04/03/2007">

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549_________________

FORM 10KSB

_________________

| | Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934    
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| | Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
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Universal Guardian Holdings, Inc.

(Exact name of small business issuer in its charter)

|Delaware
(State or other jurisdiction of incorporation or organization) |  | 33-0379106
(I.R.S. Employer Identification No.)
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4695 MacArthur Court, Suite 300
Newport Beach, California 92660
(949) 861-8295

(Address of principal executive offices) (Zip code) 
(Issuers telephone number)

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

Securities registered pursuant to Section 12(g) of the Exchange Act:  Common stock, par value $0.001

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

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   £   No   S

Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form, and no disclosure will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB:   £

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

The issuers revenues for its most recent fiscal year (fiscal 2006) was $21,840,730.

The aggregate market value of the issuers voting and non-voting common equity held by the issuers non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days, was $32,715,000 as of March 27, 2007.

The number of shares outstanding of each of the issuers classes of stock as of as of March 27, 2007, the latest practicable date, was 52,462,842 shares of common stock (voting common equity); and 600 shares of series A convertible preferred stock (non-voting preferred equity).

Traditional small business disclosure format (check one):   Yes    S   No   £

Documents Incorporated By Reference

The issuer has not incorporated by reference into this annual report: (1) any annual report to the issuers securities holders, (2) any proxy or information statement, or (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act.



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|TABLE OF CONTENTS
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BUSINESS

1

Overview

1

Business Groups

1

Corporate History And Development

2

Markets; Competition; Product Advantages

7

Marketing and Distribution Strategy

8

Manufacturing Capacity

9

Research and Development

9

Patents and Licenses

9

Government Regulation

10

Subsidiaries

10

Employees

10

PROPERTIES

11

FINANCIAL STATEMENTS AND SUMMARY FINANCIAL DATA

11

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

12

General

12

Overview

12

Universal Guardian Corporation; Discontinued Operations; Reverse Acquisition

13

Other Acquisitions

14

Going Concern

14

Results of Operations

15

Liquidity and Capital Resources

17

Off-Balance Sheet Arrangements

22

Critical Accounting Policies

22

Recent Accounting Pronouncements

23

UNCERTAINTIES AND RISK FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND FINANCIAL CONDITION

25

Risks Relating To Our Business

25

Risks Relating To An Investment In Our Securities

29

LEGAL PROCEEDINGS

33

SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

35

MARKET PRICE OF AND DIVIDENDS ON OUR COMMON SHARES AND RELATED STOCKHOLDER MATTERS

35

Description Of Market

35

Dividend Policy

35

Recent Repurchases Of Equity Securities

36

Recent Sales Of Unregistered Securities

36

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

36

CONTROLS AND PROCEDURES

36

Evaluation Of Disclosure Controls And Procedures

36

Evaluation Of Changes In Internal Control Over Financial Reporting

36

Material Weaknesses in Collecting And Processing Financial Information

36

DIRECTORS AND EXECUTIVE OFFICERS

37

EXECUTIVE COMPENSATION

37

OWNERSHIP OF OUR SECURITIES BY BENEFICIAL OWNERS AND MANAGEMENT

38

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

38



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CODE OF ETHICS

38

OTHER INFORMATION

38

EXHIBITS

38

ANNUAL CONSOLIDATED FINANCIAL STATEMENTS (AUDITED)

44

Report of Independent Registered Public Accounting Firm

F-1

Consolidated Balance Sheet

F-2

Consolidated Statements of Operations And Other Comprehensive (Loss)

F-3

Consolidated Statement of Stockholders Equity (Deficit)

F-4

Consolidated Statements of Cashflow

F-8

Notes To Consolidated Financial Statements

F-10

SIGNATURES OF EXECUTIVE OFFICERS AND DIRECTORS

45



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ADVISEMENTS

The information set forth in the section of this annual report captioned Business is current as of March 27, 2007, unless an earlier or later date is indicated in that section.  The information set forth in the sections of this annual report other than Business is current as of December 31, 2006, unless an earlier or later date is indicated in those sections.

Unless the context requires otherwise, we, us, our,  and the company and similar terms collectively refer to Universal Guardian Holdings, Inc. and our subsidiaries, while the term Universal Holdings refers to Universal Guardian Holdings, Inc. in its individual corporate capacity.  The terms common shares, preferred shares, seriesA preferred shares and seriesB preferred shares used in this annual report refer to the companys common stock, par value $0.001 per share, blank check preferred stock, par value $.001 per share, series A convertible preferred stock, par value $0.001 per share; and series B convertible preferred stock, par value $0.001 per share, respectively.  The term UGC series A preferred shares refers to series A convertible preferred stock, par value $0.001 per share, issued by the companys Universal Guardian Corporation subsidiary.

On December 3, 2002, we effected a 1 for 20 reverse stock split with respect to our common shares.  Whenever we make any reference in this annual report to the grant or issuance of common shares or options or warrants to purchase common shares, such reference shall, for comparison purposes, be made in reference to post-reverse numbers and, in the case of options and warrants, post-reverse exercise prices, unless we state otherwise.

In this annual report we make a number of statements, referred to as forward-looking statements, which are intended to convey our expectations or predictions regarding the occurrence of possible future events or the existence of trends and factors that may impact our future plans and operating results.  These forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe to be appropriate in the circumstances.  You can generally identify forward-looking statements through words and phrases such as seek, anticipate, believe, estimate, expect, intend, plan, budget, project, may be, may continue, may likely result,and similar expressions.  When reading any forward looking statement you should remain mindful that actual results or developments may vary substantially from those expected as expressed in or implied by that statement for a number of reasons or factors, such as those relating to:  (1) whether or not markets for our products and services develop and, if they do develop, the pace at which they develop; (2) our ability to attract the qualified personnel to implement our growth strategies, (3) our ability to develop sales, marketing and distribution capabilities; (4) the accuracy of our estimates and projections; (5) our ability to fund our short-term and long-term financing needs; (6) changes in our business plan and corporate strategies; and (7) other risks and uncertainties discussed in greater detail in the sections of this annual report, including those captioned Managements Discussion And Analysis Of Financial Condition And Results Of Operations and Uncertainties And Other Risk Factors That May Affect Our Future Results And Financial Condition.

Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our company and our business made elsewhere in this annual report as well as other public reports we file with the United States Securities and Exchange Commission (the SEC).  You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments.  We are not obligated to update or revise any forward-looking statement contained in this annual report to reflect new events or circumstances unless and to the extent required by applicable law.





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BUSINESS

Overview

Universal Holdings is a holding company which provides security products, systems and services to mitigate terrorist, criminal and security threats for governments and businesses worldwide through our various operating subsidiaries, broken-down into three different operating groupsthe UG Services Group, the UG Products Group, and the UG Systems Group.

Our common shares trade on the NASD Over-The-Counter Bulletin Board, also called the OTCBB, under the trading symbol UGHO.

Our corporate offices are located at 4695 MacArthur Court, Suite 300, Newport Beach, California 92660. Our telephone number is (949) 861-8295.

As of March 27, 2007, we had issued and outstanding 52,462,842 shares of common stock (including accrued but unissued shares), 600 shares of series A convertible preferred stock, common share purchase options and warrants entitling the holders to purchase up to 24,478,975 shares of common stock, and debentures in the principal amount of $6,000,000 which are convertible into 9,230,768 common shares.  Our Universal Guardian Corporation subsidiary (Guardian Corporation) also had issued and outstanding 18,714 series A preferred shares (UGC series A preferred shares) held by shareholders other than Universal Holdings.  Each of these shares is convertible into either one Guardian Corporation common share (UGC common shares) or one Universal Holdings common share.

Business Groups

UG Services Group

Our service group of operating subsidiaries (collectively the UG Services Group), provide comprehensive risk mitigation solutions as well as tactical and strategic security services to protect commercial and government personnel and assets worldwide. These services include threat assessment, risk analysis, country risk management, business intelligence, corporate investigations, information assurance, kidnap and ransom insured services, as well as tactical security including executive and diplomatic protection.  We provide these services through various operating subsidiaries in the group which consist of Universal Guardian Services PTE, Ltd. formerly known as Secure Risks Singapore, PTE. (UG Services); Secure Risks, Ltd (Secure Risks); Universal Guardian Services, Ltd., formerly known as Secure Risks-Strategic Security Solutions International Ltd. (SSSI); Secure Risks Pakistan, Ltd.; and Secure Risks Asia Pacific, Ltd. The companies comprising the UG Services Group deliver services through regional branch offices located in London, Kabul, Pakistan, Hong Kong, Singapore, Dubai and Los Angeles (Newport Beach). The vast majority of our revenues from January 1, 2004 to date have been generated by the UG Services Group from operations outside of the United States.

UG Products Group

Our products group of operating subsidiaries (collectively the UG Products Group), focus on designing, producing and marketing non-lethal or less-lethal personal protection devices and projectiles for use by military, law enforcement, private security and consumer personal protection markets throughout the world. We have recently completed development of two products which we are currently introducing to the market. The first of these products, the Cobra StunLightTM, is a heavy-duty high-intensity LED flashlight designed to provide escalating use-of-force options to the user by illuminating its target and launching a laser-aimed, ballistic stream OC (pepper spray) which causes temporarily blindness, respiratory breathing difficulty and a burning sensation of the skin that can debilitate assailants from safe stand-off distances up to 20 feet.



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The second product, the Riot DefenderTM, is for use by law enforcement and military as a non-lethal use-of-force compliance tool for suspects and to control civil disturbances. The Riot DefenderTM, is a semi-automatic projectile launcher which can debilitate an assailant using its RiotBallTM proprietary and patent pending frangible projectile at an effective range of more than 50 feet. A frangible projectile is one which breaks-up upon impact, thereby reducing the risk of injury to the suspect. The Riot DefenderTM is designed to have the capacity of ten projectiles in the pistol configuration, and 180 projectiles in the carbine configuration, and can be equipped with a laser-aiming device for better precision and accuracy. The device can use several projectile variants, including OC powder, marking powder and inert powder. Each projectile has a specific use ranging from temporarily incapacitating individual suspects to crowd control. We are currently developing international manufacturing, sales and marketing channels to facilitate the introduction of these products to targeted markets.

We have recently shipped the Cobra StunLightTM to several law enforcement agencies and distributors in Australia, France, Germany, Mexico, Saudi Arabia, Singapore, Turkey and the United States for testing, evaluation and purchase.  Our Mexican distributor has advised the company that the Federal Police of Mexico will be purchasing the Cobra StunLight in a state by state implementation throughout Mexico in 2007.  We have recently completed a pilot program for the Cobra StunLightTM with the Los Angeles Sheriff’s Departments, resulting in the Department approving the purchase of the Cobra StunLightTM by its deputies.  We are currently conducting a similar pilot program with the San Diego County Sheriff’s Department.

As between the various subsidiaries in the group, Shield Defense Corporation (SDC) focuses on sales and marketing activities in the United States and Canada; Shield Defense Europe GmbH (SDE) focuses on sales and marketing activities in the European market; and Universal Guardian Products, Ltd. (UG Products) focuses on supervising the manufacturing of the Cobra StunLightTM and the Riot DefenderTM products, research and development activities on the Cobra StunLightTM and the Riot DefenderTM products, as well as sales to rest of the world.

UG Systems Group

Our systems group of operating subsidiaries (collectively the “UG Systems Group), provide proprietary integrated and interoperable asset tracking and monitoring systems for use in government and commercial global supply chain logistics, inter-modal transportation, maritime and seaport security. We are in the process of introducing to market our Total Asset GuardianTM (“TAG”) platform which provides multifaceted solutions for global asset tracking, asset visibility and data management throughout the supply chain.

The TAG platform is comprised of a proprietary software application and processes which provide secure supply chain data collection, real-time network and security monitoring and notification. The TAG platform is a scaleable system that can be deployed on a global basis.  Our TAGeasyTM e-commerce RFID label system is a subscription-based system that provides pre-printed RFID labels and delivers them to Department of Defense and retail suppliers.  Our TAGstationTM is a hosted-system designed to provide on-site RFID capability for small to medium-sized government and retail suppliers.  TAGcentralTM consists of an enterprise level software application for major international retailers and government suppliers. In addition to the revenue generated upon the licensing and/or sale of these systems, each solution provides recurring revenue based upon subscription fees.

Corporate History And Development

We were originally incorporated in Delaware on August 31, 1989 under the name Guideline Capital Corporation.  After our incorporation, we engaged in the business of locating an acquisition target.  We identified and effected an acquisition when, effective September 13, 1999, pursuant to a Share Exchange and Reorganization Agreement, we acquired all the outstanding shares of Hollywood Partners, Inc., a California corporation from its parent company, Vitafort International Corporation.  As a consequence of



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this transaction, Vitafort acquired approximately 62.5% of our common shares, and Hollywood Partners, Inc. became our wholly owned subsidiary.  We then changed our name to Hollywood Partners.com, Inc. and, until the first quarter of 2001, engaged in the business of marketing and promoting entertainment-themed websites presenting both proprietary and sourced content. We abandoned this business in the first quarter of 2001 due to the collapse of many Internet companies and our inability to generate significant revenues. Thereafter, until mid-2002, we unsuccessfully sought to develop entertainment properties.

On October 25, 2002, in contemplation of the possible acquisition of a new business through the acquisition of a new company, our board of directors and shareholders approved a plan whereby our board was authorized, among other things, to (1) change our name to a new name selected by our board, (2) effectuate a reverse stock split in our common stock in a ratio of not less than one for ten and not more than one for thirty, as determined by our board, and (3) sell our three subsidiaries as of that date, Hollywood Partners, Inc., Avenue of the Stars Entertainment, Inc. and Hall of Fame Pro, Inc., as well as our domain name HollywoodPartners.com.  On December 4, 2002, we entered into a Share Exchange Agreement and Plan of Reorganization with Guardian Corporation and its shareholders pursuant to which those shareholders would exchange their common shares in Guardian Corporation for Universal Holdings common shares and acquire control of the company (the UGC Acquisition Agreement).  Guardian Corporation was a private company formed under the laws of Nevada on March 28, 2001 by Mr. Michael Skellern, our current Chairman of the Board, President and Chief Executive Officer, to develop security technologies, products and services for military, government and commercial markets.  Pursuant to and in anticipation of the UGC Acquisition Agreement, as subsequently amended on December 16, 2002, we: (1) effected a 1 for 20 reverse stock split on December 3, 2002 pursuant to which we reduced our outstanding common shares to 4,848,014 shares and reduced the number of common shares purchasable under our outstanding options and warrants to 1,779,875; (2) changed our name to Universal Guardian Holdings, Inc. effective December 6, 2002; and (3) issued 11,300,000 common shares to the Guardian Corporation shareholders on December 31, 2002.  Prior to the transaction, we transferred our subsidiaries and the right to use our domain name to our shareholders.  The terms of the exchange were determined by the parties on an arms-length negotiated basis.  No independent valuation was sought from a business and technology appraiser or other third party due to financial constraints.

At the time we entered into the UGC Acquisition Agreement, Guardian Corporation was owned by five shareholders, including Mr. Skellern who owned approximately 40% of Guardian Corporations common shares, and two series A preferred shareholders.  As a consequence of the UGC Acquisition Agreement, we:  (1) acquired 100% of Guardian Corporations common shares and 92.4% of its total capital stock after taking into consideration the outstanding series A preferred shares; and (2) the Guardian Corporation shareholders acquired approximately 70% of our outstanding common shares, and 69.1% of our total capital stock after taking into consideration 600 series A preferred shares issued by the company prior to the acquisition which remained outstanding after the transaction.  We valued the acquisition of Guardian Corporation at $104,855 based upon the historical cost of our net liabilities assumed on the books of Guardian Corporation.

In conjunction with our acquisition of Guardian Corporation, we provided the holders of 350,000 UGC series A preferred shares issued by Guardian Corporation the right to convert those shares into Universal Holdings common shares on a one-for-one basis, and the holders of Guardian Corporation options and warrants entitling them to purchase 2,175,000 UGC common shares were also given the right to purchase the same number of Universal Holdings common shares on the same terms. Since the shareholders of Guardian Corporation obtained control of Universal Holdings, we treated the UGC Acquisition Agreement as a recapitalization for accounting purposes, pursuant to which Universal Holdings was required, in a manner similar to reverse acquisition accounting treatment, to adopt Guardian Corporations historical financial statements as those of the company, including with respect to periods pre-dating the transaction.



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The Guardian Corporation acquisition was brought to our attention by Mr. Nikolas Konstant, our President, chairman of the board and largest shareholder at the time, and Mr. Mark Beychok, a consultant to our company and our second largest shareholder at the time and a former chairman of the board.  Messrs. Konstant and Beychok were also managing partners of the DYDX Group of Funds, LLC (DYDX).  On August 15, 2002, DYDX had entered into a letter of intent with Guardian Corporation pursuant to which DYDX agreed to secure bridge financing and a capital infusion for Guardian Corporation, subject to Guardian Corporations agreement to consummate a reverse takeover merger into a public entity to be supplied by DYDX, and Guardian Corporation completing its acquisition of The Harbour Group, Inc.  DYDX later identified our company as the public entity for the transaction, and negotiated the terms of the share exchange on our behalf.  While Guardian Corporation agreed to compensate DYDX in warrants for its services under the letter of intent, those warrants were never paid as the result of a subsequent settlement between DYDX and Guardian Corporation.  No compensation was paid by Universal Holdings to DYDX or Messrs. Konstant or Beychok in connection with the transaction.

On August 31, 2002, three months prior to our acquisition of Guardian Corporation, Guardian Corporation acquired The Harbour Group, Inc. (Harbour Group) pursuant to a share exchange.  Harbour Group was a private Virginia company formed in December 2001 which provided engineering services for waterside security that was complementary to an integrated security platform under development by Guardian Corporation.  As a consequence of this transaction, Harbour Group became a wholly-owned subsidiary of Guardian Corporation, and Harbour Groups shareholders acquired approximately 15% of Guardian Corporations outstanding common shares.

Prior to the acquisition by Guardian Corporation, Harbour Group was a subcontractor to Northern NEF, Inc., now known as CompuCom Federal Systems, which provided waterside security contracting services to U.S. Naval Criminal Investigative Services (NCIS).  This subcontract was originated and managed by the President of Harbour Group prior to Guardian Corporations acquisition of the company.  In February 2003, Guardian Corporation discovered a series of over-billing to the government by Harbour Group. Guardian Corporation subsequently initiated a self-disclosure regarding the over-charges to U.S. Navy officials, and credited the over-billings on its accounts to the Navy.  The President of Harbour Group was terminated on February 25, 2003.  Based upon our discussions with the U.S. Navy, we believe Guardian Corporation and the company to be in good standing with the Navy and do not anticipate any further action with respect to this matter.

