                                           ------------------       ------------------    -----------
<S>                                                          <C>                    <C>                  <C>       


Balance, December 31, 1994                                    $     -                $(1,822,467)         $ (88,561)
  Sale of common stock                                              -                          -             15,000
  Change par value of stock from $1.00                          
   to $.001 per share                                               -                          -                  -
  Stock split - 300 for 1                                           -                          -                  -
  Stock split - 3.7 for 1                                           -                          -                  -
  Employee stock bonus                                              -                          -                567
  Contributed services                                              -                          -            100,000
  Notes receivable, common stock                                    -                          -                  -
  Sale of common stock and warrants                                 -                          -            897,429
  Net loss                                                          -                   (512,716)          (512,716)
  Capitalization of accumulated deficit upon                    
   termination of S corporation election,                   
   December 7, 1995                                                 -                  2,320,227                  -
                                                              -------                -----------         ----------  

                                                  
Balance, December 31, 1995                                          -                    (14,956)           411,719   
  Sale of common stock and warrants                                 -                          -          3,594,613
  Contributed services                                              -                          -             37,500
  Stock options issued in exchange for other              
   services                                                         -                          -             49,750
  Net change in unrealized gain on securities                  10,736                          -             10,736
   available for sale, net of taxes of $2,500                       -                   (953,684)          (953,684)
  Net loss                                                    -------                -----------         ----------

Balance, December 31, 1996                                    $10,736                $  (968,640)        $3,150,634
                                                              =======                ===========         ==========
</TABLE>
                 
                                                                 
                                                                 
                                                                 
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.



                                     - 16 -


<PAGE>   17


                   GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                            STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 1996 AND 1995



<TABLE>
<CAPTION>
                                                          1996        1995
                                                      -----------  -----------
 <S>                                                <C>          <C>       
  CASH FLOWS FROM OPERATING ACTIVITIES
    Cash received from customers                     $ 1,460,751  $   855,692
    Cash paid to suppliers and employees              (1,986,184)  (1,402,303)
    Interest received                                     47,802        2,203
    Interest paid                                        (43,085)     (48,064)
    Other operating cash receipts                              -       43,233
                                                      ----------  -----------
           Net Cash Used in Operating Activities        (520,716)    (549,239)
                                                      ----------  -----------

  CASH FLOWS FROM INVESTING ACTIVITIES
    Payments for construction in progress             (2,285,018)           -
    Purchase of property and equipment                   (66,940)           -
    Purchase of land                                    (237,339)           -
    Purchase of securities available for sale         (2,991,771)           -
    Proceeds from called securities                      500,754            -
    Investment in certification costs                    (39,608)           -
    Increase in deposits                                 (22,672)           -
                                                      ----------- -----------
           Net Cash Used in Investing Activities      (5,142,594)           -
                                                      ----------- -----------

  CASH FLOWS FROM FINANCING ACTIVITIES
    Principal payments on borrowings                    (163,459)    (487,342)
    Proceeds from borrowings                           1,993,804      580,391
    Principal payments on related party borrowings      (101,200)           -
    Proceeds from issuance of common stock and
        warrants                                       3,677,561      912,429
    Deferred offering costs                                    -      (82,948)
                                                      ----------- -----------
           Net Cash Provided by Financing Activities   5,406,706      922,530
                                                      ----------- -----------

  NET (DECREASE) INCREASE IN CASH AND CASH
    EQUIVALENTS                                         (256,604)     373,291

  CASH AND  CASH EQUIVALENTS, BEGINNING OF YEAR          376,307        3,016
                                                      ----------- -----------

  CASH AND CASH EQUIVALENTS, END OF YEAR              $  119,703  $   376,307
                                                      =========== ===========
</TABLE>




THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.



                                     - 17 -
<PAGE>   18
                  GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                            STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 1996 AND 1995
                                  (continued)


<TABLE>
<CAPTION>
                                                              1996                 1995
                                                            ------------         -----------

<S>                                                         <C>                 <C>    
RECONCILIATION OF NET LOSS TO NET CASH USED
  IN OPERATING ACTIVITIES
    Net loss                                                 $ (953,684)         $ (512,716)
    Interest capitalized in connection with construction
      in progress                                               (21,509)               -
    Noncash (income) expenses included in net loss
      Depreciation and amortization                              47,555              53,386
      Contributed services                                       37,500             100,000
      Stock options issued in exchange for consulting
        services                                                 49,750                -
      Salary expense - employee stock issued                        -                   567
      Change in assets and liabilities
        (Increase) decrease in accounts receivable               39,246             (40,500)
        (Increase) decrease in accrued interest receivable      (60,448)               -
        (Increase) decrease in inventories                     (348,559)            (85,217)
        (Increase) decrease in prepaid expenses                  (2,654)             (2,044)
        Increase (decrease) in accounts payable and
          accrued expenses                                      746,159            (120,786)
        Increase (decrease) customer deposits                   (54,072)             58,071
                                                            -----------         -----------
             Net Cash Used in Operating Activities          $  (520,716)        $  (549,239)
                                                            ===========         ===========

SUPPLEMENTAL DISCLOSURE OF INVESTING AND
  FINANCING ACTIVITIES
    Purchase of prepaid insurance by installment
      note payable                                          $    43,750         $         -    
                                                            ===========         ===========
    Increase in common stock and additional
      paid-in capital                                       $ 4,986,228         $ 1,512,900
    Public and private offering costs paid in cash             (280,743)            (27,262)
    Public and private offering costs deducted from
      proceeds                                               (1,027,924)           (174,562)
    Noncash - stock issued to employee                                -                (567)
    Noncash - notes receivable received for stock                     -             (33,080)
    Noncash - stock issued for services rendered                      -            (335,000)
    Noncash - prepaid fees for public offering                  (82,948)                  -
                                                            -----------         -----------
             Net Proceeds from Issuance of
               Common Stock and Warrants                    $ 3,594,613            $ 912,429
                                                            ===========         ============

    Net Unrealized Gain on Securities Available for Sale    $   (10,736)        $          -
                                                            ===========         ============
</TABLE>


                                      -18-
<PAGE>   19


                  GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995



1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

      NATURE OF BUSINESS
 
      Guardian Technologies International, Inc. (the Company) was incorporated
      in Virginia on  October 30, 1989 and commenced full production in
      December, 1990.  The Company  manufactures and distributes soft armor
      products, primarily superior quality ballistic  protective vests, for law
      enforcement officers, armed forces personnel, and other legitimate
      individuals or groups requiring protective equipment.

      In February, 1996, the Company was reincorporated in the State of
      Delaware under the  name of Guardian Technologies International, Inc. and
      authorized to issue 15,000,000  shares of common stock, $.001 par value,
      and 1,000,000 shares of preferred stock, $.20 par  value.  Thereafter,
      pursuant to approval of the Company stockholders at a special
      stockholders meeting, a Plan of Agreement and Merger between Guardian
      Technologies  International, Inc., the Virginia corporation and Guardian
      Technologies International, Inc.,  the Delaware corporation was executed
      and filed with 2,364,983 shares of common stock  of the Delaware
      corporation issued in a share for share exchange for the 2,364,983 shares
      of the Virginia corporation then outstanding.

      METHOD OF ACCOUNTING

      The financial statements are presented on the accrual basis of
      accounting.

      REVENUE RECOGNITION

      Revenue is recognized upon shipment of product.

      FINANCIAL STATEMENT ESTIMATES

      The preparation of financial statements in conformity with generally
      accepted accounting  principles requires management to make estimates and
      assumptions that affect the reported  amounts of assets and liabilities
      and disclosures of contingent assets and liabilities at the  date of the
      financial statements and reported amounts of revenue and expenses during
      the  reporting period.  Due to their prospective nature, actual results
      could differ from those  estimates.



                                     - 19 -
<PAGE>   20


                   GUARDIAN TECHNOLOGIES INTERNATIONAL, INC

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995



1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

      FINANCIAL INSTRUMENTS

      The estimated fair value of cash and cash equivalents, accounts
      receivable, accounts payable  and accrued expenses and other liabilities
      approximate their carrying amounts in the  financial statements.

      CASH AND CASH EQUIVALENTS

      For purposes of the statement of cash flows, cash and cash equivalents
      include demand  deposits and all highly liquid debt instruments with
      original maturities of three months or  less.

      ACCOUNTS RECEIVABLE

      It is the practice of management to write off receivables in the year
      amounts are determined  to be uncollectible.  No allowance for doubtful
      accounts is reflected in these financial  statements since management
      believes all accounts to be fully collectible.  There was no bad  debt
      expense in 1996 or 1995.

      INVENTORIES

      Inventories are stated at the lower of cost or market, with cost being
      determined on a first-in, first-out basis for raw materials and work in
      progress.   Finished goods are stated at  standard cost.

      SECURITIES AVAILABLE FOR SALE

      The Company utilizes Statement of Financial Accounting Standards No. 115,
      Accounting  for Certain Investments in Debt and Equity Securities.  The
      statement establishes standards  of financial accounting and reporting
      for investments in equity securities that have readily  determinable fair
      values and for all investments in debt securities.

      Securities to be held for indefinite periods of time are classified as
      securities available for  sale.  Unrealized gains and losses are excluded
      from earnings and shown as a separate  component of stockholders' equity,
      net of applicable income taxes.  The investments are  recorded at fair
      value.




                                     - 20 -

<PAGE>   21


                   GUARDIAN TECHNOLOGIES INTERNATIONAL, INC

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995



1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

      DEFERRED OFFERING COSTS

      Deferred offering costs represent costs incurred in connection with
      raising capital.  Upon  completion of an offering, the amount of the
      proceeds credited to additional paid-in capital is reduced by the
      deferred offering costs.  Should an offering be unsuccessful, these costs
      are charged to expense.

      PROPERTY AND EQUIPMENT

      Property and equipment are recorded at cost and depreciated over their
      estimated useful  lives.  Leasehold improvements are amortized over their
      useful lives or the related lease  period, whichever is shorter.  The
      Company uses the straight-line and accelerated methods  of depreciation
      for financial statement and income tax reporting purposes.

      A summary of the estimated useful lives follows:

            Office furniture and equipment                  5 - 7 years
            Manufacturing equipment                         7 - 8 years
            Leasehold improvements                          2 - 7 years


      Expenditures for maintenance and repairs which do not materially extend
      the useful lives  of property and equipment are charged to earnings.
      When property or equipment is sold  or otherwise disposed of, the cost
      and related accumulated depreciation are removed from  the respective
      accounts with the resulting gain or loss reflected in earnings.

      Depreciation expense for the years ended December 31, 1996 and 1995 was
      $17,318 and  $10,774, respectively.  Amortization of leasehold
      improvements was $8,312 for the year  ended December 31, 1996 and $19,598
      for 1995.

      CERTIFICATION COSTS

      The Company has capitalized certain costs associated with certification
      of its products.  Certification costs are carried at cost less
      accumulated amortization.  Amortization is taken  on the straight-line
      basis over five years.  Amortization expense for the years ended
      December 31, 1996 and 1995 was $21,925 and $23,013, respectively.




                                     - 21 -
<PAGE>   22



                  GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995



1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

      CONTRIBUTED SERVICES

      The Company recognizes as additional paid in capital the value of
      uncompensated services  provided by the President and the Chief Executive
      Officer.

      ADVERTISING COSTS

      The Company charges advertising costs to expense as incurred.
      Advertising expense was  $52,199 for 1996 and $8,854 for 1995.

      INCOME TAXES

      The Company utilizes the liability method for accounting for income
      taxes.  The liability  method accounts for deferred income taxes by
      applying enacted statutory rates in effect at   the balance sheet date to
      differences between financial statement amounts and tax bases  of assets
      and liabilities.  The resulting deferred income tax liabilities are
      adjusted to reflect  changes in tax laws and rates.  Temporary
      differences consist of the difference in financial  statement and income
      tax bases for property and equipment and accounting for organization
      costs.  Deferred income taxes related to an asset or liability are
      classified as current or  noncurrent based on the classification of the
      related asset or liability.

      Prior to December 7, 1995, the Company, with the consent of its
      stockholders, had elected  S corporation status under Section 1372 of the
      Internal Revenue Code and similar sections  of the state income tax laws.
      On December 7, 1995, Guardian Technologies International,  Inc.
      terminated its S corporation election and is now subject to corporate
      income taxes.

      NET LOSS PER SHARE

      Net loss per share is based on the weighted average number of common and
      common equivalent shares outstanding during the period.  Primary and
      fully diluted earnings per share are the same amount.





                                     - 22 -
<PAGE>   23

                  GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995



1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

      STOCK COMPENSATION

      In 1996, the Company adopted Statement of Financial Accounting Standards
      No. 123, Accounting for Stock-Based Compensation for non-employee plans.
      SFAS 123 establishes standards of financial accounting and reporting
      for stock-based compensation plans including stock option plans, stock
      purchase plans and other arrangements by which employees or other
      related parties receive shares of stock or other equity instruments based
      on the market value of an entity's stock.

      The fair value of the Company's stock options used is the estimated
      present value at grant date using the Black Scholes pricing model with
      the following assumptions for 1996:  a risk  free interest rate of 5.58
      percent, no estimated dividend yield, an expected volatility of  24
      percent and an expected holding period of three years.

      On November 14, 1996, the Company granted an option to purchase 100,000
      shares at an  exercise price of $.44 per share, to a consultant providing
      advisory services to the Company.  At that date, the market price was
      $.9375.  The option is exercisable at any time after January 2, 1997 and
      on or before January 2, 2000.  Consulting expense of $49,750 has been
      recognized in the year ending December 31, 1996.