On September 23, 2003 Harbour Group was notified that Northern NEFs contract with the U.S. Navy was terminated under a Termination for Convenience of the Government provision, which in turn resulted in the termination of Harbour Groups subcontract with Northern NEF.  This termination of Northern NEFs contract was unrelated to the over-billing matter noted above or with the performance of Guardian Corporations products and services under its subcontract with Northern NEF.  Since the termination of the subcontract with Northern NEF, we have allowed both Harbour Group and Guardian Corporation to become dormant companies, while undertaking the development of new businesses, intellectual property and products through our other subsidiaries.  Harbour Groups and Guardian Corporations only business activities at this time are the collection of final amounts due under Harbour Groups subcontract with Northern NEF and a yet undetermined settlement amount being claimed by Guardian Corporation under applicable U.S. Government Federal Acquisition Regulations.  We believe we continue to have good relations with the U.S. Navy, and ISR Systems is currently in discussions with the U.S. Navy about the use of its integrated security platform.

On January 13, 2004, we formed a new wholly-owned California subsidiary named Shield Defense Technologies, Inc. (Shield Technologies).  Our intent in forming Shield Technologies was to coordinate the holding of our patents, patent applications, product and technology agreements, original equipment manufacturing agreements and strategic alliance agreements in a single subsidiary, through which we would coordinate the marketing and distribution of products, and services developed or provided by our



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other operating subsidiaries.  These responsibilities have since been assumed by other subsidiaries, and Shield Technologies is currently inactive.

On January 22, 2004, we formed a new wholly-owned California subsidiary named Shield Defense Corporation.  Our intent in forming Shield Defense Corporation was to centralize all of our new non-lethal and less-lethal weapon and projectile development activities, products, technologies and services into one corporation.  Shield Defense Corporation now focuses on sales and marketing activities for the UG Products Group in the United States and Mexico.

On February 13, 2004, we acquired Emerging Concepts, Inc. pursuant to a share exchange.  Emerging Concepts is a private California company formed in January 1987 which historically was engaged in the business of providing surveillance and reconnaissance systems, sensors and engineering services.  Emerging Concepts provided those systems and services to U.S. military and national security agencies, including the U.S. Navy, U.S. Air Force, U.S. Border Patrol, and major defense industry leaders such as Lockheed Martin, Northrop, Boeing, Raytheon, BAE and United Defense.  We agreed to issue 51,908 restricted shares, with a value of $20,000 based upon the average closing price of our common shares over the 30 day period prior to the closing, to the shareholders of Emerging Concepts, including its President, Mr. Delmar R. Kintner, in exchange for their shares in that company.  We later cancelled the issuance before delivery of the shares in lieu of a cash payment of $20,000.  The primary purpose of the acquisition was to utilize the established relationships between Emerging Concepts and the military and national security agencies and defense industry companies to market our products and technologies.  The principal asset of Emerging Concepts other than its relationships was its personnel holding secret clearances and facility clearances, which we estimated would cost more than $50,000 to procure were we to file new applications with the U.S. government for such clearances.  The terms of the share exchange were determined by the parties on an arms-length negotiated basis.  No independent valuation was sought from a business and technology appraiser or other third party due to financial constraints.  There was no relationship between Universal Holdings and Emerging Concepts and their respective officers, directors and shareholders, prior to the share exchange.  No finders fees or other forms of consideration were paid by Universal Holdings or Emerging Concepts or our respective officers, directors or shareholders in connection with the share exchange.  We later decided to centralize all of our more recent integrated security system development activities, products, technologies and services into this corporation, and have since changed the name of Emerging Concepts to ISR Systems Corporation (ISR Systems).

On July 1, 2004, we acquired our Secure Risks subsidiary.  Secure Risks was an inactive numbered limited liability company organized under the laws of the United Kingdom and Wales on December 16, 2003, that had never appointed officers or directors or conducted any business. We acquired Secure Risks as a vehicle to provide comprehensive business and governmental risk solutions and strategic security services and to acquire Secure Risks-Strategic Security Solutions International Ltd. as discussed below and continue its operations.

On July 1, 2004, Secure Risks acquired all of the shares of Secure Risks-Strategic Security Solutions International Ltd. (SSSI), together with its affiliated companies Strategic Security Solutions International (B.V.I.) Limited and Tag 24 Limited pursuant to a share exchange.  SSSI was a private United Kingdom and Wales limited liability company formed on September 23, 1998 which provided strategic and tactical security services to established and emerging governments, military services, multi-national corporations and high profile business and individual clients around the globe.  On December 19, 2006, we changed the name of SSSI to Universal Guardian Services, Ltd.  SSSI services include threat and vulnerability assessments, security planning and system design, executive protection and travel risk management, tactical armed security, assets in transit, crisis management, contingency planning, incident management and evacuation, executive and diplomatic protection and training, physical security training, weapons and self-defense and government training.  Pursuant to the terms of an Agreement And Plan Of Share Exchange dated June 28, 2004 and effective July 1, 2004, we issued 4,101,494 unregistered Universal Holdings common shares, with a value of $3,240,180 based upon



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the trading price of those shares, to SSSIs five shareholders-employees, Messrs. Bruce M. Braes, Ian Schriek, Richard Kuhn, John Chase and Richard Lumpkin, each of whom executed agreements to perform services to Secure Risks.  The terms of the share exchange were determined by the parties on an arms-length negotiated basis.  No independent valuation was sought from a business and technology appraiser or other third party due to financial constraints.  There was no relationship between Universal Holdings, including our officers, directors and shareholders, and SSSI, including its officers, directors and shareholders, prior to the share exchange.  No finders fees or other forms of consideration were paid by Universal Holdings or SSSI or our respective officers, directors or shareholders in connection with the share exchange.  SSSI has since changed it corporate name to Universal Guardian Services, Ltd.

On July 7, 2004, we formed a new wholly-owned Hong Kong subsidiary named Shield Defense International Ltd.  Our intent in forming Shield Defense International was to establish an off-shore corporate entity to manage the manufacturing our new non-lethal and less-lethal weapon and projectile development activities off-shore, and to centralize all of our non-lethal and less-lethal weapon and projectile development activities, products, technologies and services in that company while retaining domestic marketing and sales activities in Shield Defense Corporation. We have since changed the name of Shield Defense International Ltd. to Universal Guardian Products, Ltd.

On April 29, 2005, Universal Guardian Products, Ltd. formed Shield Defense Europe to focus on sales in the European market.

On August 31, 2005, we entered into a Share Exchange Agreement and Plan of Reorganization pursuant to which our ISR Systems subsidiary would acquire all of the outstanding capital stock of MeiDa Information Technologies, Ltd. ("MeiDa) from its ten shareholders.  MeiDa is a Hong Kong corporation which provides a radio frequency identification (RFID) solution offering a turn-key package that includes software, hardware, retailer integration and systems management that improves global supply chain logistics and operations and meets international RFID mandates.  Meida wholly owns MeiDa Information Technology, Ltd., Beijing, a Peoples Republic of China corporation which is a dormant subsidiary.  MeiDas technology consolidates multiple manufacturing sites and retailer distribution centers into one snap shot for global visibility of goods movement.  As consideration, ISR Systems agreed to pay 2,272,727 Universal Holdings common shares to MeiDas shareholders payable in two tranches, of which 1,000,000 shares were to be delivered at the closing on October 7, 2005, and the balance which were to be delivered on or before October 31, 2006, although we later elected to deliver these shares in January 2006.  For the transaction to be legally binding in Hong Kong, we were required to file and pay a stamp duty tax for the transfer of the MeiDa shares to the company.  As a result, we did not complete the issuance of the initial 1,000,000 shares until the stamp duty tax was filed and paid in January 2006, at which time the first issuance formally closed, the MeiDa shares were transferred to the company, and all 2,272,727 Universal Holdings common shares were issued to the former MeiDa stockholders.  The shareholders of MeiDa are Euro China Group AG; Linkena Anstalt; Transgaria Stiftung, Vaduz; Christopher John & Alexa-Katrin Terry; Thomas Goertz; Urs Wettstein; Timo Kipp; Guenter Guest Supplies Ltd.; Roman Kainz as trustee for Hans Dieter Rompel; and Roman Kainz as trustee for Dietmar Lillig.  We valued the transaction at $3,000,000 based on the volume average weighted price (VAWP) of our common shares for the 15 days preceding the entering into of the Share Exchange Agreement and Plan of Reorganization.  The terms of the exchange were determined by the parties on an arms-length negotiated basis.  No independent valuation was sought from a business and technology appraiser or other third party due to financial constraints.  There was no relationship between Universal Holdings, including our officers, directors and shareholders, and MeiDa, including its officers, directors and shareholders, prior to the share exchange. No finders fees or other forms of consideration will be paid by Universal Holdings or MeiDa or our respective officers, directors or shareholders in connection with the share exchange.  Mr. Herbert P. Goertz has continued as a director and chief executive officer of MeiDa.  Mr. Goertz is a beneficiary of Linkena Anstalt, an irrevocable family trust established by another member of the Goertz family over which Mr. Goertz has no investment control.  Although Mr. Goertz is a beneficiary, any distributions he may receive will be made at the sole discretion of the trustee without any power of



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Mr. Goertz to direct such distributions to himself or to any other person.  We have since changed the name of MeiDa to Universal Guardian Systems, Ltd.

On December 16, 2005, we formed Shield Defense (Macao), Ltd. (SDM) under the laws of the Macao Special Administrative Region of China.  SDM is a subsidiary of UG Products and was formed for the purpose of facilitating the sale of and distribution of the products of UG Products around the world.

Markets; Competition; Product Advantages

Security Services

We provide strategic and tactical security services to established and emerging governments, military services, multi-national corporations and businesses around the globe through our UG Services subsidiaries.  These services include threat and vulnerability assessments, security planning and system design, executive protection and travel risk management, tactical armed security, assets in transit, crisis management, contingency planning, incident management and evacuation, executive and diplomatic protection and training, physical security training, weapons and self-defense training and government training.  Almost all of our revenues since June 2004 have been generated through the provision of these security services.

Cobra StunLightTM

The markets for the Cobra StunLightTM are generally the military, law enforcement, private security and consumer markets which will use our products as an everyday, escalating use-of-force compliance device to debilitate suspects, assailants or prisoners, and, in the case of the consumer personal protection market, for use as a home and auto personal protection device to defend against assailants.

Competing devices presently in the market include:

·

TASER® brand conducted-energy weapons.  These products utilize compressed nitrogen to shoot two small probes up to 15 or 21 feet (21 foot cartridges sold to law enforcement and aviation security agencies only). These probes are connected to the weapon by high-voltage insulated wire. When the probes make contact with the target, the TASER® energy weapon transmits powerful electrical pulses along the wires and into the body of the target.  These weapons have been implicated in a number of deaths since their inception.  The TASER® is a specialty weapon generally used by a relatively small portion of law enforcement, military, private security and consumer markets given licensing requirements and other regulatory restrictions governing its use. The Cobra StunLightTM is a less-expensive everyday use multi-purpose product for those markets insofar as it can be readily carried by law enforcement or security personnel on their persons as part of their equipment (these personnel generally do not carry a TASER® with them), and the use of OC (pepper spray) is not subject to the higher level of regulation as the TASER® device.

·

The TigerLight® Non-Lethal Defense System manufactured by TigerLight, Inc.  This system is designed for one handed operation by a police officer to illuminate the suspect and subject him to OC (pepper spray), while maintaining cover with the officers firearm. The aerosol spray is located in the rear of the flashlight requiring a person to remove the light from a suspect before spraying.  The aerosol fog has a distance of 12-14 feet.

We believe our personal protection products will have a competitive advantage over these and other non-lethal and less-lethal devices since we can offer an array of non-lethal devices that meet law enforcement agency and mission requirements, as well as consumer needs.  We also believe we will be able to compete based on price, performance and value.  We believe our products will be more flexible than the competition and will be readily available to the police officer when needed. The Cobra



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StunLightTM will replace police officers current flashlights, and also be available to the consumer for protection at home and in automobiles.

Riot DefenderTM

The market for the Riot DefenderTM line of products are generally military and law enforcement agencies which will use the device for non-lethal use-of-force compliance for crowd and riot control.  We believe that the Riot DefenderTM and its patent pending Riot Ball non-lethal projectile, are innovative products in this market insofar as launcher flexibility in various applications and projectile performance when compared to other products currently on the market. This will give law enforcement officers and military commanders flexibility and improved performance that is not available today.

The principal competing device presently in the market is the powder-released OC (pepper powder ball) marketed by Jaycor Tactical Systems, Inc.  This product utilizes Tippmann Paintball markers to launch a standard-sized .68-inch paintball-type sphere containing OC (pepper powder).  Jaycor is positioning its company around this single OC (Pepper Ball) product and launcher.

Total Asset GuardianTM (TAG) platform

A large potential worldwide market exists for our proprietary integrated and interoperable Total Asset GuardianTM (“TAG”) software platform that enables a business to have asset visibility which incorporates RFID systems used by suppliers to retailers and governments worldwide. Our TAG platform can be used by commercial and government global supply chains to provide increased logistics efficiencies, visibility and security, including intermodal transportation and the shipment of hazardous and classified materials, controlled substances, and other high-value and sensitive goods.  Our integrated and interoperable security platforms interface with systems designed to protect military and government facilities including embassies, ports, airports, jails, prisons and border crossings, and businesses which need to protect commercial and industrial facilities such as petroleum, chemical and explosives suppliers and distributors. Competition is fragmented in the defense and security industries with solutions being offered by both large and small companies.  For example, there are small specialty system integrators who develop site-specific system designs and utilize a number of subcontractors to assemble, integrate and install these one-off security systems utilizing a multitude of sensor suppliers.  There are also large systems integrators such as IBM, GE and Lockheed Martin.  The TAG platform is comprised of a proprietary software application and processes which provide secure supply chain data collection and management, real-time network and security monitoring and notification.  The TAG platform is a scaleable system that can be deployed worldwide.  Our TAGstationTM is a hosted-system designed to provide on-site RFID capability for small to medium-sized government and retail suppliers.  TAGcentralTM includes an enterprise level software application for major international retailers and governments.  In addition to the revenue generated upon the sale of each solution, each solution provides recurring revenue based upon subscription fees.

Competitors in this market include IBM, GE, Savi Technologies, Tyco Corporation and Symbol Technologies.  We believe that our Total Asset GuardianTM platform comprised of our TAGeasyTM, TAGstationTM and TAGcentralTM programs will have definitive competitive advantages in functionality, performance, flexibility, delivery and costs over these competitors.

Marketing and Distribution Strategy

In the case of the Cobra StunLightTMand Riot DefenderTM, we intend to manage global marketing and sales from our various regional offices and to utilize sales agents, distributors and dealers to distribute our products to military, law enforcement, commercial security and consumer distribution channels, while developing a small internal sales and marketing staff to monitor and manage those activities and to directly market and distribute our products to selected customers.  We are currently airing Cobra



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StunLightTM infomercials and commercials on local and national television in the United States.  We may also explore joint venture and other strategic relationships.

Marketing of our Total Asset GuardianTM platform and our TAGeasyTM, TAGstationTM and TAGcentralTM programs will be sold to retailers and government suppliers worldwide by e-commerce and senior business development managers in United States and Asia.  Our managers will establish distributors, resellers and direct sales through e-commerce and national account sales as well as government contracts.

On October 1, 2006, we entered into a Joint Venture Agreement with Spheres Technologies, a Saudi Arabian company (Spheres), to form Universal Guardian (Saudi Arabia) to market and distribute our products, systems and services within the Kingdom of Saudi Arabia.  Spheres Technologies possesses a Class A license to provide security products and systems to commercial and government agencies in the Saudi Arabia.  Spheres plans to transfer existing contracts to Universal Guardian (Saudi Arabia).

We have recently entered into a Teaming Agreement with Ciber to provide international maritime and critical infrastructure with integrated security products and services.

Manufacturing Capacity

We will rely upon third party original equipment manufacturers (OEM) and/or joint-venture partners to satisfy future production as we introduce our products and systems to market.  We currently have in place an OEM contract manufacturer for the Cobra StunLightTM, and are in the process of final equipment installation and pilot production runs of our RiotBallTM non-lethal frangible projectiles used by our Riot DefenderTM.  The Riot DefenderTM will also utilize strategic manufacturing relationships with manufacturers and engineering consultants.

Our contract manufacturers are specialist contract manufacturers who produce our branded products and components to our design specifications under terms that require consistent adherence to product specifications, quality control standards and service levels.  We are currently negotiating terms and conditions that will provide for production expansion and expanded gross profit margins as sales increase.

Research and Development

Our Products and Systems Groups have been principally engaged in research and development for the past several years.  We currently conduct research and development activities either in-house or through engineering consultants.  We recorded $432,253 and $280,951 in research and development expenses in fiscal 2006 and 2005, respectively.  We have budgeted $450,000 for research and development for fiscal 2007.

Patents and Licenses

On October 30, 2003, we filed a provisional application captioned Laser and Tear Gas Equipped Self Defense LED Flashlightwith the United States Patent and Trademark Office (USPTO).  This provisional application was claimed as priority in our Patent Application Serial Number 10/851,717 entitled, Self-Defense Flashlight Equipped with an Aerosol Dispenser (the 717 Patent) covering the Cobra StunLightTM and was filed by Messrs. Dennis M. Cole and Michael J. Skellern.  Messrs. Cole and Skellern have since assigned all of their rights to that application to the company.  We have received a Notice of Allowability from the USPTO in respect to the 717 Patent.  We have also filed additional patent applications relating to improvements to the 717 Patent, including U.S. patent 7,069,926B2 captioned Flashlight and Canister Interconnection System and Method which was approved and issued by the USPTO on July 4, 2006 (the 926 Patent).  The remaining filed patent applications are still under review and we are responding to the office actions as appropriate as of the date of this annual report.



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The frangible projectile used with the Riot DefenderTM was originally patented by the U.S. Navy on November 14, 2000 (Patent no. 6,145,441), captioned Frangible payload-dispensing projectilewhich expires on April 2, 2018.  The U.S. Navy granted Guardian Corporation the exclusive right to sell and market projectiles using this patented technology for the life of the patent in an agreement dated November 19, 2002.  In January 2004, Guardian Corporation renewed its exclusive license to the U.S. Navys non-lethal frangible projectile patent for 14 years.  We are in the process of prosecuting a patent application relating to improvements to existing frangible projectile patents, which application is still under review as of the date of this annual report.