2. GOING CONCERN CONSIDERATIONS

      The Company has incurred losses of approximately $3,290,000 since
      inception.  These  continuing losses, a decline in sales during the
      fourth quarter of 1996, and unanticipated  increases in general and
      administrative costs raise doubt about the Company's ability to  continue
      as a going concern.  Its continued existence is dependent upon its
      ability to achieve profitable operations by increasing sales while
      controlling production and other costs.  In May, 1996, the Company
      completed a successful public offering which yielded  approximately
      $3,595,000 in new capital.  These funds have been used to provide
      working capital, purchase raw materials at reduced prices, reorganize
      sales efforts, expand product lines and, temporarily, to fund
      construction of new facilities.



                                     - 23 -

<PAGE>   24

                  GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995



2. GOING CONCERN CONSIDERATIONS (continued)

      During 1996, the Company's business plan was implemented and revised to
      meet changing conditions.  An increase of 76 percent in sales was
      achieved through sales efforts in foreign  markets, completion of a
      subcontract for product for the US Government, and maintenance  of
      domestic market share.  Gross profit margin increased from nil in 1995
      to 10 percent sales in 1996.  In addition, the Company completed
      development and certification of a new  ballistic vest line in 1996,
      which will be offered for sale in 1997.  The new line is  constructed of
      improved ballistic materials which the Company purchased in bulk during
      late 1996 at a substantial savings.  Sales of this line are expected to
      result in improved profit margin.  In 1997, the Company has instituted
      a cost reduction program to reduce salaries, outside consultant fees and
      other costs.  New production facilities were occupied in January, 1997.
      Reorganization of production is expected to result in improved margins
      in the near future.

      The new facility was completed in January, 1997, with the Company
      occupying approximately half the available 34,000 square feet.  The
      Company has leased out 3,600 square feet  under seven year leases to
      three tenants with annual base rents totaling about $45,000, plus common
      area maintenance charges.  A lease for 4,800 square feet is under
      negotiation.  Signed tenant leases provide for 3 percent increases in
      base rent.  When fully leased, annual  rental income is expected to be
      approximately $125,000.

      As explained further in Note 15, the Company has appointed four new
      members to the Board of Directors and arranged for interim financing of
      working capital needs in order to achieve the goals set forth above.
      For these reasons, management believes that no adjustments or
      reclassifications of recorded assets and liabilities is necessary at this
      time.

3. SECURITIES AVAILABLE FOR SALE

      Securities available for sale as shown in the balance sheet at
      December 31, 1996, are as follows:


<TABLE>
<CAPTION>
                                           Gross         Gross      Approximate
                                         Unrealized    Unrealized     Market
                             Cost          Gains         Losses        Value
                           ----------    ----------    ----------   -----------
     <S>                  <C>            <C>             <C>       <C>         
      U.S. Government and
        agency securities  $2,491,017     $10,736         $  -      $2,501,753
                           ==========     =======         ======    ==========
</TABLE>




                                     - 24 -
<PAGE>   25

                  GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995



3. SECURITIES AVAILABLE FOR SALE (continued)

      The following is the scheduled maturities of securities available for
      sale at December 31, 1996:


<TABLE>
<CAPTION>

                                                         Approximate 
                                                           Market
                                                 Cost       Value
                                             ----------  ----------
        <S>                                <C>         <C>      
         Due in one year or less            $  496,878  $  499,580
         Due from one year to five years     1,492,885   1,497,350
         Due in over five years                501,254     504,823
                                            ----------  ----------
                                            $2,491,017  $2,501,753
                                            ==========  ==========
</TABLE>


      Securities available for sale with carrying amount of $2,501,753 at
      December 31, 1996, are pledged as collateral on a line of credit payable
      (Note 6).

4. INVENTORIES

      Inventories consist of the following:


<TABLE>
<CAPTION>
                                              1996      1995
                                           ---------  --------
        <S>                               <C>        <C>                 
         Raw materials                     $ 266,925  $ 176,530
         Work in process                       7,695     35,972
         Finished goods                      140,984     24,521
         Raw materials in transit            169,978          -
                                           ---------  ---------
                                           $ 585,582  $ 237,023
                                           =========  =========
</TABLE>


5. CONSTRUCTION IN PROGRESS

      During 1996, the Company entered into various contracts for the design
      and construction  of a manufacturing and office facility on a parcel of
      unimproved land that was purchased in  May, 1996 for $237,339.  The total
      anticipated cost of the building is approximately  $2.5  million.
      Interest incurred during construction has been capitalized as part of the
      construction in progress.  The capitalized interest was $21,509 for
      1996.

      The Company commenced occupancy of the facility on January 31, 1997.

      See Note 15 for subsequent events.



                                     - 25 -

<PAGE>   26


                  GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995



6. LINES OF CREDIT

      The Company has a $100,000 line of credit arrangement with a bank,
      through June 30,  1997.  Interest is at 2 percent in excess of the bank's
      base lending rate.  No principal was  outstanding as of December 31, 1996
      and 1995.  The line of credit is guaranteed by Oliver  L. North,
      stockholder.  Borrowings and repayments in 1996 were $75,000 and $190,000
      in 1995.

      In 1996, the Company entered into a line of credit agreement with a
      securities broker which  allowed it to borrow against U.S. Government and
      agency securities (Note 3).  The  borrowings are charged interest at the
      broker's interest rate and are payable on demand.  At  December 31, 1996,
      a total of $1,850,554 has been drawn against the securities.  The
      interest rate at December 31, 1996 was 7.5 percent and is payable
      monthly.

      See Note 15 for subsequent events.

7. NOTES PAYABLE

      NOTES PAYABLE - OTHER


<TABLE>
<CAPTION>
                                            Interest   Original     Balance
                                              Rate      Amount      12/31/96  12/31/95
                                            --------   ---------    --------  --------
     <S>                                    <C>        <C>         <C>        <C>       
      Various insurance premium
        finance agreements, thirty-four
        monthly principal and interest
        payments of $5,539 until
        May, 1999.                            7.87%     $168,300    $145,832   $12,291

      Note payable, due on demand,
        secured by receivables and
        company assets, personally
        guaranteed  by Oliver L North,
        stockholder                          18.00%     $ 60,000          -     60,000

</TABLE>







                                     - 26 -
<PAGE>   27


                  GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995



7.    NOTES PAYABLE (continued)


<TABLE>
<S>                                            <C>                  <C>         <C>         <C>                            
Note payable, due on demand,
  secured by receivables and
  inventories, personally
  guaranteed by Oliver L North,
  stockholder                                   10.00%                $50,000           -       50,000
                                                                                 --------    ---------
     Totals                                                                       145,832      122,291
     Current maturities                                                           (57,016)           -
                                                                                 --------    ---------
     Long-term maturities                                                        $ 88,816    $ 122,291
                                                                                 ========    =========
</TABLE>

<TABLE>
<CAPTION>

The following is a schedule of future principal payments as of December 31, 1996:


     Year ending December 31,
     ------------------------
            <S>                                                                            <C>         
             1997                                                                           $  57,016
             1998                                                                              61,669
             1999                                                                              27,147
                                                                                            ---------
                                                                                            $ 145,832
                                                                                            =========    
</TABLE>
                
NOTES PAYABLE - RELATED PARTIES

The Company was indebted to certain stockholders and related parties as follows:


<TABLE>
<CAPTION>

                                             Interest    Original           Balance
                                               Rate       Amount      12/31/96    12/31/95
                                            ----------   --------     --------    --------
<S>                                        <C>          <C>           <C>        <C>              
Edwin Shufelt, stockholder,
  due on demand                             Prime + 1%   $100,000      $   -         $100,000

Oliver L. North, stockholder,
  due on demand                              9.00%       $  1,200          -            1,200
                                                              -       ------         --------
                                                                      $    -         $101,200
                                                                      ======         ========
</TABLE>


During 1996, the principal plus interest was repaid.  During 1995, the Company
borrowed $40,281 from its president and $3,910 from the chief executive
officer.  The amounts were repaid with interest.