All of our scientific personnel have executed non-disclosure agreements that reserve ownership of intellectual property with the company.  Universal Holdings and each of our subsidiaries require non-disclosure and non-circumvention agreements from all potential vendors, consultants, manufacturers, agents and employees.

Government Regulation

Every state allows the sale of OC (pepper spray) aerosol products to law enforcement agencies or military personnel without regulation or licensing, while approximately 45 states allow the sale of these products to other consumers without regulation or licensing other than limiting the quantity of chemical contained in the product.  California, for instance, has one of the most stringent state regulations, limits the sale of consumer OC (pepper spray) or CS (tear gas) aerosol products to 2.5 oz.  We are marketing two versions of the Cobra StunLightTMproduct that satisfy these regulations, a consumer version carrying a 2.5 oz canister and a law enforcement version that carries a larger canister.

Every state allows the sale of projectile launcher products to law enforcement agencies or military personnel without regulation or licensing, while approximately 37 states allow the sale of these products to other consumers without regulation or licensing.  Since we do not believe there will be a high level of consumer demand for our Riot DefenderTM products and have not made a determination as to whether we will enter this market, we do not consider the limitations placed on the consumer market to be material.

Subsidiaries

We directly or indirectly own the following active operating subsidiaries:   Universal Guardian Services PTE, Ltd. (formerly known as Secure Risks Singapore, PTE.); Secure Risks, Ltd.; Universal Guardian Services, Ltd. (formerly known as Secure Risks-Strategic Security Solutions International Ltd.); Secure Risk Pakistan, Ltd.; Secure Risks Asia Pacific, Ltd.; Universal Guardian Products, Ltd. (formerly known as Shield Defense International Ltd.); Shield Defense Corporation; Shield Defense Europe GmbH and ISR Systems Corporation.

Our Universal Guardian Systems, Ltd. (formerly known as MeiDa Information Technologies, Ltd.) subsidiary is currently inactive, having transferred its technology rights to ISR Systems Corporation.  Our Shield Defense Technologies, Inc. and Shield Defense (Macao) Ltd. subsidiaries are also currently inactive.  We also currently own 88.7% of the capital stock of another inactive subsidiary, Universal Guardian Corporation, which in turn owns one inactive wholly-owned subsidiary, The Harbour Group, Inc.  Secure Risks has pledged to Universal Holdings the SSSI shares owned by Secure Risks as security for intercompany loans and advances made by Universal Holdings to both of those subsidiaries.  We have recently disposed of an additional subsidiary, Secure Risks Venezuela, Ltd., for nominal consideration.

Employees

Universal Holdings and our subsidiaries currently have a staff comprised of five executive officers, three regional directors and approximately thirty employees.  We also use the services of approximately 1,500 out-sourced contract employees and consultants to provide services under various government and



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commercial contracts. We anticipate that the employees and consultants currently engaged by the company will be able to handle most of our administrative, research and development, sales and marketing, and manufacturing requirements.  We believe that our employee relations are good.  None of our employees are represented by a collective bargaining unit.

PROPERTIES

Universal Holdings currently leases its principal executive offices located in Newport Beach, California, from The Irvine Company.  The lease agreement, which has a term of 36 months ending July 31, 2007, provides for the initial payment of $6,600 in base rent per month subject to annual adjustments.  We will also be obligated to reimburse the lessor for our proportionate share of any increase in building costs and property taxes over the base year of the lease.  Universal Holdings uses this space as the executive offices of all United States-based subsidiaries. There is no affiliation between Universal Holdings or any of our principals or agents and The Irvine Company or any of their principals or agents.

Our subsidiaries also maintain offices in various cities throughout the world pursuant to monthly leases or other arrangements terminable at will or upon short notice.

FINANCIAL STATEMENTS AND SUMMARY FINANCIAL DATA

Our financial statements and notes thereto are filed in a separate section at the end of this annual report.  The following tables summarize the consolidated statements of operations and balance sheet data for our company for the periods or as of the dates indicated, respectively:

|                                           |  | Year Ended
December 31,
|------------------------------------------ |  | -----------------------
|Consolidated Statement Of Operations Data: |  | 2006                   
|Revenue                                    |  | $        21,840,730    
|Gross profit                               |  | $        10,775,087    
|Net loss                                   |  | $        (8,396,950)   
|                                           |  |                        
|Consolidated Balance Sheet Data:           |  |                        
|Current assets                             |  |                        
|Total assets                               |  |                        
|Current liabilities                        |  |                        
|Total liabilities                          |  |                        
|Total stockholders equity                 |  |                        





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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2006 and explanatory notes included as part of this annual report.

Overview

Universal Holdings is a holding company which provides security products, systems and services to mitigate terrorist, criminal and security threats for governments and businesses worldwide through our various operating subsidiaries, broken-down into three different operating groups, the UG Services Group, the UG Products Group, and the UG Systems Group.

UG Services Group

Our service group of operating subsidiaries (collectively the UG Services Group), provide comprehensive risk mitigation solutions as well as tactical and strategic security services to protect commercial and government personnel and assets worldwide. These services include threat assessment, risk analysis, country risk management, business intelligence, corporate investigations, information assurance, kidnap and ransom insured services, as well as tactical security including executive and diplomatic protection and training.  We provide these services through various operating subsidiaries in the group which consist of Universal Guardian Services PTE, Ltd. formerly known as Secure Risks Singapore, PTE.(UG Services); Secure Risks, Ltd (Secure Risks); Universal Guardian Services, Ltd., formerly known as Secure Risks-Strategic Security Solutions International Ltd. (SSSI); Secure Risks Pakistan, Ltd.; and Secure Risks Asia Pacific, Ltd. The companies comprising the UG Services Group deliver services through regional branch offices located in London, Kabul, Pakistan, Hong Kong, Singapore, Dubai and Los Angeles (Newport Beach). The vast majority of our revenues from January 1, 2004 to date have been generated by the UG Services Group from operations outside of the United States.

UG Products Group

Our products group of operating subsidiaries (collectively the UG Products Group), focus on designing, producing and marketing non-lethal or less-lethal personal protection devices and projectiles for use by military, law enforcement, private security and consumer personal protection markets throughout the world. We have recently completed development of two products which we are currently introducing to the market. The first of these products, the Cobra StunLightTM, is a heavy-duty high-intensity LED flashlight designed to provide escalating use-of-force options to the user by illuminating its target and launching a laser-aimed, ballistic stream OC (pepper spray) which causes temporarily blindness, respiratory breathing difficulty and a burning sensation of the skin that can debilitate assailants from safe stand-off distances up to 20 feet.

The second product, the Riot DefenderTM, is for use by law enforcement and military as a non-lethal use-of-force compliance tool for suspects and to control civil disturbances. The Riot DefenderTM, is a semi-automatic projectile launcher which can debilitate an assailant using its RiotBallTM proprietary and patent pending frangible projectile at an effective range of more than 50 feet. A frangible projectile is one which breaks-up upon impact, thereby reducing the risk of injury to the suspect. The Riot DefenderTM is designed to have the capacity of ten projectiles in the pistol configuration, and 180 projectiles in the carbine configuration, and can be equipped with a laser-aiming device for better precision and accuracy. The device can use several projectile variants, including OC powder, marking powder and inert powder. Each projectile has a specific use ranging from temporarily incapacitating individual suspects to crowd



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control. We are currently developing international manufacturing, sales and marketing channels to facilitate the introduction of these products to targeted markets.

We have recently shipped the Cobra StunLightTM to several law enforcement agencies and distributors in Australia, France, Germany, Mexico, Saudi Arabia, Singapore, Turkey and the United States for testing, evaluation and purchase.  Our Mexican distributor has advised the company that the Federal Police of Mexico will be purchasing the Cobra StunLight in a state by state implementation throughout Mexico in 2007.  We have recently completed a pilot program for the Cobra StunLightTM with the Los Angeles Sheriff’s Departments, resulting in the Department approving the purchase of the Cobra StunLightTM by its deputies.  We are currently conducting a similar pilot program with the San Diego County Sheriff’s Department.

As between the various subsidiaries in the group, Shield Defense Corporation (SDC) focuses on sales and marketing activities in the United States and Canada; Shield Defense Europe GmbH (SDE) focuses on sales and marketing activities in the European market; and Universal Guardian Products, Ltd. (UG Products) focuses on supervising the manufacturing of the Cobra StunLightTM and the Riot DefenderTM products, research and development activities on the Cobra StunLightTM and the Riot DefenderTM products, as well as sales to rest of the world.

UG Systems Group

Our systems group of operating subsidiaries (collectively the “UG Systems Group), provide proprietary integrated and interoperable asset tracking and monitoring systems for use in government and commercial global supply chain logistics, inter-modal transportation, maritime and seaport security. We are in the process of introducing to market our Total Asset GuardianTM (“TAG”) platform which provides multifaceted solutions for global asset tracking, asset visibility and data management throughout the supply chain.

The TAG platform is comprised of a proprietary software application and processes which provide secure supply chain data collection, real-time network and security monitoring and notification. The TAG platform is a scaleable system that can be deployed on a global basis.  Our TAGeasyTM e-commerce RFID label system is a subscription-based system that provides pre-printed RFID labels and delivers them to Department of Defense and retail suppliers.  Our TAGstationTM is a hosted-system designed to provide on-site RFID capability for small to medium-sized government and retail suppliers.  TAGcentralTM consists of an enterprise level software application for major international retailers and government suppliers. In addition to the revenue generated upon the licensing and/or sale of these systems, each solution provides recurring revenue based upon subscription fees.

Inactive Subsidiaries

Our majority-owned Universal Guardian Corporation subsidiary (Guardian Corporation), and its wholly-owned The Harbour Group, Inc. (Harbour Group) subsidiary, have each been inactive since Harbour Groups subcontract with Northern NEF to provide waterside security systems for U.S. naval port facilities was terminated by Northern NEF in September 2003 as a consequence of the U.S. Navys termination of its master contract with Northern NEF for the Convenience of the Government.  We have since allowed both companies to become dormant, other than the collection of amounts claimed from the U.S. Navy under applicable U.S. Government Federal Acquisition Regulations in connection with the termination of our subcontract with Northern NEF.

Universal Guardian Corporation; Discontinued Operations; Reverse Acquisition

On December 31, 2002, we consummated a share exchange pursuant to which we acquired Guardian Corporation as our wholly-owned subsidiary, and the shareholders of Guardian Corporation acquired approximately 70% of our outstanding common shares, and 69.1% of our total capital stock.  Since the



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shareholders of Guardian Corporation obtained control of our company, we treated the share exchange as a recapitalization for accounting purposes, pursuant to which Universal Holdings was required, in a manner similar to reverse acquisition accounting treatment, to adopt Guardian Corporations historical financial statements as those of our company, including with respect to periods pre-dating the acquisition.

The sole income producing asset of Guardian Corporation was its Harbour Group subsidiary which, in turn, had one income producing asset, a subcontract with Northern NEF, Inc, which provided waterside security systems for U.S. naval port facilities.  On September 23, 2003, Harbour Group was notified that Northern NEFs contract with the U.S. Navy was terminated for the Convenience of the Government, thereby terminating its subcontract with Northern NEF.  Since the termination of the subcontract, we have undertaken the development of new businesses, intellectual property and products through our Secure Risks, Shield Defense and ISR Systems subsidiaries as described above, and have allowed both The Harbour Group and Guardian Corporation to become dormant companies.  The Harbour Groups and Guardian Corporations only business activities at the time of this annual report are the collection of final amounts due under The Harbour Groups subcontract with Northern NEF and settlement amounts being claimed by Guardian Corporation under applicable U.S. Government Federal Acquisition Regulations.  Since our financial statements are prepared on a consolidated basis, all of the revenues and a substantial portion of the costs reflected in our consolidated financial condition and results of operations consist of those of The Harbour Group.  Since The Harbour Groups subcontract with Northern NEF has been terminated and we have allowed the company to become dormant, there will be no further revenues generated by that company other than the collection of amounts claimed from the U.S. Navy in connection with that termination.

Other Acquisitions

On July 1, 2004, our Secure Risks subsidiary acquired all of the shares of SSSI pursuant to a share exchange.  The vast majority of revenues recognized by the company since July 1, 2004, are attributable to Secure Risks and SSSI.

Our ISR Systems subsidiary acquired all of the outstanding capital stock of UG Systems (formerly MeiDa) pursuant to a share exchange entered into on October 7, 2005 and consummated in January 2006.   In reading the discussion of our consolidated financial condition and results of operations provided below, please keep in mind that our actual future results will likely differ from our historical results as a result of this acquisition.

Going Concern

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern.  As noted below in Results Of Operations and Liquidity And Capital ResourcesCapital Resources Going Forward, while our UG Services Group has generated significant increases in revenue and gross profit over the past several fiscal years, these gains have been offset by significant continuing selling, general and administrative costs attributable to supporting our UG Products and UG Systems Groups pending the delayed introduction of their products and services to market.  As a consequence of these continuing costs and delays, we now anticipate that we will need to raise approximately $2 million in additional capital to fully execute our plan of operation over the next twelve months, including ramping-up sales of our UG Products and UG Systems Group products and services in order to generating revenues to make a significant contribution toward covering their proportionate share of selling, general and administrative costs.  The foregoing circumstances raise substantial doubt about our ability to continue as a going concern in the event we are unable to raise the additional capital. Our consolidated financial statements and their explanatory notes included as part of this annual report do not include any adjustments that might result from the outcome of this uncertainty, nor do they include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts



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and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Results of Operations

Selected Statement Of Operations Data

Summarized in the table below is statement of operations data comparing the year ended December 31, 2006 with the year ended December 31, 2005:

|                                              | Year Ended December 31, |  | Change
($)     |  | Change
(%)     
|--------------------------------------------- | ----------------------- |  | -------------- |  | ---------------
|                                              | 2006                    |  | 2005           |  |                
|Net revenue                                   | $   21,840,730          |  | $   14,173,833 |  | $   7,666,897  
|Cost of revenue                               | 11,065,643              |  | 7,720,776      |  | 3,344,867      
|Gross profit                                  | 10,775,087              |  | 6,453,057      |  | 4,322,030      
|Selling, general and administrative expenses: | 19,032,930              |  | 11,630,570     |  | 7,402,360      
|Loss from operations                          | (8,257,843)             |  | (5,177,513)    |  | (3,080,330)    
|Interest expense                              | (57,834)                |  | (9,232)        |  | (48,602)       
|Financing costs                               | (164,928)               |  | (1,124,973)    |  | 960,045        
|Amortization of debt discount                 | (143,024)               |  |               |  | (143,024)      
|Interest income                               | 43,927                  |  | 18,850         |  | 25,077         
|Equity loss in variable interest entity       |                        |  | (623)          |  | 623            
|Other, net                                    | 17,245                  |  | 33,329         |  | (16,084)       
|Total other income (expense)                  | (304,614)               |  | (1,082,649)    |  | 778,035        
|Loss before provision for income taxes        | (8,562,457)             |  | (6,260,162)    |  | (2,302,295)    
|Provision (benefit) for income taxes          | (165,507)               |  | 202,604        |  | (368,111)      
|Net loss                                      | (8,396,950)             |  | (6,462,766)    |  | $   (1,934,184)

Revenues And Gross Profits

Revenue for the year ended December 31, 2006 was $21,840,730, as compared to $14,173,833 for the year ended December 31, 2005, representing a $7,666,897 or 54% increase.  Cost of revenue, gross profit and gross margin for the year ended December 31, 2006 were $11,065,643, 10,775,087 and 49%, respectively, as compared to $7,720,776, 6,453,057 and 46%, for the year ended December 31, 2005.

Our revenues for the year ended December 31, 2006 were principally derived from contracts for security services rendered by our UG Services Group.  Approximately 85% of these revenues derived from contracts in Afghanistan.  Included in our contracts are contracts with International Relief and Development, Inc. (IRD), the U.S. Army and CDM Constructors, each of which contract (or set of contracts) would constitute more than 10% of our revenues.

Our revenues were principally derived from contracts for security services rendered by our SSSI subsidiary.  For the years ended December 31, 2006 and December 31, 2005, approximately 75% and 85% of these revenues, respectively, derived from contracts in Afghanistan.  Included in these contracts are



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contracts with International Relief and Development, Inc. (IRD), the U.S. Army and CDM Constructors, each of which contract (or set of contracts) would constitute more than 10% of our revenues for that period.

The improvement in our gross margins for year ended December 31, 2006 over year ended December 31, 2005 was principally attributable to increased operations by our SSSI subsidiary.

Selling, General And Administrative Expenses And Loss From Operations

Summarized in the table below are selling, general and administrative expenses comparing the year ended December 31, 2006 with the year ended December 31, 2005:

|                                                |  | Year Ended December 31, |  | Change
($)         |  | Change
(%)         
|----------------------------------------------- |  | ----------------------- |  | ------------------ |  | -------------------
|                                                |  | 2006                    |  | 2005               |  |                    
|Fees for outside consultants 
and professionals |  | $         2,144,468     |  | $        5,602,560 |  | $      (3,458,092) 
|Payroll and related benefits                    |  | 9,135,206               |  | 2,505,242          |  | 6,629,964          
|Rent                                            |  | 1,096,632               |  | 392,744            |  | 703,888            
|Travel                                          |  | 1,593,916               |  | 717,913            |  | 876,003            
|Insurance                                       |  | 795,764                 |  | 543,642            |  | 252,122            
|Utilities                                       |  | 244,967                 |  | 145,840            |  | 99,127             
|Writedown of asset                              |  | 67,130                  |  |                   |  | 67,130             
|Depreciation                                    |  | 988,759                 |  | 420,794            |  | 567,965            
|Marketing                                       |  | 1,072,669               |  | 141,907            |  | 930,762            
|Research and development                        |  | 432,253                 |  | 280,951            |  | 151,302            
|Other                                           |  | 1,461,166               |  | 878,977            |  | 582,189            
|                                                |  | $       19,032,930      |  | $      11,630,570  |  | $         7,402,360



Selling, general and administrative expenses for the year ended December 31, 2006 was $19,032,930, as compared to $11,630,570 for the year ended December 31, 2005, representing a $7,402,360 or 64% overall increase.  The overall increase was partially attributable to an increase in the level of business activities and staffing by our SSSI subsidiary, and partially attributable to continuing selling, general and administrative costs attributable to supporting our UG Products and UG Systems Groups pending the delayed introduction of their products and services to market.  Specifically, payroll and related benefits for year ended December 31, 2006 increased by $6,629,964 or 265% over the year ended December 31, 2005, representing additional employed staff and the recognition of the fair value of stock options granted to employees pursuant to FAS 123R, which was implemented beginning January 1, 2006.  Other significant increases included marketing, travel, and expense of $930,762, $876,003 and 703,888, respectively, over the year ended December 31, 2005.  This increase in general and administrative expenses were partially offset by a reduction in fees for outside consultants and professionals for the year ended December 31, 2006 in the amount of $3,458,092, or 62% over the year ended December 31, 2005, attributable to a shift by SSSI from consulting staff to employed staff.