                                     - 27 -
<PAGE>   28

                  GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995



8. LEASE COMMITMENTS

      The Company leases office and warehouse space under two agreements.  One
      agreement  expired November 1995 and was extended through July, 1996.
      Thereafter, it was renewed  on a month to month basis.   The other lease
      expired June, 1996 and is on a month to  month basis at December 31,
      1996.

      The Company sub-leases office space to other parties on a month-to-month
      basis.  Office  rental expense of $136,299 and $131,685 for the years
      ended December 31, 1996 and  1995, respectively, are net of sublease
      rental income of $36,162 and $28,233, respectively.

9. INCOME TAXES

      There was no provision for income taxes for the years ended December 31,
      1996 or 1995  due to net operating losses, the Company's termination of
      its election to be taxed as an S  corporation on December 7, 1995 and
      because deferred tax assets were offset by a valuation  allowance.  The
      deferred tax asset for the years ended December 31, are comprised of the
      following items:


<TABLE>
<CAPTION>

                                                   1996      1995
                                                ----------  --------
          <S>                                  <C>         <C>            
           Deferred tax assets:
             Net operating loss carryforward    $(352,000)  $(8,000)
             Property and equipment               (25,000)   (4,500)
             Accrued expenses                      (6,000)     (500)
                                                ---------   -------
                   Gross deferred tax assets     (383,000)  (13,000)

           Deferred tax liability:
             Net unrealized gain on securities
               available for sale                   5,000         -
           Less:  deferred tax asset valuation
             allowance                            378,000    13,000
                                                ---------  --------
                   Net deferred tax asset       $       -  $      -
                                                =========  ========
</TABLE>




                                     - 28 -
<PAGE>   29

                  GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995


9. INCOME TAXES (continued)

      A reconciliation between the amount of reported Federal income tax
      benefit and the amount computed by multiplying the applicable statutory
      Federal income tax rate is as follows:


<TABLE>
<CAPTION>

                                         1996                                  1995
                                 -----------------------           --------------------------
<S>                               <C>          <C>                <C>               <C>          
Computed expected tax benefit      $(324,250)   (34.00)%           $ (174,325)       (34.00)%
(Increase) decrease in tax
  benefit resulting from:
    Adjustments resulting from
       S corporation election            -        0.00                161,325         31.45
    State tax benefit                (57,250)    (6.00)                     -          0.00
    Other                             16,500      1.45                      -          0.00
                                   ---------   -------             ----------       -------
                                    (365,000)   (38.55)               (13,000)        (2.55)
                                   ---------   -------             ----------       -------

Allowance to reduce tax benefit
  to net realizable value:
    Beginning of year              $ (13,000)    (1.40)            $        -          0.00
    End of year                      378,000     39.95                 13,000          2.55
                                   ---------  --------             ----------       -------
                                     365,000     38.55                 13,000          2.55
                                   ---------  --------             ----------       -------
Income tax benefit                 $      -       0.00%            $        -          0.00%
                                   ========   ========             ==========       =======
</TABLE>


      At December 31, 1996, the Company has a net operating loss carryforward
      of approximately  $925,000 available under provisions of the Internal
      Revenue Code to be applied against  future taxable income.  This
      carryforward expires December 31, 2011.

10.    MAJOR CUSTOMERS

      The Company sells its products primarily to authorized dealers for resale
      to municipal,  county and state law enforcement agencies throughout the
      United States.  Approximately  21 percent of sales in 1996 were to
      foreign governments and agencies.  There were no  material sales to
      foreign governments and agencies in 1995.

     Percentage of sales to major domestic customers at December 31, are as
follows:


<TABLE>
<CAPTION>
                                                              1996               1995
                                                              ----               ----
<S>                                                           <C>               <C>
                  U.S. Government subcontract                  23%                -
                  Municipal law enforcement agency              9%               14%
                  Domestic dealer                               2%               15%
</TABLE>


                                      -29-
<PAGE>   30



                  GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995



11. MAJOR SUPPLIER CONCENTRATION

      The ballistic resistant products of the Company are primarily
      manufactured with the raw materials Spectra 1000 woven fabric and
      Spectra Shield.  These two products are only  manufactured and
      distributed by Allied-Signal, Inc.  As of December 31, 1996 and 1995,
      Guardian Technologies International, Inc., owed $276,765 and $83,352,
      respectively, to Allied-Signal, Inc.

12. FINANCIAL INSTRUMENTS

      CONCENTRATIONS OF CREDIT RISK

      Financial instruments which potentially subject the Company to
      concentrations of credit risk consist of trade accounts receivable and
      cash.  The Company grants credit terms in the normal course of business
      to its customers, who are primarily dealers or municipal, state and
      Federal law enforcement agencies, and who are located throughout the
      United States.  As part of its ongoing procedures, the Company monitors
      the credit worthiness of its customers.

      The Company maintains cash in commercial banks in accounts which are
      insured by the Federal Deposit Insurance Corporation (FDIC) up to
      $100,000 per customer and in uninsured accounts.  The Company has
      amounts on deposit with banks which at times exceed the $100,000 insured
      threshold.  The cash amount presented on the balance sheet  reflects the
      actual amounts on deposit with banks reduced for outstanding checks and
      increased for deposits in transit.  At December 31, 1995, the Company had
      uninsured cash  bank balances of $428,332.  There were no uninsured bank
      balances at December 31, 1996.

13. CONTRIBUTED CAPITAL

      In May, 1996, the Company completed an initial public offering of 977,500
      shares of common stock at $5.10 per share with 977,500 common stock
      purchase warrants.  The warrant entitles the holder to purchase one
      share of common stock at an exercise price of  $5.00 during the five year
      period following the effective date of the offering.  At December  31,
      1996, no warrants had been exercised.  The offering also registered
      732,835 additional shares of common stock, 1,465,670 warrants and
      1,465,670 shares of common stock underlying the warrants by existing
      stockholders.  No proceeds from the resale of these shares will be
      received by the Company.  Total net proceeds from the offering were
      $3,594,613 after deducting commission fees and other costs of the sale.



                                     - 30 -
<PAGE>   31


                  GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995



13. CONTRIBUTED CAPITAL (continued)

      There were 2,443,170 warrants, with an exercise price of $5.00 per share,
      outstanding at  December 31, 1996 and 1,465,670 warrants, with an
      exercise price of $5.00 per share,  outstanding at December 31, 1995.

      On February 20, 1995, the stockholders of the Company approved an
      amendment of the  articles of incorporation to increase the authorized
      shares of common stock to 5,000,000  shares and to authorize 1,000,000
      shares of preferred stock.  The amendment was filed on  March 22, 1996
      with the State Corporation Commission of Virginia.

      On February 21, 1995, the Company declared a 300 for 1 stock split in
      which the number  of shares was increased from 1,193 to 357,900 shares of
      common stock outstanding.  Par  value of common stock was changed from
      $1.00 to $0.01.

      During October, 1995, the Company borrowed $175,000 from principals of
      the investment  banker for the private placement offering.  The loan was
      repaid with proceeds from the  private placement offering.

      On November 15, 1995, the Company effected a 3.7 for 1 forward stock
      split pursuant to  which the number of shares were increased from 357,900
      to 1,324,230 shares of Common  Stock outstanding.

      In December, 1995, the Company completed an offering of its Securities
      under an  exemption pursuant to Rule 506, Regulation D promulgated under
      the Securities Act.  This  offering closed with the sale of 732,835 units
      at an offering price of $1.50 per unit which  offering raised an
      aggregate of $1,099,252 for the Company.  Each unit sold in this offering
      consisted of one share of common stock and two warrants each to purchase
      one share of  common stock at an exercise price of $5.00 per share.  The
      Company received net proceeds  of $878,729 after deducting commission
      fees and other costs of the sale, including 110,000  shares issued to the
      securities counsel in exchange for services rendered in connection with
      the offering.




                                     - 31 -
<PAGE>   32

                  GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995



13. CONTRIBUTED CAPITAL (continued)

      Additionally, in 1995, the Company sold 194,588 shares to investors
      including the securities  counsel for $.17 per share.  The notes
      receivable of $33,080 as of December 31, 1996 and  1995, represent
      amounts due from two stockholders for purchase of 194,588 shares of
      common stock.  The notes were due April 16, 1996, with interest at the
      rate of 9  percent.   Common stock was issued to employees in recognition
      of services rendered of 3,330 shares  at an issued price of $567 for the
      year ended December 31, 1995. Uncompensated services  provided by the
      President and Chief Executive Officer totaled $37,500 and $100,000 for
      1996 and 1995, respectively.

14. STOCK PRICES SINCE INITIAL PUBLIC OFFERING

      The common stock of the Company is traded on the NASDAQ Stock Market
      under the symbol GRDN.  The prices listed below are the high and low
      sales prices for common shares since the initial public offering on May
      14, 1996.


<TABLE>
<CAPTION>
                                           Price
                                      ------------------
              Quarter Ended              Low      High
              ------------            ---------  --------
               <S>                     <C>        <C>               
                  6/30/96               $   5.75   $  12.75
                  9/30/96               $ 0.9375   $   6.50
                 12/31/96               $0.40625   $1.46875
</TABLE>


      The common stock purchase warrants of the Company are traded on the
      NASDAQ Stock  Market under the symbol GRDNW.  The prices listed below are
      the high and low sales  prices for common share warrants since the
      initial public offering on May 14, 1996.


<TABLE>
<CAPTION>
                                              Price
                                         -------------------
                     Quarter Ended          Low      High
                     -------------       ---------  --------
                     <S>                 <C>       <C>               
                       6/30/96            $  4.25   $  11.50
                       9/30/96            $0.3125   $   5.25
                      12/31/96            $0.0625   $0.96875
</TABLE>




                                     - 32 -
<PAGE>   33


                  GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995



15. SUBSEQUENT EVENTS

      BOARD OF DIRECTORS

      On February 27, 1997, at a special meeting of the Board of Directors, the
      Company  appointed Herbert M. Jacobi,  Attorney, and Hugh E. Sawyer,
      President of National Linen  Services, to the Board of Directors for one
      year terms, or until the next annual shareholders'  meeting, whichever is
      earlier.   On March 4, 1997, at a special meeting of the Board of
      Directors, the Company appointed John C. Power, President of Redwood
      MicroCap Fund,  Inc., and Stephen G. Calandrella, President of the
      Rockies Fund, to the Board of Directors  for one year terms, or until the
      next annual shareholders' meeting, whichever is earlier.

      In March, 1997, Redwood MicroCap Fund, Inc., a company registered under
      the Investment  Company Act of 1940, purchased 309,300 shares of common
      stock of the Company.  During February and March, 1997, the Rockies Fund,
      a company registered under the  Investment Company Act of 1940 as a
      business development company, purchased 311,600  shares of common stock
      and 411,000 common stock purchase warrants of the Company.

      EMPLOYMENT AGREEMENTS

      Effective January 1, 1997, the employment agreements of the President and
      Vice President  were amended to reduce the base salaries payable to each
      to $77,900 for 1997, only.  The  agreements permit the Board to increase,
      but not decrease, the base salaries of the officers  during the remaining
      four year terms of the contracts. The Board or Compensation  Committee,
      in their sole discretion, may award bonuses to the officers.  The amended
      agreements include provisions for additional compensation payable to the
      officers in the  event of termination of employment without cause, or
      upon change of control of the  Company.

      ADDITIONAL BORROWINGS

      In January, 1997, the Company drew an additional $290,000 under the line
      of credit  agreement with the securities broker.  These funds were used
      to make the final payment on  the new office and manufacturing
      facilities, located in Sterling, Virginia.  Also, in January  and
      February, 1997, the Company drew a total of $40,000 under the bank line
      of credit  agreement.





                                     - 33 -
<PAGE>   34

                  GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995


15. SUBSEQUENT EVENTS (continued)

      ADDITIONAL BORROWINGS (continued)

      On February 7, 1997, the Company executed a one year note for $900,000
      with a  commercial entity.  Interest at 15 percent, annual rate,  is due
      monthly.  After payment of  three months interest, there are no further
      prepayment penalties. The principal balance is  due at maturity.  The
      note is secured by a first deed of trust on the office and manufacturing
      facility in Sterling, Virginia.  On April 10, 1997, the lender and the
      Company executed a  commitment letter to extend additional credit
      facilities under the above agreement.   The  commitment letter, which is
      valid for thirty days, modifies the original agreement to include  the
      following terms and conditions.   Total additional funds available under
      the credit  facility are $900,000.   The Company may borrow up to
      $650,000 with current tenants'  leases in place and up to a maximum of
      $900,000 when the building is fully leased.   Borrowings under the credit
      facility will bear interest at 15 percent annual rate, payable  monthly.
      The original principal amount of $900,000, plus any borrowings under the
      credit  facility will be due and payable on February 7, 1999.   The
      Company agrees to pay a  minimum of three months interest on additional
      borrowings during the remainder of the  term of the agreement.