Other Income And Expense And Net Loss

Interest expense for the year ended December 31, 2006 was $57,834, as compared to $9,232for the year ended December 31, 2005, representing a $48,602 or 526% increase.  Interest expense relates to interest on



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notes payable and convertible debentures.  The overall increase in interest expense for the year ended December 31, 2006 as compared to the year ended December 31, 2005 was attributable to the interest charged related to the interest on the $5 million convertible debenture issued in December 2006 and the amortization of the debt issuance costs associated with these convertible debentures.

Financing costs for the year ended December 31, 2006 was $164,928, as compared to $1,124,973 for the year ended December 31, 2005.  Financing costs for the year ended December 31, 2006 reflect the value olf warrants given in settlement of contractual rights. Financing costs for the year ended December 31, 2005 related to the non-registration penalty related to issuance of common stock in a private placement offering in May 2004, the amortization and write off of the beneficial conversion feature and fair value of warrants issued in connection with the $500,000 of convertible debentures in January 2005, and the value of 250,000 warrants issued to the placement agent and the commissions and fees paid in connection with the issuance of the convertible debentures.

Amortization of debt discount for the year ended December 31, 2006 was $143,024, as compared to $0 for the year ended December 31, 2005.  Amortization of debt discount related to the discount associated with the $5 million convertible debentures issued in December 2006.

Interest income for the year ended December 31, 2006 was $43,927, as compared to $18,850 for the year ended December 31, 2005, representing a $25,077 or 133% increase.  Interest income in 2006 principally relates to larger cash balances attributable to financings facilitated during 2005.

The $623 equity loss in variable interest entity for the year ended December 31, 2005 relates to the acquisition of our UG Systems subsidiary and the accounting treatment as a variable interest entity.

We had net other income for the year ended December 31, 2006 of $17,245, as compared to net other income of $33,329 for the year ended December 31, 2005.  The net other income for each year principally related to the gain on disposal of fixed assets.

Net Loss

We recorded a net loss before provision for income taxes of $8,562,457 during the year ended December 31, 2006, as compared to $6,260,162 during the fiscal year ended December 31, 2005, representing a $2,302,295 or 37% increase in our net loss.  The overall increase in our net loss for the year ended December 31, 2006 over the year ended December 31, 2005 is principally attributed to the $7,402,360 increase in selling, general and administrative expenses, partially offset by the $4,322,030 increase in gross profit and the $778,035 reduction in other expense.

Liquidity and Capital Resources

Historical Sources of Cash

For the period January 1, 2005 through December 31, 2006 we principally financed our operations and acquisitions through a combination of (1) the sale of common shares for cash ($9,409,000); (2) the issuance of our common shares and/or options or warrants to purchase our common shares to various consultants in payment for the provision of their services, or to other creditors in satisfaction of our indebtedness to them ($848,140); (3) short-term financings including the sale of debentures ($500,000); (4) proceeds from the exercise of common share purchase options or warrants ($994,638); (5) the sale of series B preferred shares for cash ($525,000); (6) the issuance of convertible debentures ($5,000,000); and(7) revenues received from our Secure Risks subsidiary.  Included in the above are the following significant transactions:

·

On January 4, 2005, as part of a single transaction, we sold 100,000 restricted common shares to Mr. Michael Weiss in a private placement for cash for total gross proceeds of $100,000.  As part of



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that transaction, we issued to Mr. Weiss fully vested common share purchase warrants entitling him to purchase, through January 4, 2010, 25,000 common shares at $2 per share and an additional 25,000 shares at $2.50 per share.  Until July 2, 2005, we shall have the right to call or redeem the common shares underlying the warrant at the price of $3 per share for the first 25,000 shares, and $4 per share for the remaining 25,000 shares, in the event that we have registered those underlying shares, and the closing price of our common stock exceeds the applicable call price for the five consecutive days prior to our exercise of that right.

·

On January 14, 2005, as part of a single transaction, we sold short-term convertible debentures in the amount of $250,000 to The Hunter Fund Ltd. (Hunter Fund), $150,000 to IKZA Holding Corp. (IKZA) and $100,000 to Loman International SA (Loman).  We are obligated to pay the aggregate $500,000 in principal on the debentures, together with interest accrued thereon at the annualized rate of 24%, in cash to the debenture holders on June 30, 2005.  This amount was paid in full on February 8, 2005.

·

As additional consideration for the purchase of the debenture, we also granted to Hunter Fund, IKZA and Loman common share purchase warrants entitling them to purchase 125,000, 75,000 and 50,000 common shares, respectively, at the price of $2 per share.  These warrants lapse if unexercised by January 14, 2010.

·

The aforesaid private placement was effected through Hunter as placement agent.  Under the terms of our placement agency agreement, Hunter was paid $40,000 in cash and issued common share purchase warrants entitling it to purchase 250,000 restricted common shares at $2 per share.  These warrants lapse if unexercised on January 14, 2010.  In addition, we agreed to reduce the exercise price on 625,000 common share warrants previously issued to Hunter in May 2004 from $1.50 to $1 per share, and on an additional 625,000 common share warrants previously issued at that time from $2 to $1.25 per share.  In the event the volume average weighted price for our common shares exceeds $5 per share five consecutive days, the exercise prices will revert to that originally agreed upon.

·

On February 7, 2005, as part of a single private placement, we sold (1) a total of 1,884,375 common shares together with common share purchase warrants entitling the holder to purchase 753,750 restricted common shares to Monarch Pointe Fund, Ltd. (Monarch) for the sum of $3,015,000, and (2) a total of 928,125 common shares together with common share purchase warrants entitling the holder to purchase 371,250 restricted common shares to Mercator Momentum Fund, LP (Mercator Fund) for the sum of $1,485,000. As part of that transaction, we paid to Mercator Advisory Group, LLC (MAG), as investment advisor, the sum of $265,000 in cash for due diligence and legal fees and common share purchase warrants entitling it to purchase 281,250 restricted common shares.  One-half of the aforesaid warrants issued to Monarch, Mercator Fund and MAG are exercisable at $2.40 per share, while the balance is exercisable at $2 per share.  These warrants lapse if unexercised on February 7, 2008.  Notwithstanding the foregoing, the aggregate number of common shares into which Monarch and Mercator Fund can convert the aforesaid warrants, after taking into consideration all other shares held by Monarch, Mercator Fund or their affiliates, cannot exceed more than 9.99% of our outstanding common shares.

·

On August 31, 2005, we entered into a Share Exchange Agreement and Plan of Reorganization pursuant to which our ISR Systems subsidiary would acquire all of the outstanding capital stock of UG Systems (formerly MeiDa) from its shareholders for the payment of 2,272,727 Universal Holdings common shares. We valued the transaction at $3,000,000 based on the volume average weighted price (VAWP) of our common shares for the 15 days preceding the entering into of the Share Exchange Agreement and Plan of Reorganization

·

On August 17, 2005, we sold 4,250 series B convertible preferred shares to Monarch, and 1,000 series B convertible preferred shares to Mercator Momentum Fund III, LP (Mercator Fund III),



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for the aggregate sum of $525,000 as part of a single private placement.  The 4,250 series B preferred shares issuable to Monarch are convertible into up to 432,174 unregistered common shares, while the 1,000 series B preferred shares issuable to Mercator Fund III are convertible into up to 101,688 unregistered common shares.  Notwithstanding the foregoing, the aggregate number of common shares into which Monarch and Mercator Fund can convert the series B preferred shares, after taking into consideration all other shares held by Monarch, Mercator Fund III or their affiliates, cannot exceed more than 9.99% of our outstanding common shares.  As part of the foregoing transaction, we paid to MAG, as investment advisor for the purchasers, the sum of $12,000 in cash to cover due diligence and legal fees.  The series B convertible preferred shares were converted into common shares in April 2006.

·

On December 14, 2005, we sold 1,420,000 restricted common shares to Paulson Investment Company, Inc. in a private placement for cash for total gross proceeds of $710,000.  As part of that transaction, we issued to Paulson Investment Company fully vested common share purchase warrants entitling it to purchase 1,420,000 common shares at $0.50 per share.  These warrants were exercised on February 27, 2006.

·

On June 20, 2006, we closed a private placement pursuant to which we sold (1) a total of 5,333,351 common shares, and (2) five-year stock purchase warrants entitling the holders to purchase a total of 2,666,681 common shares at $ 1.121⁄2 per share, to forty accredited investors in consideration of gross cash proceeds of $4,000,000.  As part of that transaction, we paid the following compensation to Paulson Investment Company, Inc., as placement agent for the offering:  (1) cash compensation in the amount of $400,000, representing 10% of the gross proceeds of the offering; (2) a non-accountable expense allowance in the amount of $120,000, representing 3% of the gross proceeds of the offering; and (3) a five-year placement agent warrant entitling Paulson to purchase a total of 266,669 units at the price of $1.50 per unit, each unit comprised of two common shares and a five-year stock purchase warrant entitling Paulson to purchase one common share at $1.121⁄2 per share.  We may accelerate the term of the aforesaid stock purchase warrants in the event that the fair market value of our common shares equals or exceeds $1.50 for five consecutive trading days.  In any such event, the holder of the warrant will have thirty days from notice to exercise the warrant.

·

On December 4 and 8, 2006, we sold a total of $5,000,000 of convertible debentures to a total of 43 accredited investors in a $2 million-$5 million minimum-maximum private placement facilitated through the Maxim Group, LLC (Maxim Group) which closed in two tranches on December 4 and 8, 2006.  Interest on outstanding principal of the debentures accrues at the rate of 6% per annum (increased to 12% for so long as the company is in default under the terms of the debenture), and payable quarterly commencing March 31, 2007.  Outstanding principal on the debentures is payable 24 months from the closing date, subject to acceleration in the event of certain defaults or breaches of continuing covenants.  Universal Holdings reserves the right to redeem or pay the unpaid principal of the debentures at an earlier date in the event the market price of our common shares exceeds $1.30 for 15 consecutive days, so long as the debenture holders are given a prior right to convert unpaid principal into common shares, and the conversion shares have been registered with the SEC.

Subsequent to the foregoing financings, on January 11, 2007, in a separate private placement also facilitated through Maxim Group, we sold an additional $1,000,000 of convertible debentures to two accredited investors.  Interest on outstanding principal of the debentures accrues at the rate of 6% per annum (increased to 12% for so long as the company is in default under the terms of the debenture), and payable quarterly commencing March 31, 2007.  Outstanding principal on the debentures is payable 24 months from the closing date, subject to acceleration in the event of certain defaults or breaches of continuing covenants.  Universal Holdings reserves the right to redeem or pay the unpaid principal of the debentures at an earlier date in the event the market price of our common shares exceeds $1.30 for 15



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consecutive days, so long as the debenture holders are given a prior right to convert unpaid principal into common shares, and the conversion shares have been registered with the SEC.

The holders of the debentures in each private placement described above (December 4/8, 2006 and January 11, 2007) may convert unpaid principal on the debentures into common shares at the rate of $0.65 per share, equal to 80% of the VWAP for our common shares for the ten trading day period prior to the first closing.  Universal Holdings may also elect to pay interest in common shares in lieu of cash at a conversion rate equal to 80% of the VWAP for our common shares for the ten trading day period preceding the interest payment date.

As additional consideration for the purchase of the debentures in the first and second private placements, Universal Holdings also granted to the debenture holders stock purchase warrants in each such offering entitling them to purchase a total of 3,846,159 and 769,231 common shares, respectively, at the price of $0.81 per share, or 125% of the conversion price for the debenture.  These warrants contain cashless exercise provisions in the event the underlying shares are not registered with the SEC, and lapse if unexercised five years from the closing date.

The debenture and warrants for each of the private placements are entitled to standard anti-dilution protection for stock splits, stock combinations, stock dividends and reorganizations.  In the case of certain non-exempt issuances of securities below the conversion and exercise prices for the debenture and warrants, the holders of those securities will also entitled to full-ratchet anti-dilution protection for a period of one year, and standard weighted-average anti-dilution protection thereafter.

Universal Holdings agreed to register with the SEC the common shares issuable upon conversion of principal and interest under the debenture or the exercise of the warrants in each private placement.  In the event we fail to file a registration statement with the SEC within thirty days of the final closing date, or in the event such registration statement is filed but is not declared effective by the SEC within 90 days of the final closing date (or 120 days if subject to SEC or NASD review), then we will generally be obligated (with certain exceptions) to pay to each debenture holder damages in cash equal to 1% of his or her purchase price for each thirty-day period of such failure, or partial period thereof, subject to a 4% cap.  The debenture holders for the first private placement later agreed to extend the date to file the initial registration statement with the SEC until January 15, 2007, and the Company electronically submitted to the SEC on that date a registration statement covering both offerings.  The SEC has since reviewed that registration statement, and the Company anticipates that it will file an amended registration statement and that such registration statement will be declared effective prior to the 120-day date.

As compensation for acting as placement agent for each of the two debenture private placements, we agreed to pay Maxim Group a cash placement fee equal to 8% of the gross proceeds from each such offering.  We further agreed to grant Maxim Group five-year stock purchase warrants, exercisable at $0.65 per share, entitling it to purchase 769,230 and 153,846 common shares, respectively, representing 10% of the common shares initially issuable upon conversion of the debentures for the first and second private placements, respectively.  We also agreed to pay Maxim Group a non-accountable expense allowance equal to 3% of the gross proceeds from each offering, and to reimburse Maxim Group for its expenses and legal fees incurred in connection with each offering, but not to exceed $15,000.

Cash Position and Sources And Uses Of Cash

Our cash and cash equivalents position as of December 31, 2006 was $3,458,992, as compared to $666,505 as of December 31, 2005.  The increase in our cash and cash equivalents for the year ended December 31, 2006 was principally attributable to $8,609,966 in cash raised through financing activities, partially offset by $5,419,553 in cash used in operating activities and $400,993 in cash used in investing activities.



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Our operating activities used cash in the amount of $5,419,553 for the year ended December 31, 2006, as compared to $4,510,768 for the year ended December 31, 2005.  The $5,419,553 in cash used in operating activities for 2006 reflected our net loss of $8,396,950 for that period, partially offset by an overall net increase in non-cash deductions and non-cash working capital balances in the amount of $2,977,397.  The $4,510,768 in cash used in operating activities for 2005 reflected our net loss of $6,462,766 for that period, partially offset by an overall net increase in non-cash deductions and non-cash working capital balances in the amount of $1,951,998.

Our investing activities used cash in the amount of $400,993 for the year ended December 31, 2006, as compared to $1,054,625 for the year ended December 31, 2005.  The decrease in our investing activities loss for the year ended December 31, 2006 over 2005 was principally attributed to a reduction in the purchase of property and equipment for our SSSI subsidiary.

Our financing activities generated cash in the amount of $8,609,966 for the year ended December 31, 2006, as compared to $5,891,005for the year ended December 31, 2005.  The principal sources of cash for 2006was proceeds from the sale of debentures the amount of $5,000,000, proceeds from the issuance of common shares in the amount of $4,000,000, and proceeds received from the exercise of common share purchase warrants in the amount of $710,000, partially offset by offering costs in the amount of $1,100,034.  The principal sources of cash for 2005was the issuance of common shares in the amount of $5,409,000, the issuance of series B preferred stock in the amount of $525,000 and proceeds received from the exercise of common share purchase warrants in the amount of $284,638, partially offset by offering costs in the amount of $277,000.

Capital Resources Going Forward

We had approximately $3,459,000 of cash on hand as of December 31, 2006 to fund our operations going forward.  Our plan of operation for the next twelve months is for our UG Services Group to continue to increase sales activities; and for our UG Systems Group and UG Products Group to continue activities to continue to introduce to market and to promote and market their respective products and services, thereby contributing cash-flow to allow them to start covering a meaningful portion of their operational costs and their share of our general and administrative expenses.  Based upon projected sales estimates going forward after taking into consideration the aforesaid contemplated increased sales activities, we currently have budgeted approximately $35,884,000 in costs for the twelve month period, including approximately $16,289,000 in costs of sales; $450,000 in research and development; $5,448,000 in sales and marketing and $13,697,000 in sales, general and administrative expenses.  Based on our projection we will need to raise an additional $2,000,000 in capital to fully execute our plan of operation over the next twelve months.

We will seek to raise the additional capital we required through the public or private sale of debt or equity securities, the procurement of advances on contracts or licenses, funding from joint-venture or strategic partners, debt financing or short-term loans, or a combination of the foregoing.  We may also seek to satisfy indebtedness without any cash outlay through the private issuance of debt or equity securities.  We currently do not have any binding commitments for, or readily available sources of, additional financing.  We cannot give you any assurance that we will be able to secure the additional cash or working capital we may require to continue our operations.  Should we be unable to raise the additional working capital required to fully execute our plan of operation over the next twelve months, or should our costs and expenses prove to be greater than we currently anticipate, or should we change our current business plan in a manner that will increase or accelerate our anticipated costs and expenses, such as through an acquisition of new products or businesses, the depletion of our working capital will be accelerated as will our need to seek further investment capital, and we may be forced to reduce or suspend our operations in the meantime.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation as a



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going concern.  As noted below in Results Of Operations and Liquidity And Capital ResourcesCapital Resources Going Forward, while our UG Services Group has generated significant increases in revenue and gross profit over the past several fiscal years, these gains have been offset by significant continuing selling, general and administrative costs attributable to supporting our UG Products and UG Systems Groups pending the delayed introduction of their products and services to market.  As a consequence of these continuing costs and delays, we now anticipate that we will need to raise approximately $2 million in additional capital to fully execute our plan of operation over the next twelve months, including ramping-up sales of our UG Products and UG Systems Group products and services in order to generating revenues to make a significant contribution toward covering their proportionate share of selling, general and administrative costs.  The foregoing circumstances raise substantial doubt about our ability to continue as a going concern in the event we are unable to raise the additional capital required. Our consolidated financial statements and their explanatory notes included as part of this annual report do not include any adjustments that might result from the outcome of this uncertainty, nor do they include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Our anticipated costs are based upon our current business plan and estimates.  Our actual costs could vary materially from those estimated, particularly in the event that the projected sales revenues going forward upon which we have calculated those costs do not materialize.  Further, we could also change our current business plan resulting in a change in our anticipated costs.  See the discussion concerning forward-looking statements in that section of this annual report captioned Advisements.

Off-Balance Sheet Arrangements

There are no guarantees, commitments, lease and debt agreements or other agreements that could trigger adverse change in our credit rating, earnings, cash flows or stock price, including requirements to perform under standby agreements.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our annual consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The only critical accounting policy in the judgment of our management relates to the recognition of set up fees from contracts we enter into with our customers to provide certain services.  When an initial set up fee is charged, we recognize this fee as revenue on a monthly basis over the terms of the contracts as services are performed.  Revenue, billed monthly, is only recognized if we deem that collection is probable and other criteria of SFAS No. 48, ETIF 00-21 and SAB No. 104 are met.  For a description of those and other generally accepted accounting policies that we follow, see note 1, Organization and Significant Accounting Policies, contained in the explanatory notes to our annual consolidated financial statements included with this annual report.

The preparation of our consolidated financial statements also requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities, although we do not consider those estimates to represent critical accounting policies.  For a description of those estimates, see note 1, Organization and Significant Accounting Policies, contained in the explanatory notes to our annual consolidated financial statements included with this annual report.  On an ongoing basis, we evaluate our estimates, including those related to reserves, impairment of long-lived assets, value of our stock issued to consultants for services and estimates of costs to complete contracts.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or



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conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.

Recent Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 155, Accounting for Certain Hybrid Financial Instruments.  SFAS No. 155 amends SFAS No 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.  SFAS No. 155, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.  SFAS 155 is effective for all financial instruments acquired or issued after the beginning of the companys first fiscal year that begins after September 15, 2006.  Management believes that this statement will not have a significant impact on the companys consolidated financial statements.

In March 2006, the FASB issued SFAS 156 Accounting for Servicing of Financial Assets.SFAS No. 156 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities.  This statement: (1) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract, (2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; (3) permits an entity to choose the amortization method or fair value measurement method for each class of separately recognized servicing assets and servicing liabilities; (4) at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under SFAS 115, provided that the available-for-sale securities are identified in some manner as offsetting the entitys exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.   SFAS No 156 is effective as of the beginning of the companys first fiscal year that begins after September 15, 2006.  Management believes that this statement will not have a significant impact on the companys consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. SFAS No 157 is effective for fiscal years beginning after November 15, 2007. Management has not determined the effect, if any, the adoption of this statement will have on the companys consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans−An amendment of FASB Statements No. 87, 88, 106, and 132(R)".  One objective of this standard is to make it easier for investors, employees, retirees and other parties to understand and assess an employer's financial position and its ability to fulfill the obligations under its benefit plans. SFAS No. 158 requires employers to fully recognize in their financial statements the obligations associated with single−employer defined benefit pension plans, retiree healthcare plans, and other postretirement plans.  SFAS No. 158 requires an employer to fully recognize in its statement of financial position the overfunded or underfunded status of a defined benefit postretirement plan (other than a



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multiemployer plan) as an asset or liability and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.  This statement also requires an employer to measure the funded status of a plan as of the date of its year−end statement of financial position, with limited exceptions.  SFAS No. 158 requires an entity to recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS No. 87.  This statement requires an entity to disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation.  The company is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures for fiscal years ending after December 15, 2006.  Management believes that this statement will not have a significant impact on the companys consolidated financial statements.

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No.109. Interpretation No. 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information.  The amount of tax benefits to be recognized for a tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.  Tax benefits relating to tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met or certain other events have occurred.  Previously recognized tax benefits relating to tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.  Interpretation No. 48 also provides guidance on the accounting for and disclosure of tax reserves for unrecognized tax benefits, interest and penalties and accounting in interim periods.  Interpretation No. 48 is effective for fiscal years beginning after December 15, 2006.  The change in net assets as a result of applying this pronouncement will be a change in accounting principle with the cumulative effect of the change required to be treated as an adjustment to the opening balance of retained earnings on January 1, 2007, except in certain cases involving uncertainties relating to income taxes in purchase business combinations.  In such instances, the impact of the adoption of Interpretation No. 48 will result in an adjustment to goodwill.  While the company analysis of the impact of adopting Interpretation No. 48 is not yet complete, it does not currently anticipate it will have a material impact on the companys consolidated financial statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, (SAB 108),which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment.  The company adopted SAB 108 in the fourth quarter of 2006 with no impact on its consolidated financial statements.

In December 2006, the FASB issued FASB Staff Position (FSP) EITF 00-19-2, Accounting for Registration Payment Arrangements.  EITF 00-19-2 addresses an issuer's accounting for registration payment arrangements.  This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies.  The guidance in EITF 00-19-2 amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to include scope exceptions for



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registration payment arrangements.  EITF 00-19-2 further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles (GAAP) without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement.   EITF 00-19-2 is effective for fiscal year beginning after December 15, 2006.  The Company has determined that this FSP will not have an impact in its December 31, 2006 financial statements.

UNCERTAINTIES AND RISK FACTORS THAT MAY
AFFECT OUR FUTURE RESULTS AND FINANCIAL CONDITION

We have described below a number of uncertainties and risks which, in addition to uncertainties and risks presented elsewhere in this annual report, may adversely affect our business, operating results and financial condition.  The uncertainties and risks enumerated below as well as those presented elsewhere in this annual report should be considered carefully in evaluating our company and our business and the value of our securities.

Risks Relating To Our Business

We have accumulated losses since our inception.  Our continued inability to generate revenues and profits could cause us to go out of business.

We have incurred an accumulated deficit in the amount of $24,463,040 from our inception through December 31, 2006, and continue to incur operating losses through the date of this annual report.  While our management believes that we will attain breakeven in terms of cash inflows over outflows and ultimately profitability as a consequence of the continued anticipated growth in revenues of the UG Services Group as well as the introduction to the market of products and services which have been under development for several years, we will nevertheless continue to generate operating losses for an indefinite period of time, and cannot give you any assurance that the growth in revenues will occur as anticipated or at all or that we will attain break-even or profitability at any particular point in time or at all.  See that section of this annual report captioned Managements Discussion And Analysis Of Financial Condition And Results of OperationsLiquidity And Capital Resources.

If we are unable to raise additional working capital, we will be unable to fully fund our operations and to otherwise execute our business plan, leading to the reduction or suspension of our operations and ultimately our going out of business.

We had approximately $3,459,000 of cash on hand as of December 31, 2006 to fund our operations going forward.  Based upon projected sales estimates going forward after taking into consideration the aforesaid contemplated increased sales activities, particularly with respect to the continued introduction, promotion and marketing of our UG Products and UG Services Group products and services, we anticipate that we will need to raise an additional $2,000,000 in capital to fully execute our plan of operation over the next twelve months.  We will seek to raise the additional capital we require through the public or private sale of debt or equity securities, the procurement of advances on contracts or licenses, funding from joint-venture or strategic partners, debt financing or short-term loans, or a combination of the foregoing.  We may also seek to satisfy indebtedness without any cash outlay through the private issuance of debt or equity securities.  We currently do not have any binding commitments for, or readily available sources of, additional financing.  We cannot give you any assurance that we will be able to secure the additional cash or working capital we may require to continue our operations.  Should we be unable to raise the additional working capital required to fully execute our plan of operation over the next twelve months, or should our costs and expenses prove to be greater than we currently anticipate, or should we change our current business plan in a manner that will increase or accelerate our anticipated costs and expenses, such as through an acquisition of new products or businesses, the depletion of our working capital will be accelerated as will our need to seek further investment capital,



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and we may be forced to reduce or suspend our operations in the meantime.  See that section of this annual report captioned Managements Discussion And Analysis Of Financial Condition And Results of OperationsLiquidity And Capital Resources.

Our independent auditors stated in their report accompanying our consolidated financial statements for our fiscal year ended December 31, 2006 that we had incurred net losses since our inception and had a working capital deficit, and stated that those conditions raised substantial doubt about our ability to continue as a going concern. Note 2 to our financial statements addressed managements plans to address the working capital deficit.  We cannot assure you that our business plans will be successful in addressing these issues.  If we cannot successfully continue as a going concern, our shareholders may lose their entire investment in our common shares.  See that section of this annual report captioned Managements Discussion And Analysis Of Financial Condition And Results of OperationsGoing Concern.

Even if we are able to raise additional financing, we might not be able to obtain it on terms that are not unduly expensive or burdensome to the company or disadvantageous to our existing shareholders.

Even if we are able to raise additional cash or working capital through the public or private sale of debt or equity securities, the procurement of advances on contracts or licenses, funding from joint-venture or strategic partners, debt financing or short-term loans, or the satisfaction of indebtedness without any cash outlay through the private issuance of debt or equity securities, the terms of such transactions may be unduly expensive or burdensome to the company or disadvantageous to our existing shareholders.  For example, we may be forced to sell or issue our securities at significant discounts to market, or pursuant to onerous terms and conditions, including the issuance of preferred stock with disadvantageous dividend, voting or veto, board membership, conversion, redemption or liquidation provisions; the issuance of convertible debt with disadvantageous interest rates and conversion features; the issuance of warrants with cashless exercise features; the issuance of securities with anti-dilution provisions; and the grant of registration rights with significant penalties for the failure to quickly register.  If we raise debt financing, we may be required to secure the financing with all of our business assets, which could be sold or retained by the creditor should we default in our payment obligations.  We also might be required to sell or license our products or technologies under disadvantageous circumstances we would not otherwise consider, including granting licenses with low royalty rates and exclusivity provisions.

We will face intense competition from competitors that have greater financial, technical and marketing resources.  These competitive forces may impact our projected growth and ability to generate revenues and profits.

The market for defense, security and inventory control and tracking products and services is intensely competitive and characterized by rapidly changing technology, evolving industry standards, and price competition.  There are no substantial barriers to entry, and we expect that competition will be intense and may increase.  Many of our existing competitors may have substantially greater financial, product development, technical and marketing resources, larger customer bases, longer operating histories, better name recognition and more established relationships in the industry.  As a result, certain of these competitors may be able to develop and expand their product and service offerings more rapidly, adapt to new or emerging technologies and changes in customer requirements more quickly, take advantage of acquisition and other opportunities more readily, devote greater resources to the marketing and sale of their products and services, or aggressively reduce their sales prices below the our costs. We cannot assure you that we will be able compete successfully with existing competitors or new competitors.



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We are dependent for our success on a few key executive officers.  Were we to lose one or more of these key executive officers, we would be forced to expend significant time and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the diversion of working capital.

Our success depends to a critical extent on the continued efforts of services of our Chief Executive Officer, Mr. Michael J. Skellern, and to a lesser degree on the Managing Director of UG Services, Mr. Bruce Braes. Were we to lose one or more of these key executive officers, we would be forced to expend significant time and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the diversion of limited working capital.  We can give you no assurance that we can find satisfactory replacements for these key executive officers at all, or on terms that are not unduly expensive or burdensome to our company.  Although Messrs. Skellern and Braes have signed employment agreements providing for their continued service to the company through September 8, 2009 and June 30, 2007, respectively, these agreements will not preclude either of these employees from leaving the company.  However, we do currently carry a key man life insurance policy on Mr. Skellern which will assist us in recouping our costs in the event of his demise.

We plan to grow very rapidly, which will place strains on our management team and other company resources to both implement more sophisticated managerial, operational and financial systems, procedures and controls and to train and manage the personnel necessary to implement those functions.  Our inability to manage our growth could impede our ability to implement our business plan.

We will need to significantly expand our operations to implement our longer-term business plan and growth strategies.  We will also be required to manage multiple relationships with various strategic partners, technology licensors, customers, manufacturers and suppliers, advertisers, consultants and other third parties.  This expansion and these expanded relationships will require us to significantly improve or replace our existing managerial, operational and financial systems, procedures and controls; to improve the communication and coordination between our various corporate functions; and to manage, train, motivate and maintain a growing and diverse employee base. The time and costs to effectuate these steps have placed a significant strain on our management personnel, systems and resources, particularly given the limited amount of financial resources and skilled employees that are available. We cannot assure you that we will institute, in a timely manner or at all, the improvements to our managerial, operational and financial systems, procedures and controls necessary to support our anticipated increased levels of operations and to coordinate our various corporate functions, or that we will be able to properly manage, train, motivate and retain our anticipated increased employee base.

We may have difficulty in attracting and retaining management and outside independent members to our board of directors as a result of their concerns relating to their increased personal exposure to lawsuits and shareholder claims by virtue of holding these positions in a publicly-held company

The directors and management of publicly traded corporations are increasingly concerned with the extent of their personal exposure to lawsuits and shareholder claims, as well as governmental and creditor claims which may be made against them, particularly in view of recent changes in securities laws imposing additional duties, obligations and liabilities on management and directors.  Due to these concerns, directors and management are also becoming increasingly concerned with the availability of directors and officers liability insurance to pay on a timely basis the costs incurred in defending shareholder claims.  Directors and officers liability insurance has recently become much more expensive and difficult to obtain.  If we are unable to obtain directors and officers liability insurance at affordable rates or at all, it may become increasingly more difficult to attract and retain qualified outside directors to serve on our board of directors.  The fees of directors are also rising in response to their increased duties, obligations and liabilities as well as increased exposure to such risks.  As a company with a limited operating history and limited resources, we will have a more difficult time attracting and retaining



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management and outside independent directors than a more established company due to these enhanced duties, obligations and liabilities.

We intend to rely upon licensees, strategic partners or third party marketing and distribution partners to provide a significant part of our marketing and sales functions for our Shield Defense products.  Should these outside parties fail to perform as expected, we will need to develop or procure other marketing and distribution channels, which would cause delays or interruptions in our product supply and result in the loss of significant sales and customers.

Except for the introduction of a consumer direct marketing campaign by our products group, we currently have limited internal sales or distribution capabilities for our products and services and will rely extensively on third-party licensees, strategic partners or third party marketing and distribution companies to perform a significant part of those functions.  As a consequence of that reliance, our ability to effectively market and distribute those products will be dependent in large part on the strength and financial condition of others, the expertise and relationships of those third-parties with customers, and the interest of those parties in selling and marketing our products.  Prospective third-party licensees, strategic partners and marketing and distribution parties may also market and distribute the products of other companies.  If our relationships with any third-party licensees, strategic partners or marketing and distribution partners were to terminate, we would need to either develop alternative relationships or develop our own internal sales and marketing forces to continue to sell those products.  Even if we are able to develop our internal sales, marketing and distribution capabilities, these efforts would require significant cash and other resources that would be diverted from other uses, if available at all, and could cause delays or interruptions in our product supply to customers, which could result in the loss of significant sales or customers.  We can give you no assurance that we will be successful in our efforts to engage licensees, strategic partners or third party marketing and distribution companies to meet our sales, marketing and distribution requirements for those products.

We intend to rely upon the third-party manufacturers or suppliers to manufacture our products and system components.  Should these manufacturers fail to perform as expected, we will need to develop or procure other manufacturing sources, which would cause delays or interruptions in our product supply and result in the loss of significant sales and customers.

We currently have no internal manufacturing capability for our products or system components, and will rely extensively on licensees, strategic partners or third party contract manufacturers or suppliers.  Should we be forced to manufacture our products, we cannot give you any assurance that we will be able to develop an internal manufacturing capability or procure third party suppliers.  Moreover, we cannot give you any assurance that any contract manufacturers or suppliers we procure will be able to supply those products in a timely or cost effective manner or in accordance with applicable domestic or foreign regulatory requirements or consistent with our specifications.

The consumer markets for some of our defense and security products are subject to foreign and domestic governmental regulation.  If we are unable to obtain regulatory approvals for the exportation and/or sale of our products at all or in a timely manner, we will not be able to grow as quickly as expected, and the loss of anticipated revenues will also reduce our ability to fully fund our operations and to otherwise execute our business plan.

We anticipate that a material portion of the revenue we expect from the sale of our Cobra StunLightTMwill come from consumer markets.  We expect that a small portion of revenue will also be generated in connection with the sale of our Riot DefenderTM to the law enforcement and military markets.  Some states currently impose regulations or licensing requirements on the importation and sale or use of these products to consumers.  Many foreign jurisdictions also impose regulations or licensing requirements for the manufacture and exportation of our products.  The process of obtaining domestic and/or foreign regulatory



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approval could be lengthy and be very costly, if approval can be obtained at all.  If we fail to comply with these requirements, we could be subjected to enforcement actions such as an injunction to stop us from marketing the product at issue or a possible seizure of our assets.  We intend to work diligently to assure compliance with all applicable regulations that impact our business.  We can give you no assurance, however, that we will be able to obtain regulatory approval for all of our products.  We also cannot assure you that additional regulations will not be enacted in the future that would be costly or difficult to comply with.  Our inability to protect our intellectual property rights could allow competitors to use our property rights and technologies in competition against our company, which would reduce our sales.  In such an event we would not be able to grow as quickly as expected, and the loss of anticipated revenues will also reduce our ability to fully fund our operations and to otherwise execute our business plan.

We rely on a combination of patent, patent pending, copyright, trademark and trade secret laws, proprietary rights agreements and non-disclosure agreements to protect our intellectual properties.  We cannot give you any assurance that these measures will prove to be effective in protecting our intellectual properties.  We also cannot give you any assurance that our existing patents will not be invalidated, that any patents that we currently or prospectively apply for will be granted, or that any of these patents will ultimately provide significant commercial benefits.  Further, competing companies may circumvent any patents that we may hold by developing products which closely emulate but do not infringe our patents.  While we intend to seek patent protection for our products in selected foreign countries, those patents may not receive the same degree of protection as they would in the United States.  We can give you no assurance that we will be able to successfully defend our patents and proprietary rights in any action we may file for patent infringement.  Similarly, we cannot give you any assurance that we will not be required to defend against litigation involving the patents or proprietary rights of others, or that we will be able to obtain licenses for these rights.  Legal and accounting costs relating to prosecuting or defending patent infringement litigation may be substantial.

We also rely on proprietary designs, technologies, processes and know-how not eligible for patent protection.  We cannot give you any assurance that our competitors will not independently develop the same or superior designs, technologies, processes and know-how.

While we have and will continue to enter into proprietary rights agreements with our employees and third parties giving us proprietary rights to certain technology developed by those employees or parties while engaged by our company, we can give you no assurance that courts of competent jurisdiction will enforce those agreements.

Risks Relating To An Investment In Our Securities

To date, we have not paid any cash dividends and no cash dividends will be paid in the foreseeable future.

We do not anticipate paying cash dividends on our common shares in the foreseeable future, and we cannot assure an investor that funds will be legally available to pay dividends, or that even if the funds are legally available, that the dividends will be paid.

The application of the penny stock rules could adversely affect the market price of our common shares and increase your transaction costs to sell those shares.