      TENANT LEASES

      During March, 1997, the Company executed lease agreements with three
      tenants, including  one entity affiliated with the President, effective
      February 1, 1997, for approximately 3,600  square feet of office space in
      the facility located in Sterling, Virginia.  The leases are for  seven
      years, call for monthly payments of base rent and operating expenses, and
      a 3 percent  increase in base rent annually.  The Company is negotiating
      lease terms with a fourth  tenant.

      Minimum lease payments by year are as follows:


                           1997                       $ 41,560
                           1998                         46,584
                           1999                         47,982
                           2000                         49,421
                           2001                         50,904
                           2002                         52,431
                           2003                         54,004
                           2004                          4,511
                                                      --------
                                                      $347,397
                                                      ========




                                     - 34 -
<PAGE>   35



ITEM 8  CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURES

None.

                                    PART III

ITEM 9  DIRECTORS AND EXECUTIVE OFFICERS

     The executive officer and directors of the Company are listed in the table
below and brief summaries of their business experience and certain other
information with respect to them are set forth thereafter.


     NAME                   AGE             POSITION

Oliver L. North...........   53   Chairman of the Board, President and Secretary
Joseph F. Fernandez.......   60   Director, Vice President and Treasurer
Travis Y Green............   41   Director
Herbert M. Jacobi.........   52   Director
Hugh Sawyer...............   45   Director
John C. Power.............   34   Director
Stephen G. Calandrella....   37   Director

     The Company's Articles of Incorporation authorize three (3) classes of
Directors which  classes serve for varying terms. The Articles also grant to
the sitting Directors the authority to fill  any vacancies on the Board and/or
to appoint members to the Board to fill any vacancies resulting  from an
increase in the authorized number of Directors. As at the date hereof, there
are seven (7)  directors, four (4) of whom have been appointed by the original
Directors. Messrs. North and  Fernandez' terms as Directors are for a three (3)
year period, Mr. Green for a two (2) year period  and the appointees for a one
(1) year period.

     Oliver L. North has served as Chairman of the Board, President and
Secretary from inception. He graduated from the United States Naval Academy in
June 1968 and served in the United States Marine Corps for twenty-two years.
His service included a tour of duty in Vietnam where he earned a Silver Star
for heroism, a Bronze Star with a "V" for valor, and two Purple Hearts for
wounds in action.  From 1981 through 1986, he served as a member of President
Ronald Reagan's National Security Council staff and became Deputy Director of
Political-Military Affairs. In this capacity, he helped plan the liberation of
Grenada, the capture of terrorists who hijacked the cruise ship Achille Lauro,
and the U.S. raid on Quaddafi's terrorist training camps in Libya.  He retired
from the Marine Corps in 1988.


     In March, 1988, Mr. North was indicted on charges arising out of the
so-called Iran-Contra  affair. Four of the charges were dismissed prior to
trial. On May 4, 1989 Mr. North was acquitted  on nine counts and convicted on
three in the United States District Court in Washington, D.C. The  convictions
were appealed to the United States Court of Appeals for the District of
Columbia  Circuit. On July 20, 1990, the Court of Appeals vacated all the
convictions, reversed one conviction  outright, and sent the case back to the
District Court.  The Independent Counsel who had brought  


                                     - 35 -
<PAGE>   36

the case then declined to continue further prosecution and all remaining charges
were dismissed.  There are no outstanding criminal charges or convictions
against Mr. North today.
        
     Joseph F. Fernandez has served as Vice President, Treasurer and Director
since inception.  Mr. Fernandez began his career as a Police Officer with
Miami/Dade County Police Department  and served in this position for eight
years.  In 1967, he was employed by the U.S. Central  Intelligence Agency. In
this capacity, he served in both foreign and domestic posts dealing with
highly sensitive national security issues and intelligence operations.  As a
Senior Operations Officer  in the Clandestine Services, he directly supervised
CIA units of up to 35 persons in day-to-day  operational assignments and
planned, distributed and accounted for budgets in excess of $8 million.

     On June 22, 1988, Mr. Fernandez was indicted on five criminal counts
arising out of the  so-called Iran-Contra Affair. These indictments were
dismissed without prejudice on October 13,  1988. On April 4, 1989, Mr.
Fernandez was re-indicted in a different venue on four criminal counts  arising
out of the Iran-Contra Affair. This indictment was dismissed with prejudice on
November  24, 1989. The Independent Counsel lodged an appeal in the U.S. Court
of Appeals. In September,  1990, that Court upheld the dismissal of the
indictment, and on October 5, 1990, the mandate of  the Court of Appeals was
issued thereby making final the dismissal of all charges against Mr.
Fernandez. There are no outstanding criminal charges or convictions against Mr.
Fernandez today.

     Travis Y Green has been a Director since inception. He holds a Masters in
International  Business Studies from the University of South Carolina, and he
graduated with a Bachelors Degree  in Business Administration from Emory
University.  Mr. Green was an Account Executive at  Dresdner Bank AG, in New
York in 1978, and continued his financial career a the Wall Street firm  of
Brown Brothers Harriman & Co. for 10 years from 1982 through 1992.  In 1993, he
established  the investment banking firm of Green, Morris & Associates in
Atlanta, Georgia where he serves as  President.

     Herbert M. Jacobi has been an attorney in private practice in New York,
New York since 1967.

     Hugh Sawyer has served as President of National Linen Service, a $500
million in sales  subsidiary of National Service Industry, based in Atlanta,
Georgia since early 1996. He was  formerly president of Wells Fargo Armored
Services Division of Borg Warner.

     John C. Power has served as President and Chief Executive Officer of
Redwood MicroCap  Fund, Inc. ("MicroCap") since February, 1992. MicroCap is
registered as an Investment Company  under the Investment Company Act of 1940,
as amended (the "40 Act"), but is attempting to de-register from the 40 Act.
MicroCap has majority and/or wholly-owned subsidiaries engaged in oil  and gas
exploration, production and management and radio broadcasting. Since November
1996,  Mr. Power has been the Managing Member of Northern Lights Broadcasting,
L.L.C., a limited  liability company engaged in the acquisition and development
of radio stations in Montana and North  Dakota. Since November 1996, Mr. Power
has also been President of Power Surge, Inc. Mr. Power  has also served as
president of Power Curve, Inc., a private investment and consulting firm since
1986, and as an officer and director of Signature Wines of Napa Valley, Inc.
from September, 1995  to June 1996. From March, 1994 to September, 1995, Mr.
Power served as a general partner of  Signature Wines, a California general
partnership, a predecessor entity of Signature Wines of Napa




                                     - 36 -
<PAGE>   37

Valley, Inc. Mr. Power served as a director of BioSource International, Inc.
(NASDAQ:BIOI) from  August, 1993 to December, 1994, of Optimax Industries, Inc.
(NASDAQ:OPMX) from April 1993  to March 1995, and of AirSoft Corporation, a
manufacturer of network communications software  and systems, from 1993 to June
1996. Mr. Power received his formal education at Occidental  College and at the
University of California at Davis.