As long as the trading price of our common shares is below $5 per share, the open-market trading of our common shares will be subject to the penny stock rules. The penny stock rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse).  For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchasers written consent to the transaction before the purchase. Additionally, for any



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transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell the common shares, and may result in decreased liquidity for our common shares and increased transaction costs for sales and purchases of our common shares as compared to other securities.

Our common shares are thinly traded, so you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.

Our common shares have historically been sporadically or thinly-traded on the OTCBB, meaning that the number of persons interested in purchasing our common shares at or near ask prices at any given time may be relatively small or non-existent.  This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable.  As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without a material reduction in share price.  We cannot give you any assurance that a broader or more active public trading market for our common shares will develop or be sustained, or that current trading levels will be sustained.  Due to these conditions, we can give you no assurance that you will be able to sell your shares at or near ask prices or at all if you need money or otherwise desire to liquidate your shares.

The market price for our common shares is particularly volatile given our status as a relatively unknown company with a small and thinly-traded public float, limited operating history and lack of revenues or profits to date for our newly introduced products, which could lead to wide fluctuations in our share price.  The price at which you purchase our common shares may not be indicative of the price that will prevail in the trading market.  You may be unable to sell your common shares at or above your purchase price, which may result in substantial losses to you. The volatility in our common share price may subject us to securities litigation.

The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future.  The volatility in our share price is attributable to a number of factors.  First, we have relatively few common shares outstanding in the public float since most of our shares are held by a small number of shareholders.  In addition, as noted above, our common shares are sporadically or thinly traded.   As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction.  The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without a material reduction in share price.  Secondly, we are a speculative or risky investment due to our limited operating history and lack of revenues or profits to date, and uncertainty of future market acceptance for our products.  As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer.  Additionally, in the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities.  We may in the future be the



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target of similar litigation.  Securities litigation could result in substantial costs and liabilities and could divert managements attention and resources.

The following factors may add to the volatility in the price of our common shares:  actual or anticipated variations in our quarterly or annual operating results; acceptance of our products and services as viable security and technology solutions; government regulations, announcements of significant acquisitions, strategic partnerships or joint ventures; our capital commitments; and additions or departures of our key personnel.  Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance.  We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.

Our officers and directors own or control a significant portion of our outstanding common shares, giving them the ability to control or otherwise influence our management and the outcome of corporate actions requiring shareholder approval notwithstanding the overall opposition of our other shareholders.  This concentration of ownership could discourage or prevent a potential takeover of our company that might otherwise result in you receiving a premium over the market price for your common shares.

Our officers and directors currently beneficially own or control the power to vote 18.0% of our outstanding common shares as of the date of this annual report, and could increase that percentage to 25.4% assuming they were to fully exercise their vested convertible securities.  As a consequence of their substantial stock holdings, these shareholders will have the ability to elect a majority of our board of directors, and thereby control our management. These shareholders will also have the ability to control the outcome of corporate actions requiring shareholder approval, including mergers and other changes of corporate control, going private transactions, and other extraordinary transactions.

A large number of common shares are issuable upon exercise of outstanding common share purchase options or warrants or the conversion of outstanding convertible preferred shares.  The exercise or conversion of these securities could result in the substantial dilution of your investment in terms of your percentage ownership in the company as well as the book value of your common shares.  The sale of a large amount of common shares received upon exercise of these options or warrants on the public market to finance the exercise price or to pay associated income taxes, or the perception that such sales could occur, could substantially depress the prevailing market prices for our common shares.

There are outstanding as of March 27, 2007 common share purchase options and warrants entitling the holders to purchase 24,478,975 common shares with a weighted average exercise price of $1.02 per share, of which 23,373,974 of these options or warrants are vested and currently exercisable.  There are also outstanding debentures in the principal amount of $6,000,000 which are convertible into 9,230,768 common shares at a conversion rate of $0.65 per share.  There are also outstanding (1) 600 series A preferred shares convertible into 8 common shares, and (2) 18,714 UGC series A preferred shares convertible into 18,714 Universal Holdings common shares based upon a $1.25 per share stated value and conversion rate.  A material portion of the options and warrants have exercise prices less than current market prices for our common shares, while a material portion of the convertible preferred shares have an as-converted cost basis approximating current market rates.  A number of these options and warrants contain full-ratchet or weighted-average anti-dilution rights, which would reduce their exercise price to the extent such provisions are operative.  A number of these options and warrants also contain net or cashless exercise provisions.  The existence of an exercise or cost basis in these securities less than current market rates may act as and incentive for the holder of the securities to exercise or convert the securities, and sell the shares on the public markets.  The exercise or effective conversion price for the exercise or conversion all the aforesaid convertible securities may also be less than your cost to acquire our common shares.  In the event of the exercise or conversion of these convertible securities, you could suffer substantial dilution of your investment in terms of your percentage ownership in the company as



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well as the book value of your common shares. In addition, the holders of the common share purchase options or warrants may sell common shares in tandem with their exercise of those options or warrants to finance that exercise, or may resell the shares purchased in order to cover any income tax liabilities that may arise from their exercise of the options or warrants.

Our issuance of additional common shares or preferred shares, or options or warrants to purchase those shares, would dilute your proportionate ownership and voting rights.  Our issuance of additional preferred shares, or options or warrants to purchase those shares, could negatively impact the value of your investment in our common shares as the result of preferential voting rights or veto powers, dividend rights, disproportionate rights to appoint directors to our board, conversion rights, redemption rights and liquidation provisions granted to the preferred shareholders, including the grant of rights that could discourage or prevent the distribution of dividends to you, or prevent the sale of our assets or a potential takeover of our company that might otherwise result in you receiving a distribution or a premium over the market price for your common shares.

We are entitled under our certificate of incorporation to issue up to 100,000,000 common and 5,000,000 blank check preferred shares.  Based upon the number of common shares outstanding as of March 27, 2007, we have 47,437,158 common shares available for issuance and 4,999,400 preferred shares available for issuance to meet our future equity issuance requirements, including the exercise or conversion of presently outstanding convertible securities.  Our board may generally issue those common and preferred shares, or options or warrants or convertible indebtedness to purchase those shares, without further approval by our shareholders based upon such factors as our board of directors may deem relevant at that time.  Any preferred shares we may issue shall have such rights, preferences, privileges and restrictions as may be designated from time-to-time by our board, including preferential dividend rights, voting rights, conversion rights, redemption rights and liquidation provisions.  It is likely that we will be required to issue a large amount of additional securities to raise capital to further our development and marketing plans.  It is also likely that we will be required to issue a large amount of additional securities to directors, officers, employees and consultants as compensatory grants in connection with their services, both in the form of stand-alone grants or under our various stock plans.  We cannot give you any assurance that we will not issue additional common or preferred shares, or options or warrants to purchase those shares, under circumstances we may deem appropriate at the time.

Our certificate of incorporation contains provisions that could make it more difficult for our shareholders to replace a majority of directors and obtain control of our board of directors.

Our certificate of incorporation (1) permits our board of directors to increase the size of our board to up to nine members, and to fill any vacancy created by a majority vote, (2) limits the right to call a special meeting of our shareholders to our President, Chairman of the Board, or our board of directors, and (3) limits the right to remove a director to the affirmative vote of holders of 80% of our voting securities. Pursuant to our certificate of incorporation, we also have a classified board of directors composed of three classes of directors, each class serving a staggered three year term.  These provisions make it more difficult for our shareholders to replace a majority of our directors and obtain control of our board of directors.

We are subject to the Delaware Business Combination Act, which could discourage or prevent a potential takeover of our company that might otherwise result in you receiving a premium over the market price for your common shares.

As a Delaware corporation, we are subject to the Delaware Business Combination Act which precludes a shareholder who owns 15% or more of our shares from entering into a business combination involving our company for a period of three years, unless (1) our board of directors approves the combination before the shareholder acquires the 15% interest; (2) the interested shareholder acquires at least 85% of our shares as part of the transaction in which he acquired the initial 15%, excluding shares owned by our



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officers who are also directors and voting stock held by employee benefit plans; or (3) the combination is approved by a majority vote of our board of directors and two-thirds vote of our other shareholders at a duly called shareholders meeting.  A business combination is defined as (1) a merger or consolidation requiring shareholder approval, (2) the sale, lease, pledge, or other disposition of our assets, including by dissolution, having at least 50% of the entire asset value of our company, or (3) a proposed tender or exchange offer of 50% or more of our voting stock.

The elimination of monetary liability against our directors, officers and employees under our certificate of incorporation and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures by our company and may discourage lawsuits against our directors, officers and employees.

Our certificate of incorporation contains provisions which eliminate the liability of our directors for monetary damages to our company and shareholders to the maximum extent permitted under Delaware corporate law.  Our bylaws also require us to indemnify our directors to the maximum extent permitted by Delaware corporate law.  We may also have contractual indemnification obligations under our agreements with our directors, officers and employees.  The foregoing indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors, officers and employees, which we may be unable to recoup.  These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors, officers and employees for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors, officers and employees even though such actions, if successful, might otherwise benefit our company and shareholders.

LEGAL PROCEEDINGS

We have summarized below (1) any legal or governmental proceedings relating to our company or properties to which we are a party which we consider to be material and which are pending as of the date of this annual report, and (2) any proceedings to which any of our directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us which are pending as of the date of this annual report.

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On February 8, 2007, Universal Holdings received correspondence from U.S. counsel representing Mr. John Chase, a former Secure Risks shareholder and employee, demanding, among other things, that Universal Holdings release from escrow 615,224 Universal Holdings common shares initially issued to Mr. Chase in exchange for his Secure Risks shares in connection with Universal Holdings acquisition of Secure Risks in June 2004, and further demanding that Universal Holdings issue an opinion letter approving the sale of a portion of these shares under SEC Rule 144, and threatening litigation should Universal Holdings fail to promptly comply with the aforesaid demands.  Shortly before receiving this demand letter, Universal Holdings received a copy of an application to the High Court of Chancery in the United Kingdom from an English law firm seeking the functional equivalent of the issuance of a subpoena duces tecum to Secure Risks on behalf of The Ackerman Group  The application was being made in connection with a lawsuit filed by The Ackerman Group against Mr. Chase, a number of other individuals as well as TAG 24, Ltd (TAG 24), a company acquired by Secure Risks from Mr. Chase immediately before Universal Holdings acquisition of Secure Risks in contemplation and as part of that transaction.  In the lawsuit, The Ackerman Group alleges that Mr. Chase was formerly employed by The Ackerman Group, and that he formed TAG 24 while so employed and used assets misappropriated from The Ackerman Group to start his new operation.  The Ackerman Group is suing Mr. Chase and TAG 24 for misappropriation of company assets, including clients and customers.  These appear to be the part of the assets that Mr. Chase sold to Secure Risks as part of the series of transactions whereby Universal Holdings acquired Secure Risks.



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Universal Holdings and Secure Risks are not named as defendants in The Ackerman Groups lawsuit, and have not to date been threatened with litigation by The Ackerman Group.  Nevertheless, it is possible that should The Ackerman Group prevail, the consideration received by Mr. Chase in exchange for the assets he allegedly misappropriated from The Ackerman Group may be subject to levy in an enforcement action under a variety of legal and equitable theories, including constructive trust.  In order to avoid any liability for Universal Holdings or Secure Risks as being complicit in any transfer of such assets during the pendency of such litigation, Universal Holdings has notified Mr. Chase that the company will not release any of such shares from escrow or otherwise permit any of such shares to be sold under Rule 144 or otherwise transferred during the pendency of such litigation.  It is also possible that The Ackerman Group could assert claims against Secure Risks as TAG 24s successor, which would result in equitable rights of offset against Mr. Chase.  The events also appear to violate representations and covenants personally given by Mr. Chase in connection with the transaction whereby Universal Holdings acquired Secure Risks.  Mr. Chase has not, to date, responded to Universal Holdings notification of its decision not to release the shares from escrow or to allow a transfer of the shares.  We are currently in the process of determining whether to proceed with an action to rescind the issuance of shares to Mr. Chase on the grounds of fraud.

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On January 11, 2005, the company received a cease and desist letter from Pepperball Technologies, Inc. claiming that our prospective manufacture of frangible projectiles for our Python (now named Riot Defender) Projectile Launcher infringes on Pepperballs patents, and further claiming that the prior President of our Shield Defense Corporation subsidiary, Mr. Dennis M. Cole, who was previously employed by Pepperball, violated his at will employment agreement by providing Universal Holdings with alleged trade secrets.  The frangible projectiles that will be manufactured by the company are protected by a patent originally issued to the U.S. Navy on November 14, 2000 (U.S. Patent No. 6,145,441).  The U.S. Navy granted Guardian Corporation the exclusive right to sell and market projectiles using this patented technology for the life of the patent pursuant to an agreement dated November 19, 2002.  In January, 2004, Guardian Corporation renewed its exclusive license to the U.S. Navys patent for 14 years.  We have received non-infringement opinions from patent counsel confirming that our manufacture and sale of our frangible projectiles will not infringe upon Pepperballs intellectual property rights.  To date, we have yet to sell any frangible projectiles which undermines any claims of damages which may be asserted by Pepperball.  On January 28, 2005 we responded to Pepperballs correspondence and we are prepared to vigorously defend its claims if necessary.  In reply, Pepperball has is demanding that we provide them with exemplars of our products so that they may make an independent determination as to whether our design infringes on their patents.  We are taking the matter under advisement.

·

On June 3, 2004, our Guardian Corporation subsidiary entered into a stipulated settlement with its former landlord, AC Pacific View, whereby Guardian Corporation agreed to pay the sum of $200,000 to AC Pacific View on or before December 31, 2004 in full satisfaction of all of Guardian Corporations obligations arising under a terminated lease.  In the event payment was not made by that date, AC Pacific View would be entitled to enter judgment against Guardian Corporation for the sum of $200,000, less any amounts paid.   Guardian Corporation has not paid this amount to date, and is insolvent but for the potential recovery of damages in connection with the termination of Guardian Corporations subcontract with Northern NEF. AC Pacific View has noticed Guardian Corporations default under the stipulation but has yet to enter judgment, and Guardian Corporation is presently negotiating an extension of time in respect to the entry of judgment.  Management does not believe that the judgment, if filed by AC Pacific View, will be enforceable against Universal Holdings or any other subsidiary of Universal Holdings other than Guardian Corporation.



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SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

During the fourth quarter of fiscal 2006, we did not submit any to vote to our securities holders.

MARKET PRICE OF AND DIVIDENDS ON OUR COMMON SHARES
AND RELATED STOCKHOLDER MATTERS

Description Of Market

Our common shares are currently quoted on the OTCBB under the symbol UGHO.  The following table sets forth the quarterly high and low bid prices for our common shares on the OTCBB for the periods indicated.  The prices set forth below represent inter-dealer quotations, without retail markup, markdown or commission and may not be reflective of actual transactions.

|               |            | Bid Price         
|-------------- | ---------- | ------------------
|Period         | Volume     | High              
|2006:          |            |                   
|Fourth Quarter | 9,416,263  | $             0.99
|Third Quarter  | 12,711,369 | 1.12              
|Second Quarter | 15,578,796 | 1.09              
|First Quarter  | 17,050,370 | 1.24              
|2005:          |            |                   
|Fourth Quarter | 22,522,012 | $             1.37
|Third Quarter  | 17,802,888 | 1.48              
|Second Quarter | 13,239,910 | 1.91              
|First Quarter  | 70,920,167 | 2.56              



The closing price for our common shares on March 27, 2007 as reported on the OTCBB was $0.76 per share.  There were 118 registered holders or persons otherwise entitled to hold our common shares as of that date pursuant to a shareholders list provided by our transfer agent and our records relating to issuable shares.  The number of registered shareholders excludes any estimate by us of the number of beneficial owners of common shares held in street name.  Based upon shareholder information procured in connection with our last annual meeting of shareholders, there are approximately 5,400 beneficial holders of our common shares, including with respect to shares held in street name.

Dividend Policy

We have never paid any cash dividends on our common shares, and we do not anticipate that we will pay any dividends with respect to those securities in the foreseeable future.  Our current business plan is to retain any future earnings to finance the expansion development of our business.  Any future determination to pay cash dividends will be at the discretion of our board of directors, and will be dependent upon our financial condition, results of operations, capital requirements and other factors as our board may deem relevant at that time.  We are restricted from paying cash dividends under two-year convertible debentures sold in December 2006 and January 2007.



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Recent Repurchases Of Equity Securities

During the fourth quarter of fiscal 2006, we did not repurchase any equity securities.

Recent Sales Of Unregistered Securities

During the fourth quarter of fiscal 2006, we did not sell or issue any securities not registered under the Securities Act of 1933 that were not previously reported in a periodic report on form 10-QSB or on a current report on form 8-K.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable

CONTROLS AND PROCEDURES

Evaluation Of Disclosure Controls And Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SECs rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including our President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  Our Chief Executive Officer and Chief Financial Officer, in consultation with our other members of management and advisors as appropriate, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report pursuant to Rule 15d-15(b) promulgated under the Exchange Act.  Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as currently constituted may not be effective in alerting them in a timely fashion to all material information required to be included in our periodic filings with the SEC in view of the concerns about information flows described below in the subsection captioned Material Weaknesses In Collecting And Processing International Financial Information.

Evaluation Of Changes In Internal Control Over Financial Reporting

The term internal control over financial reporting is defined as a process designed by, or under the supervision of, our President and Principal Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as a consequence of event described below in that subsection captioned Material Weaknesses In Collecting And Processing International Financial Information, there have been changes in our internal controls over financial reporting that may materially affect our internal controls over financial reporting.

Material Weaknesses in Collecting And Processing Financial Information

Our independent registered public accounting firm has determined that certain material weaknesses in our internal controls over the financial reporting process for our consolidated financial statements as a result of delays in receiving and processing financial information from our various worldwide operations and incorporating and consolidating that information into the holding companys financial records.  We



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believed this weakness was attributable to the fact that our subsidiaries operate, in many cases, in remote locations throughout the world, including Afghanistan, Singapore and Hong Kong, and use different accounting methods based upon their locale and different and separate accounting systems and computer programs.   Contributing factors included the fact that we inherited these independent accounting systems when we acquired these businesses, and that the information processing problems have been aggravated by the growth of our businesses and the recent acquisition of our UG Systems subsidiary.  Our auditors believed that this situation reflected a material weakness in our internal controls and procedures insofar as there is a more than remote likelihood that delays in receiving and processing financial information in conjunction with consolidating our financial statements could lead to a material misstatement of our financial statements.  While we do not believe there have been, and our auditors have not identified, any material misstatements in our financial statements to date as a result of this weakness, we nevertheless concurred with our auditors that our financial information collection and processing system is inadequate.  Indeed, we advised our auditors that we were aware of the weakness in our accounting systems due to their various remote locations and systems described above and had already commenced steps to address the situation.  Specifically, we had acquired, and are currently in the process of implementing, an industry-recognized international enterprise resource planning or ERP software system containing an SAP accounting program which will integrate the accounting and information management functions of all of our worldwide operations into a single accounting and information data-base that can be accessed at any time by management.  We anticipate that we will complete the implementation process by the end of fiscal 2007.  We believe that the implementation of the ERP system will address our auditors concerns.

Given the complexities in implementing ERP systems, no assurance can be given that the ERP system will be implemented by the end of fiscal 2007.  The occurrence of a material misstatements in our financial statements by reason of a material weakness in our internal controls and procedures or any other reason could harm our operating results, cause us to fail to meet our reporting obligations, subject us to increased risk of errors and fraud related to our financial statements or result in material misstatements in our financial statements.  Any such failure also could adversely affect the results of the periodic management evaluations and annual independent certified public accountant attestation reports regarding the effectiveness of our internal control over financial reporting that will be required when the Securities and Exchange Commissions rules under Section 404 of the Sarbanes-Oxley Act of 2002 become applicable to us.  Inadequate internal controls could also expose the officers and directors of our company to securities laws violations and also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common shares.

DIRECTORS AND EXECUTIVE OFFICERS

Information relating to our directors and executive officers required under the rules of the SEC will be contained in our definitive proxy statement to be distributed later this year in advance of our Annual Meeting of Shareholders and, pursuant to those rules, that information is hereby incorporated into this annual report by reference.

EXECUTIVE COMPENSATION

Information relating to executive compensation required under the rules of the SEC will be contained in our definitive proxy statement to be distributed later this year in advance of our Annual Meeting of Shareholders and, pursuant to those rules, that information is hereby incorporated into this annual report by reference.



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OWNERSHIP OF OUR SECURITIES BY BENEFICIAL OWNERS AND MANAGEMENT

Information relating to the ownership of our securities by beneficial owners and our management required under the rules of the SEC will be contained in our definitive proxy statement to be distributed later this year in advance of our Annual Meeting of Shareholders and, pursuant to those rules, that information is hereby incorporated into this annual report by reference.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information relating to certain relationships and related transactions involving our beneficial owners, management and agents required under the rules of the SEC will be contained in our definitive proxy statement to be distributed later this year in advance of our Annual Meeting of Shareholders and, pursuant to those rules, that information is hereby incorporated into this annual report by reference.

CODE OF ETHICS

Our Board of Directors adopted a code of ethics for management.  We will provide a copy of the code without charge to any person who sends a request for a copy to our principal executive officers.

OTHER INFORMATION

During the fourth quarter of fiscal 2006, there was no information required to be disclosed in a report on form 8-K that was not reported.

EXHIBITS

2.1

Share Exchange Agreement and Plan of Reorganization dated September 13, 1999 between Guideline Capital Corporation, Vitafort International Corporation and Hollywood Partners, Inc. (1)

2.2

Share Exchange Agreement And Plan Of Reorganization dated December 4, 2002 between Hollywood Partners.Com, Inc., Universal Guardian Corporation, and the shareholders of Universal Guardian Corporation (3)

2.3

Amendment To Share Exchange Agreement And Plan Of Reorganization dated December 16, 2002 between Hollywood Partners.Com, Inc., Universal Guardian Corporation, and the shareholders of Universal Guardian Corporation (3)

3.1

Restated And Amended Certificate Of Incorporation Of Guideline Capital Corporation as filed with the Delaware Secretary of State on September 20, 1999 (1)

3.2

Bylaws of Hollywood Partners.Com Inc. (1)

3.3

Certificate Of Amendment Of Certificate Of Incorporation Of Hollywood Partners.Com, Inc. as filed with the Delaware Secretary of State on December 3, 2002 (6)

3.4

Certificate Of Amendment Of Certificate Of Incorporation Of Hollywood Partners.Com, Inc. as filed with the Delaware Secretary of State on December 6, 2002 (6)

3.5

Certificate of Designation of Preferences, Rights and Limitations of Universal Guardian Corporation Series A Preferred Stock as filed with the Delaware Secretary of State on March 14, 2003 (6)

3.6

Certificate of Designations of Preferences and Rights of Series B Convertible Preferred Stock as filed with the Delaware Secretary of State on August 17, 2005 (9)



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5.1

Universal Guardian Holdings, Inc. 2003 Incentive Equity Stock Plan As Adopted April 21, 2003 (4)

5.2

Hollywood Partners.com 2002 Stock Compensation Program (consisting of the Hollywood Partners.com, Inc. 2002 Non-Qualified Stock Option Plan, the Hollywood Partners.com, Inc. 2002 Restricted Share Plan, the Hollywood Partners.com, Inc. 2002 Employee Stock Purchase Plan, the Hollywood Partners Inc. Stock Appreciation Rights Plan, and the Hollywood Partners.com, Inc. 2002 Other Stock Rights Plan (2)

5.3

Form of Hollywood Partners.com, Inc. Common Share Purchase Warrant generally issued to investors or consultants (6)

5.4

Form of Hollywood Partners.com, Inc. Common Share Purchase Option generally issued to employees or consultants (6)

5.5

Common Stock Purchase Warrant dated February 25, 2003 issued to Edward Whelan (6)

5.6

Common Stock Purchase Warrant dated February 25, 2003 issued to Edward Meyer (6)

5.7

Common Stock Purchase Warrant dated June 1, 2003 issued to Camden Securities, Inc. (6)

5.8

Common Stock Purchase Warrant dated July 1, 2003 issued to Stern & Co. (6)

5.9

Common Stock Purchase Warrant dated July 3, 2003 issued to Michael H. Weiss (6)

5.10

Common Stock Purchase Warrant dated December 2, 2003 issued to Shai Z. Stern. (7)

5.11

Form of Common Stock Purchase Agreement for each of Michael and Dominique Appleby for Private Placement Closing on February 6, 2004 (6)

5.12

Form of Common Stock Purchase Warrant for each of Michael and Dominique Appleby for Private Placement closing on February 6, 2004 (6)

5.13

Common Stock Purchase Agreement dated May 25, 2004 between Universal Guardian Holdings, Inc. and Absolute Return Europe Fund (8)

5.14

Common Stock Purchase Warrant dated May 25, 2004 issued to Hunter World Markets, Inc. (8)

5.15

Common Stock Purchase Warrant dated May 25, 2004 issued to Hunter World Markets, Inc. (8)

5.16

Universal Guardian Holdings, Inc. Common Stock Purchase Warrant dated June 15, 2004 issued to HomelandSecurityStocks.com. (10)

5.17

Universal Guardian Holdings, Inc. Common Stock Purchase Warrant dated June 15, 2004 issued to HomelandSecurityStocks.com. (10)

5.18

Common Stock Purchase Agreement dated January 4, 2005 between Universal Guardian Holdings, Inc. and Michael H. Weiss (10)

5.19

Universal Guardian Holdings, Inc. Common Stock Purchase Warrant dated January 4, 2005 issued to Michael H. Weiss (10)

5.20

Universal Guardian Holdings, Inc. Common Stock Purchase Warrant dated January 14, 2005 issued to Hunter World Markets, Inc. (10)

5.21

Universal Guardian Holdings, Inc. 6-Month 12% Secured Convertible Debenture Issued on January 14, 2005 to The Hunter Fund Ltd. (10)

5.22

Universal Guardian Holdings, Inc. Common Stock Purchase Warrant dated January 14, 2005 issued to The Hunter Fund Ltd. (10)

5.23

Universal Guardian Holdings, Inc. 6-Month 12% Secured Convertible Debenture Issued on January 14, 2005 to IKZA Holding Corp. (10)



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5.24

Universal Guardian Holdings, Inc. Common Stock Purchase Warrant dated January 14, 2005 issued to IKZA Holding Corp. (10)

5.25

Universal Guardian Holdings, Inc. 6-Month 12% Secured Convertible Debenture Issued on January 14, 2005 to Loman International SA (10)

5.26

Universal Guardian Holdings, Inc. Common Stock Purchase Warrant dated January 14, 2005 issued to Loman International SA (10)

5.27

Subscription Agreement dated February 7, 2005 between Universal Guardian Holdings, Inc., Monarch Pointe Fund, Ltd., Mercator Momentum Fund, LP and Mercator Advisory Group, LLC (10)

5.28

Registration Rights Agreement dated February 7, 2005 between Universal Guardian Holdings, Inc., Monarch Pointe Fund, Ltd., Mercator Momentum Fund, LP and Mercator Advisory Group, LLC (10)

5.29

Universal Guardian Holdings, Inc. Warrant To Purchase Common Stock dated February 7, 2005 issued to Monarch Pointe Fund, Ltd. (10)

5.30

Universal Guardian Holdings, Inc. Warrant To Purchase Common Stock dated February 7, 2005 issued to Monarch Pointe Fund, Ltd. (10)

5.31

Universal Guardian Holdings, Inc. Warrant To Purchase Common Stock dated February 7, 2005 issued to Mercator Momentum Fund, LP (10)

5.32

Universal Guardian Holdings, Inc. Warrant To Purchase Common Stock dated February 7, 2005 issued to Mercator Momentum Fund, LP (10)

5.33

Universal Guardian Holdings, Inc. Warrant To Purchase Common Stock dated February 7, 2005 issued to Mercator Advisory Group, LLC (10)

5.34

Universal Guardian Holdings, Inc. Warrant To Purchase Common Stock dated February 7, 2005 issued to Mercator Advisory Group, LLC (10)

5.35

Universal Guardian Holdings, Inc. Warrant To Purchase Common Stock dated December 14, 2005 issued to Paulson Investment Company, Inc. (18)

5.36

Form of Universal Guardian Holdings, Inc. Common Stock Purchase Warrant dated June 20, 2006 issued to investors in private placement (19)

5.37

Form of Universal Guardian Holdings, Inc. Common Stock Purchase Warrant dated June 20, 2006 issued to Paulson Investment Company, Inc. as placement agent  (19)

5.38

Form of Registration Rights Agreement dated June 20, 2006 between Universal Guardian Holdings, Inc. and investors in private placement (19)

5.39

Form of 6% convertible debenture between Universal Guardian Holdings, Inc. and investors in the sale of debentures and warrants closing on December 4 and 8, 2006 and January 11, 2007 (21)

5.40

Form of warrant to purchase common stock between Universal Guardian Holdings, Inc. and investors in the sale of debentures and warrants closing on December 4 and 8, 2006 and January 11 2007 (21)

10.1

Letter of Intent dated August 15, 2002 between DYDX Group of Funds, LLC and Universal Guardian Corporation (6)

10.2

Promissory Note dated September 4, 2002 by Universal Guardian Corporation to Pacific International, Inc. in the principal amount of $180,000 (6)

10.3

Exclusive License dated December 19, 2002 between Universal Guardian Corporation and United States of America as represented by the Secretary of the Navy (8).



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10.4

Convertible Bridge Loan Termination And Conversion of Debt Agreement dated January 14, 2003 between Universal Guardian Corporation, The Harbour Group, Inc., Sotiris Emmanouil, and DYDX Group of Funds, LLC (6)

10.5

Convertible Bridge Loan Termination And Conversion of Debt Agreement dated January 14, 2003 between Universal Guardian Corporation, The Harbour Group, Inc., Michael Drescher, and DYDX Group of Funds, LLC (6)

10.6

Waiver letter dated April 14, 2003 from DYDX Group of Funds, LLC to Universal Guardian Holdings, Inc. (6)

10.7

Termination Agreement dated May 1, 2003 between DYDX Group of Funds, LLC, and Universal Guardian Holdings, Inc. (7)

10.8

Consulting Agreement dated October 9, 2003 between Universal Guardian Corporation and Del Kintner (6)

10.9

Agreement For Strategic Alliance dated January 13, 2004 between Shield Defense Technologies, Inc. and Information And Infrastructure Technologies, Inc. (6)

10.10

Employment Agreement dated February 1, 2004 between Shield Defense Corporation and Dennis M Cole (6)

10.11

Agreement And Plan Of Share Exchange dated February 9, 2004 between Universal Guardian Holdings, Inc. and Emerging Concepts, Inc. (6)

10.12

Agreement And Plan Of Share Exchange dated June 28, 2004 between Universal Guardian Holdings, Inc., Secure Risks Ltd., and shareholders of Secure Risks-Strategic Security Solutions International Ltd. (13)

10.13

Employment Agreement dated June 1, 2004 between Secure Risks Ltd. and Michael J. Stannard (10)

10.14

Employment Agreement dated June 15, 2004 between Universal Guardian Holdings. Inc. and Marian Barcikowski (10)

10.15

Service Agreement dated June 16, 2004 between Secure Risks Ltd. and John Chase (10)

10.16

Service Agreement dated June 17, 2004 between Secure Risks Ltd. and Bruce M. Braes (10)

10.17

Employment Agreement dated August 1, 2004 between Secure Risks Ltd. and William M. Glanton (10)

10.18

Executive Employment Agreement dated October 1, 2002 between Universal Guardian Holdings, Inc. and Michael J. Skellern (10)

10.19

Agreement for Consultancy Services dated July 27, 2004 between Secure Risks Ltd. and International Relief And Development, Inc. (10)

10.20

Consulting Agreement dated December 1, 2004 between Universal Guardian Holdings, Inc. and William C. Lowe (10)

10.21

Placement Agent Agreement dated January 12, 2005 between Universal Guardian Holdings, Inc. and Hunter World Markets, Inc. (10)

10.22

Office Space Lease effective June 15, 2004 between The Irvine Company, as lessor, and Universal Guardian Holdings, Inc., as lessee (10)

10.23

Lease dated May 1, 2004 between LexLawn Associates Limited Directors Pension Scheme, as lessor, and Secure Risks-Strategic Security Solutions International Ltd., as lessee (10)

10.24

Executive Employment Agreement dated September 8, 2004 between Universal Guardian Holdings, Inc. and Mark V. Asdourian (11)



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10.25

Subscription Agreement dated August 16, 2005 between Universal Guardian Holdings, Inc., Monarch Pointe Fund, Ltd., and Mercator Momentum Fund III, LP and Mercator Advisory Group, LLC (13)

10.26

Registration Rights Agreement dated August 16, 2005 between Universal Guardian Holdings, Inc., Monarch Pointe Fund, Ltd., Mercator Momentum Fund III, LP and Mercator Advisory Group, LLC (13)

10.27

Universal Guardian Holdings, Inc. Consultant Stock Option Certificate dated August 16, 2005 issued to Kim Bradford (13)

10.28

Universal Guardian Holdings, Inc. Consultant Stock Option Certificate dated August 16, 2005 issued to Kim Bradford (13)

10.29

Universal Guardian Holdings, Inc. Consultant Stock Option Certificate dated August 16, 2005 issued to Paul DiFrancesco (13)

10.30

Universal Guardian Holdings, Inc. Consultant Stock Option Certificate dated August 16, 2005 issued to Paul DiFrancesco (13)

10.31

Share Exchange Agreement And Plan Of Reorganization dated August 31, 2005 between Universal Guardian Holdings, Inc., ISR Systems Corporation, MeiDa Information Technology, Ltd., and shareholders of MeiDa Information Technology, Ltd. (13)

10.32

First Amendment To Share Exchange Agreement And Plan Of Reorganization dated September 13, 2005 between Universal Guardian Holdings, Inc., ISR Systems Corporation, MeiDa Information Technology, Ltd., and shareholders of MeiDa Information Technology, Ltd. (13)

10.33

Executive Employment Agreement dated October 7, 2005 between ISR Systems Corporation and Herbert P. Goertz (14)

10.34

Pledge Agreement dated November 17, 2005 between Michael J. Skellern and Argyll Equities LLC (16)

10.35

Common Stock Purchase Agreement dated December 14, 2005 between Universal Guardian Holdings, Inc. and Paulson Investment Company, Inc. (18)

10.36

Placement Agent Agreement dated April 6, 2006 between Universal guardian Holdings, Inc. and Paulson Investment Company, Inc.  (19)

10.37

Employment Agreement dated June 12, 2006 between Universal Guardian Holdings, Inc. and Keith Winsell (19)

10.38

Employment Agreement dated August 21, 2006 between Universal Guardian Holdings, Inc. and Randall A. Jones (20)

10.39

Form of subscription agreement between Universal Guardian Holdings, Inc. and investors in the sale of debentures and warrants closing on December 4 and 8, 2006 and January 8 2007 (21)

22.

List of subsidiaries *

23.

Consent of Independent Auditors (AJ. Robbins, PC) *

24.

Powers of Attorney for Mel R. Brashears, Michael D. Bozarth and Kenneth A. Merchant *

|
|

*

Filed herewith.

(1)

Previously filed as an exhibit to our current report on form 8-K filed with the SEC on September 29, 1999.

(2)

Previously filed as an exhibit to our information statement on form 14C filed with the SEC on November 7, 2002.

(3)

Previously filed as an exhibit to our current report on form 8-K filed with the SEC on January 15, 2003.



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(4)

Previously filed as an exhibit to our registration statement on form S-8 filed with the SEC on April 25, 2003.

(5)

Previously filed as an exhibit to our current report on form 8-K filed with the SEC on February 11, 2004.

(6)

Previously filed as an exhibit to our annual report of form 10-KSB for the year ended December 31, 2003 filed with the SEC on April 14, 2004.

(7)

Previously filed as an exhibit to our registration statement on form SB-2 filed with the SEC on April 26, 2004.

(8)

Previously filed as an exhibit to our current report on form 8-K filed with the SEC on July 2, 2004.

(9)

Previously filed as an exhibit to our current report on form 8-K filed with the SEC on July 15, 2004.

(10)

Previously filed as an exhibit to our registration statement on form SB-2 filed with the SEC on February 15, 2005.

(11)

Previously filed as an exhibit to our registration statement on form SB-2 filed with the SEC on May 26, 2005.

(12)

Previously filed as an exhibit to our current report on form 8-K filed with the SEC on September 9, 2005.

(13)

Previously filed as an exhibit to our registration statement on form SB-2 filed with the SEC on October 3, 2005.

(14)

Previously filed as an exhibit to our quarterly report on form 10-QSB filed with the SEC on November 15, 2005.

(15)

Previously filed as an exhibit to our registration statement on form SB-2 (amendment no. 1) filed with the SEC on November 2, 2005.

(16)

Previously filed as an exhibit to our registration statement on form SB-2 (amendment no. 2) filed with the SEC on December 14, 2005.