     Stephen G. Calandrella has been President and a Director of The Rockies
Fund, Inc. since  February, 1991, and Chief Executive Officer since January 30,
1994.  Mr. Calandrella has  previously served as a Director of Kelly Motors,
Ltd., Good Times Restaurants, Inc., Southshore  Corp., and Cogenco
International, Inc. Mr. Calandrella also served as a Director for Combined
Penny Stock Fund, Inc. and Redwood MicroCap Fund, Inc., both of which are
closed-end  investment companies registered under the Investment Fund Act of
1940.  Mr. Calandrella currently  serves as a member of the Board of Directors
of several publicly held companies.  Mr. Calandrella  has also engaged in
financing and consulting activities for development stage companies which
consist of advising public and private companies on capital formation methods,
enhancing  shareholder valuations, mergers, acquisitions and corporate
restructurings as well as arranging for  bridge loans and equity purchases.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT

     Section 16 (a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers, directors and persons who own more
than ten percent  of the Common Stock (collectively, "Reporting Persons") to
file initial reports of ownership and  changes of ownership of the Common Stock
with the SEC and the NASDAQ Stock Market.  Reporting Persons are required to
furnish the Company with copies of all forms that they file under  Section
16(a).  The Company is not aware of any failure on the part of any Reporting
Persons to timely file reports required pursuant to Section 16(a).

ITEM 10 EXECUTIVE COMPENSATION

     The following table sets forth the executive compensation and distribution
paid to each executive officer of the Company during the years ended December
31.

                          EXECUTIVE COMPENSATION TABLE

<TABLE>
<CAPTION>
                                Annual Compensation                   Long Term Compensation
                            ---------------------------           ----------------------------------   
Name                     Year                                        Restricted       Restricted
Principal                Ended                       Other           Stock     Options  LTIF      All other
Other Position           December Salary      Bonus  Compensation    Awards    SARA     Payouts   Compensations
-----------------------  -------- -------     -----  ------------    ------    ----     -------   -------------
<S>                     <C>       <C>        <C>    <C>             <C>       <C>     <C>        <C>
Oliver L. North          1996      $113,740     --     --              --        --      --         (1)
President and
  Secretary              1995            --     --     --              --        --      --         (1)

Joseph F. Fernandez      1996      $117,074     --     --              --        --      --         (1)
Vice President           1995       $40,000     --     --              --        --      --         (1)
and Treasurer
</TABLE>

(1)  Contributed services for Oliver L. North and Joseph F. Fernandez for 1996
     and 1995 that were recorded as additional paid-in capital were $37,500 and
     $70,000, respectively, for both years.  No shares were issued in exchange
     for the contributed services.



                                      -37-
<PAGE>   38

EMPLOYMENT CONTRACTS

     Oliver L. North and Joseph F. Fernandez executed employment contracts with
the Company  effective May 31, 1996.  The contracts are for a four (4) year
term with compensation at a rate of $150,000  for the first year of the term,
subject to increases as determined by the Board of Directors, plus fringe
benefits including health insurance.

Effective January 1, 1997, the employment agreements of the President and Vice
President were amended  to reduce the base salaries payable to each to $77,900
for 1997, only.  The agreements permit the Board  to increase, but not
decrease, the base salaries of the officers during the remaining terms of the
contracts.  The Board or Compensation Committee, in their sole discretion, may
award bonuses to the officers.  The  amended agreements include provisions for
additional compensation payable to the officers in the event of  termination of
employment without cause, or upon change of control of the Company.

     Oliver L. North, President, devotes approximately three (3) hours per day
to a radio program of  which he is the host during which program Mr. North is
not at the Company's offices.  Nonetheless, the  Company believes that Mr.
North devotes a full business day to the Company's affairs.

ITEM 11         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information, as of March 31, 1997
with respect to the beneficial ownership of shares of Common Stock by (i) each
stockholder known by the Company to be the  beneficial owner of more than five
percent (5%) of the outstanding shares of Common Stock; (ii) each  director of
the Company; (iii) each executive officer named in the Summary Compensation
Table appearing  below under "Executive Compensation", and (iv) all executive
officers and directors as a group.  Except as  indicated in the footnotes to
the table, persons named in the table have sole voting and investment power
with respect to all shares of Common Stock which they respectively own
beneficially.


<TABLE>
<CAPTION>
         Name and Address               Numer of Shares       Percent
         of Beneficial Owner          Beneficially Owned*     of Class*
         ---------------------------------------------------  ---------
         <S>                            <C>                   <C>
         Oliver L. North                      473,970         14.2%
         Rt. 1, Box 560
         Bluemont, VA  20135

         Joseph F. Fernandez                  283,050         8.5%
         542 Whitecedar Court
         Vienna, VA  22180

         Travis Y. Green                       11,100          .3%
         One Ravinia Drive
         Atlanta, GA  30346

         Redwood MicroCap Fund(1)             309,600          9.3%
         2055 Angle Drive, Suite 105
         Colorado Springs, CO  80918

         Rockies Fund (2)                     722,600         19.3%
         4465 Northpark Drive, Suite 400
         Colorado Springs, CO  80907

</TABLE>


                                     - 38 -
<PAGE>   39
<TABLE>
<CAPTION>

         Name and Address               Numer of Shares        Percent
         of Beneficial Owner            Beneficially Owned*   of Class*
         -------------------            --------------------  -----------
        <S>                             <C>                  <C>
         All Events Consulting Inc.(3)        450,000         13.5%
         7 Hampton Street
         Hauppauge, NY  11787

         Helmsley Finance Ltd.(4)             300,000          9.0%
         39 Dan St. Jersey
         Channel Island
         JFU 8 UA

         Michael Iovino(5)                    180,000          5.2%
         2530 4th Avenue
         East Meadow, NY  11554

         John Magliocco (6)                   225,000          6.4%
         14 Applegreen Drive
         Westbury, NY  11568

         M.D. Iabbah (7)                      225,000          6.4%
         708 Greenwich St
         Apt 5C, New York
         NY  10014

         All Officers and Directors
         as a Group (5 persons)             1,800,320         48.0%
</TABLE>


     *    Under applicable rules of the Securities and Exchange
          Commission (the "SEC"), a person is deemed to be the beneficial owner
          of share of Common Stock if, among other things, he or she directly
          or indirectly has or shares voting power or investment power with
          respect to such shares.  A person is also considered to beneficially
          own shares of Common Stock which he or she does not actually own but
          has the right to acquire presently or within the next sixty (60)
          days, by exercise of warrants or otherwise.  The percentage of
          ownership was determined by assuming that all Warrants held by this
          securityholder have been exercised and that Warrants held by other
          securityholders have not been exercised.

(1)  Redwood MicroCap Fund, Inc. a company registered under the Investment
     Company Act  of 1940 purchased 309,600 shares of Common Stock in March,
     1997.  John C. Power,  President of the Fund, was appointed to the Board
     of Directors of the Company on March  4, 1997.

(2)  The Rockies Fund, Inc., a company registered under the Investment Company
     Act of 1940,  purchased in a series of transactions in February and March,
     1997, 311,600 shares of  Common Stock and 411,000 Common Stock purchase
     Warrants.   Stephen G. Calandrella,  President of the Fund, was appointed
     to the Board of Directors of the Company on March  4, 1997.

(3)  All Events Consulting, Inc. ("All Events") is a company engaged in the
     promotion of  events.  Vincent Caruso is the principal beneficial owner of
     the Company.  All Events is  the beneficial owner of 150,000 shares of
     Common Stock and 300,000 Warrants, each to  purchase one share of Common
     Stock.


                                     - 39 -
<PAGE>   40

(4)  Helmsley Finance Limited ("Helmsley") is a four year old British Virgin
     Island company  engaged in providing financial investment services.
     Charles HNE Wilson is the principal  beneficial owner of Helmsley.
     Helmsley is the beneficial owner of 100,000 shares of  Common Stock and
     200,000 Warrants, each to purchase one share of Common Stock.

(5)  Michael Iovino is the beneficial owner of 60,000 shares of Common Stock
     and 120,000  Warrants, each to purchase one share of Common Stock.

(6)  John Magliocco is the beneficial owner of 75,000 shares of Common Stock
     and 150,000  Warrants, each to purchase one share of Common Stock.

(7)  M.D. Iabba is the beneficial owner of 75,000 shares of Common Stock and
     150,000  Warrants, each to purchase one share of Common Stock.


ITEM 12         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

None.

ITEM 13         EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits


<TABLE>
<CAPTION>

             Exhibit
             Number   Description
             -------  ---------------------------------------------
             <S>      <C>
             3.1      Certificate of Incorporation of the Company.*

             3.2      Bylaws of the Company.*

             4.1      Form of Common Stock Certificate.*

             4.2      Form of Warrant.*

            10.1      Employment Agreement between the Company and 
                      Oliver L. North.

            10.2      Employment Agreement between the Company and 
                      Joseph F. Fernandez.

            10.3      Revolving Line of Credit Agreement dated 
                      December 7, 1995 among the Company, Creditanstalt 
                      Corporate Finance, Inc., and Oliver L. North, as
                      Guarantor.

            10.4      Promissory Note dated December 7, 1995 from the Company 
                      to Creditanstalt Corporate Finance, Inc.

            10.5      Guaranty dated December 7, 1995 from Oliver L. North to 
                      Creditanstalt Corporate Finance, Inc.

</TABLE>

                                     - 40 -
<PAGE>   41

10.6   Amendment dated November 26, 1996 relating to Revolving Loan of Credit
       Agreement among the Company, Creditanstalt Corporate Finance, Inc. and
       Oliver L. North, as Guarantor.

10.7   Margin Agreement dated June 24, 1996 between the Company and Pershing,
       Division of Donaldson, Lufkin & Jenrette Securities Corporation.

10.8   Promissory Note dated February 7, 1997 from the Company to Dashco, Inc.

10.9   Deed of Trust between the Company and Marc A. Busman and Rosalyn R.
       Busman, Trustees.

10.10  Deed of Lease dated January 23, 1997 between the Company, as Landlord,
       and Freedom Alliance, as Tenant.

10.11  Letter re: Line of Credit facility between the Company and Adler
       Financial Group.

11     Statement re: Computation of Per Share Earnings.

23     Consent of Thompson, Greenspon & Co., P.C.

27     Financial Data Schedule

________________________________

*    Filed as an Exhibit to the Company's Registration Statement on Form SB-2
     dated March 22, 1996 (Reg. No. 333-2712-NY) and incorporated herein by
     reference.




(b)  Reports on Form 8-K

     No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1996.


                                     - 41 -
<PAGE>   42

                                   SIGNATURES

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

                                     GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
                                                     (Registrant)

Date:  April 15, 1997                By: /s/ Joseph F. Fernandez
                                         ---------------------------
                                             Joseph F. Fernandez
                                             Vice President

     In accordance with the Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

By: /s/ Oliver L. North                         Date:  April 15, 1997
    ---------------------------------------
     Oliver L. North
       President (Principal Executive
     Officer) and Director

By: /s/ Joseph F. Fernandez                     Date:  April 15, 1997
    ---------------------------------------
     Joseph F. Fernandez
       Vice President and Treasurer
     (Principal Accounting and Financial
     Officer) and Director

By: /s/ Travis Y. Green                         Date:  April 14, 1997
    ---------------------------------------
     Travis Y. Green
     Director

By: /s/ Herbert M. Jacobi                       Date:  April 15, 1997
    ---------------------------------------
     Herbert M. Jacobi
     Director

By:                                             Date:  April 15, 1997
     --------------------------------------
     Hugh E. Sawyer
     Director

By: /s/ John C. Power                           Date:  April 15, 1997
    ---------------------------------------
     John C. Power
     Director

By:                                             Date:  April 15, 1997
     --------------------------------------
     Stephen G. Calandrella
     Director

<PAGE>   43


                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
             Exhibit
             Number   Description
             -------  ---------------------------------------------
             <S>      <C>
             3.1      Certificate of Incorporation of the Company.*

             3.2      Bylaws of the Company.*

             4.1      Form of Common Stock Certificate.*

             4.2      Form of Warrant.*

            10.1      Employment Agreement between the Company and 
                      Oliver L. North.

            10.2      Employment Agreement between the Company and of 
                      Joseph F. Fernandez.

            10.3      Revolving Line of Credit Agreement dated December 7, 1995
                      among the Company, Creditanstalt Corporate Finance, Inc., 
                      and Oliver L. North, as Guarantor.

            10.4      Promissory Note dated December 7, 1995 from the Company 
                      to Creditanstalt Corporate Finance, Inc.

            10.5      Guaranty dated December 7, 1995 from Oliver L. North to 
                      Creditanstalt Corporate Finance, Inc.

            10.6      Amendment dated November 26, 1996 relating to Revolving 
                      Loan of Credit Agreement among the Company, 
                      Creditanstalt Corporate Finance, Inc. and 
                      Oliver L. North, as Guarantor.

            10.7      Margin Agreement dated June 24, 1996 between the Company 
                      and Pershing, Division of Donaldson, Lufkin & Jenrette 
                      Securities Corporation.

            10.8      Promissory Note dated February 7, 1997 from the Company 
                      to Dashco, Inc.

            10.9      Deed of Trust between the Company and Marc A. Busman and 
                      Rosalyn R. Busman, Trustees

            10.10     Deed of Lease dated January 23, 1997 between the Company,
                      as Landlord, and Freedom Alliance, as Tenant.

            10.11     Letter re: Line of Credit facility between the Company 
                      and Adler Financial Group.

</TABLE>




                                     - 43 -
<PAGE>   44

<TABLE>
             <S>  <C>
             11   Statement re: Computation of Per Share Earnings.

             23   Consent of Thompson, Greenspon & Co., P.C.

             27   Financial Data Schedule
</TABLE>


________________________________

*    Filed as an Exhibit to the Company's Registration Statement on Form SB-2
     dated March 22, 1996 (Reg. No. 333-2712-NY) and incorporated herein by
     reference.


                                     - 44 -