(17)

Previously filed as an exhibit to our registration statement on form SB-2 filed with the SEC on January 25, 2006.

(18)

Previously filed as an exhibit to our annual report of form 10-KSB for the year ended December 31, 2005 filed with the SEC on March 31, 2006.

(19)

Previously filed as an exhibit to our registration statement on form SB-2 filed with the SEC on July 28, 2006.

(20)

Previously filed as an exhibit to our registration statement on form SB-2 (amendment no. 1) filed with the SEC on October 6, 2006.

(21)

Previously filed as an exhibit to our current report on form 8-K filed with the SEC on December 11, 2006.





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UNIVERSAL GUARDIAN HOLDINGS, INC.

ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
(AUDITED)



Contents

|                                                                                                                    | Page
|------------------------------------------------------------------------------------------------------------------- | ----
|Report of Independent Registered Public Accounting Firm                                                             | F-1 
|Consolidated Financial Statements (Audited):                                                                        |     
|Consolidated Balance Sheet As Of December 31, 2006                                                                  | F-2 
|Consolidated Statements Of Operations And Other Comprehensive (Loss) For The Years Ended December 31, 2006 and 2005 | F-3 
|Consolidated Statement Of Stockholders Equity (Deficit) For The Years Ended December 31, 2006 and 2005             | F-4 
|Consolidated Statements Of Cash Flows  For The Years Ended December 31, 2006 and 2005                               | F-8 
|Notes To Consolidated Financial Statements                                                                          | F-10





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AJ. ROBBINS, P.C.

Certified Public Accountants

216 Sixteenth Street

Suite 600

Denver, Colorado 80202



Report of Independent Registered Public Accounting Firm



To The Board of Directors and Stockholders of
Universal Guardian Holdings, Inc.
Newport Beach, California

We have audited the accompanying consolidated balance sheet of Universal Guardian Holdings, Inc. and Subsidiaries as of December 31, 2006, and the related consolidated statements of operations and other comprehensive (loss), stockholders equity (deficit) and cash flows for each of the years in the two year period then ended.  These consolidated financial statements are the responsibility of the Companys management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Universal Guardian Holdings, Inc. and Subsidiaries as of December 31, 2006, and the consolidated results of their operations and other comprehensive (loss) and consolidated cash flows for each of the years in the two year period then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company has experienced recurring losses and negative cash flows from operations and has a capital deficit at December 31, 2006, that raises 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.

/s/ AJ. Robbins PC.



AJ. Robbins PC

Certified Public Accountants



Denver, Colorado
February 23, 2007, except for Note 10 for which the date is March 7, 2007





1



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
As Of December 31, 2006
|-----------------------------------------------------------------------------------------------------



|                                                                                                                                                                                     | December 31,
2006     
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------
|ASSETS                                                                                                                                                                               |                       
|CURRENT ASSETS                                                                                                                                                                       |                       
|Cash and cash equivalents                                                                                                                                                            | $            3,458,992
|Accounts receivable, net of allowance for doubtful accounts of $83,465                                                                                                               | 2,822,046             
|Due from officer                                                                                                                                                                     | 75,343                
|Inventory                                                                                                                                                                            | 563,499               
|Other current assets                                                                                                                                                                 | 542,095               
|TOTAL CURRENT ASSETS                                                                                                                                                                 | 7,461,975             
|PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,002,982                                                                                                                | 1,250,210             
|GOODWILL                                                                                                                                                                             | 3,525,093             
|INTELLECTUAL PROPERTY, net of accumulated amortization of $466,156                                                                                                                   | 2,796,929             
|DEBT ISSUE COSTS                                                                                                                                                                     | 981,616               
|TOTAL ASSETS                                                                                                                                                                         | $          16,015,823 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                 |                       
|CURRENT LIABILITIES                                                                                                                                                                  |                       
|Accounts payable                                                                                                                                                                     | $            1,903,920
|Accrued expenses                                                                                                                                                                     | 1,052,744             
|Income taxes payable                                                                                                                                                                 | 201,743               
|Accrued expenses  related parties                                                                                                                                                   | 166,183               
|Accrued obligation under abandoned lease                                                                                                                                             | 200,000               
|TOTAL CURRENT LIABILITIES                                                                                                                                                            | 3,524,590             
|CONVERTIBLE DEBENTURES, net of discount of $3,928,751                                                                                                                                | 1,071,249             
|TOTAL LIABILITIES                                                                                                                                                                    | 4,595,839             
|SERIES A CONVERTIBLE PREFERRED STOCK OF SUBSIDIARY - 
UNIVERSAL GUARDIAN CORPORATION                                                                                               | 25,264                
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                        |                      
|STOCKHOLDERS EQUITY                                                                                                                                                                 |                       
|Preferred stock; $0.001 par value, 5,000,000 shares authorized                                                                                                                       |                       
|Series A convertible preferred stock, cumulative 7%; $0.001 par value, 
600 shares designated as Series A; 600 shares issued and outstanding 
($148,750 of dividends in arrears) | 1                     
|Common stock; $0.001 par value; 100,000,000 shares authorized; 52,165,774
shares issued and outstanding                                                                              | 52,166                
|Additional paid-in capital                                                                                                                                                           | 35,808,956            
|Accumulated other comprehensive (loss)                                                                                                                                               | (3,363)               
|Accumulated deficit                                                                                                                                                                  | (24,463,040)          
|TOTAL STOCKHOLDERS EQUITY                                                                                                                                                           | 11,394,720            
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                           | $          16,015,823 



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



2



---







|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations And Other Comprehensive (Loss)
For The Years Ended December 31, 2006 and 2005
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                        |  | December 31,
2006       |  | December 31,
2005        
|------------------------------------------------------- |  | ----------------------- |  | -------------------------
|                                                        |  |                         |  |                          
|NET REVENUE                                             |  | $        21,840,730     |  | $         14,173,833     
|COST OF REVENUE                                         |  | 11,065,643              |  | 7,720,776                
|GROSS PROFIT                                            |  | 10,775,087              |  | 6,453,057                
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            |  | 19,032,930              |  | 11,630,570               
|LOSS FROM OPERATIONS                                    |  | (8,257,843)             |  | (5,177,513)              
|OTHER INCOME (EXPENSE)                                  |  |                         |  |                          
|Interest expense                                        |  | (57,834)                |  | (9,232)                  
|Financing costs                                         |  | (164,928)               |  | (1,124,973)              
|Amortization of debt discount                           |  | (143,024)               |  |                         
|Interest income                                         |  | 43,927                  |  | 18,850                   
|Equity loss in variable interest entity                 |  |                        |  | (623)                    
|Other, net                                              |  | 17,245                  |  | 33,329                   
|TOTAL OTHER INCOME (EXPENSE)                            |  | (304,614)               |  | (1,082,649)              
|LOSS BEFORE PROVISION FOR INCOME TAXES                  |  | (8,562,457)             |  | (6,260,162)              
|PROVISION (BENEFIT) FOR INCOME TAXES                    |  | (165,507)               |  | 202,604                  
|NET LOSS                                                |  | $       (8,396,950)     |  | $         (6,462,766)    
|OTHER COMPREHENSIVE (LOSS)                              |  |                         |  |                          
|Foreign currency translation gain                       |  | $              3,067    |  | $                 55,487 
|COMPREHENSIVE (LOSS)                                    |  | $       (8,393,883)     |  | $         (6,407,279)    
|PREFERRED STOCK DIVIDENDS                               |  | $            (21,000)   |  | $              (21,000)  
|NET LOSS ATTRIBUTED TO COMMON STOCKHOLDERS              |  | $       (8,417,950)     |  | $         (6,483,766)    
|NET LOSS PER SHARE:
BASIC AND DILUTED                   |  | $                (0.17) |  | $                  (0.17)
|WEIGHTED AVERAGE SHARES 
OUTSTANDING:
BASIC AND DILUTED |  | 48,733,475              |  | 39,219,247               







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



3



---







|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders Equity (Deficit)
For The Years Ended December 31, 2006 and 2005
|----------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                                                  | Series A Convertible
Preferred Stock |  | Series B Convertible
Preferred Stock |  | Common Stock |  | Additional
Paid-in
Capital |  | Prepaid
Consulting
Fees |  | Accumulated
Other 
Compre-
hensive
(Loss) |  | Accumulated
Deficit |  | Total       
|--------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------- |  | -------------------------------------- |  | ------------ |  | -------------------------- |  | ----------------------- |  | ----------------------------------------- |  | ------------------- |  | ------------
|                                                                                                                                  | Shares                                 |  | Amount                                 |  | Shares       |  | Amount                     |  | Shares                  |  | Amount                                    |  |                     |  |             
|                                                                                                                                  |                                        |  |                                        |  |              |  |                            |  |                         |  |                                           |  |                     |  |             
|Balance, 
December 31, 2004                                                                                                       | 600                                    |  | $          1                           |  |             |  | $                         |  | 35,878,398              |  | $ 35,878                                  |  | $ 11,642,985        |  | $   (62,500)
|2005:                                                                                                                             |                                        |  |                                        |  |              |  |                            |  |                         |  |                                           |  |                     |  |             
|Common stock issued 
for services                                                                                                 |                                       |  |                                       |  |             |  |                           |  | 199,926                 |  | 200                                       |  | 251,656             |  |            
|Common stock issued 
for legal settlement                                                                                         |                                       |  |                                       |  |             |  |                           |  | 58,519                  |  | 58                                        |  | 89,742              |  |            
|Common stock issued 
for cash, net of offering 
costs of $265,000                                                                 |                                       |  |                                       |  |             |  |                           |  | 4,432,500               |  | 4,433                                     |  | 5,139,567           |  |            
|Cancellation of unissued 
shares of common stock 
originally accrued for 
issuance in connection 
with acquisition of 
subsidiary |                                       |  |                                       |  |             |  |                           |  | (51,908)                |  | (52)                                      |  | (19,948)            |  |            
|Conversion of Universal 
Guardian Corporation 
series A preferred stock
into common stock                                         |                                       |  |                                       |  |             |  |                           |  | 12,817                  |  | 13                                        |  | 16,008              |  |            
|Exercise of warrants for 
cash, services and 
cashless exercises                                                                  |                                       |  |                                       |  |             |  |                           |  | 1,622,205               |  | 1,622                                     |  | 345,516             |  |            
|Series B convertible preferred stock issued 
for cash, net of offering 
costs of $12,000                                        |                                       |  |                                       |  | 5,250        |  | 5                          |  |                        |  |                                          |  | 512,995             |  |            



(continued on next page)



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



4



---







|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders Equity (Deficit)
For The Years Ended December 31, 2006 and 2005
(continued)
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                                 | Series A Convertible
Preferred Stock |  | Series B Convertible
Preferred Stock |  | Common Stock |  | Additional
Paid-in
Capital |  | Prepaid
Consulting
Fees |  | Accumulated
Other 
Compre-
hensive
(Loss) |  | Accumulated
Deficit |  | Total      
|---------------------------------------------------------------------------------------------------------------- | -------------------------------------- |  | -------------------------------------- |  | ------------ |  | -------------------------- |  | ----------------------- |  | ----------------------------------------- |  | ------------------- |  | -----------
|                                                                                                                 | Shares                                 |  | Amount                                 |  | Shares       |  | Amount                     |  | Shares                  |  | Amount                                    |  |                     |  |            
|Fair value of 
re-priced warrants                                                                                |                                       |  |                                       |  |             |  |                           |  |                        |  |                                          |  | 12,516              |  |           
|Fair value of warrants 
issued in connection 
with issuance of 
convertible debentures                           |                                       |  |                                       |  |             |  |                           |  |                        |  |                                          |  | 254,887             |  |           
|Value of beneficial 
conversion feature 
associated with the 
issuance of convertible 
debentures                |                                       |  |                                       |  |             |  |                           |  |                        |  |                                          |  | 245,113             |  |           
|Value of beneficial 
conversion feature 
associated with the 
issuance of series B convertible preferred
stock |                                       |  |                                       |  |             |  |                           |  |                        |  |                                          |  | 99,657              |  |           
|Fair value of warrants 
issued to placement 
agent in connection 
with issuance of 
convertible debentures       |                                       |  |                                       |  |             |  |                           |  |                        |  |                                          |  | 519,937             |  |           
|Fair value of warrants 
issued to consultants                                                                    |                                       |  |                                       |  |             |  |                           |  |                        |  |                                          |  | 1,266,917           |  | (1,266,917)
|Amortization of prepaid 
consulting fees                                                                         |                                       |  |                                       |  |             |  |                           |  |                        |  |                                          |  |                    |  | 1,275,381  
|Foreign currency 
translation adjustment                                                                         |                                       |  |                                       |  |             |  |                           |  |                        |  |                                          |  |                    |  |           

(continued on next page)





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



5



---







|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders Equity (Deficit)
For The Years Ended December 31, 2006 and 2005
(continued)
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                 | Series A Convertible
Preferred Stock |  | Series B Convertible
Preferred Stock |  | Common Stock |  | Additional
Paid-in
Capital |  | Prepaid
Consulting
Fees |  | Accumulated
Other 
Compre-
hensive
(Loss) |  | Accumulated
Deficit |  | Total       
|-------------------------------------------------------------------------------- | -------------------------------------- |  | -------------------------------------- |  | ------------ |  | -------------------------- |  | ----------------------- |  | ----------------------------------------- |  | ------------------- |  | ------------
|                                                                                 | Shares                                 |  | Amount                                 |  | Shares       |  | Amount                     |  | Shares                  |  | Amount                                    |  |                     |  |             
|                                                                                 |                                        |  |                                        |  |              |  |                            |  |                         |  |                                           |  |                     |  |             
|Net loss                                                                         |                                       |  |                                       |  |             |  |                           |  |                        |  |                                          |  |                    |  |            
|Balance, 
December 31, 2005                                                      | 600                                    |  | $        1                             |  | 5,250        |  | $         5                |  | 42,152,457              |  | $ 42,152                                  |  | $ 20,377,548        |  | $   (54,036)
|2006:                                                                            |                                        |  |                                        |  |              |  |                            |  |                         |  |                                           |  |                     |  |             
|Common stock issued 
for services                                                |                                       |  |                                       |  |             |  |                           |  | 165,505                 |  | 166                                       |  | 151,390             |  |            
|Common stock issued 
as settlement                                               |                                       |  |                                       |  |             |  |                           |  | 425,745                 |  | 426                                       |  | 354,502             |  |            
|Common stock issued 
in connection with 
acquisition                             |                                       |  |                                       |  |             |  |                           |  | 2,272,727               |  | 2,273                                     |  | 2,997,727           |  |            
|Common stock issued 
upon conversion of 
series B convertible 
preferred stock |                                       |  |                                       |  | (5,250)      |  | (5)                        |  | 480,505                 |  | 481                                       |  | (476)               |  |            
|Common stock issued 
for cash, net of 
commissions and 
expenses of $527,197     |                                       |  |                                       |  |             |  |                           |  | 5,333,351               |  | 5,333                                     |  | 3,467,470           |  |            
|Cancellation of shares previously issued                                         |                                       |  |                                       |  |             |  |                           |  | (84,516)                |  | (85)                                      |  | 85                  |  |            
|Exercise of  warrants 
for cash                                                  |                                       |  |                                       |  |             |  |                           |  | 1,420,000               |  | 1,420                                     |  | 708,580             |  |            



(continued on next page)





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



6



---







|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders Equity (Deficit)
For The Years Ended December 31, 2006 and 2005
(continued)
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                     | Series A Convertible
Preferred Stock |  | Series B Convertible
Preferred Stock |  | Common Stock |  | Additional
Paid-in
Capital |  | Prepaid
Consulting
Fees |  | Accumulated
Other 
Compre-
hensive
(Loss) |  | Accumulated
Deficit |  | Total         
|---------------------------------------------------- | -------------------------------------- |  | -------------------------------------- |  | ------------ |  | -------------------------- |  | ----------------------- |  | ----------------------------------------- |  | ------------------- |  | --------------
|                                                     | Shares                                 |  | Amount                                 |  | Shares       |  | Amount                     |  | Shares                  |  | Amount                                    |  |                     |  |               
|Fair value of  warrants
issued to consultants        |                                       |  |                                       |  |             |  |                           |  |                        |  |                                          |  | 490,513             |  |              
|Fair value of 
vesting options 
issued to employees  |                                       |  |                                       |  |             |  |                           |  |                        |  |                                          |  | 3,189,842           |  |              
|Value of warrants issued with convertible debentures |                                       |  |                                       |  |             |  |                           |  |                        |  |                                          |  | 1,538,772           |  |              
|Value of beneficial conversion feature               |                                       |  |                                       |  |             |  |                           |  |                        |  |                                          |  | 2,533,003           |  |              
|Amortization of pre-paid consulting fees             |                                       |  |                                       |  |             |  |                           |  |                        |  |                                          |  |                    |  | 54,036        
|Foreign currency 
translation adjustment             |                                       |  |                                       |  |             |  |                           |  |                        |  |                                          |  |                    |  |              
|Net loss                                             |                                       |  |                                       |  |             |  |                           |  |                        |  |                                          |  |                    |  |              
|Balance, 
December 31, 2006                          | 600                                    |  | $        1                             |  |             |  | $                         |  | 52,165,774              |  | $ 52,166                                  |  | $ 35,808,956        |  | $            







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



7



---







|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cashflow
For The Years Ended December 31, 2006 and 2005
|-------------------------------------------------------------------------------------------------------------------------------------



|                                                                                          | For the Years Ended 
|----------------------------------------------------------------------------------------- | --------------------
|                                                                                          | December 31,
2006   
|CASH FLOWS FROM (TO) OPERATING ACTIVITIES:                                                |                     
|Net loss                                                                                  | $       (8,396,950) 
|Adjustment to reconcile net loss to net cash provided by 
(used in) operating activities: |                     
|Depreciation and amortization expense                                                     | 988,759             
|Amortization of prepaid consulting fee                                                    | 54,036              
|Amortization of debt issue costs                                                          | 35,982              
|Common stock issued for services                                                          | 151,556             
|Common stock issued for legal settlement                                                  | 354,928             
|Value of vesting options issued to employees                                              | 3,189,842           
|Services rendered to pay for exercise price of options                                    |                    
|Fair value of options and warrants issued to consultants/ placement agent                 | 45,752              
|Value of re-priced warrants                                                               |                    
|Amortization of debt discounts                                                            | 143,024             
|(Gain) loss on disposal of fixed assets                                                   | 67,130              
|Equity loss in variable interest entity                                                   |                    
|Exchange gain                                                                             |                    
|(Increase) decrease in:                                                                   |                     
|Accounts receivable                                                                       | (385,339)           
|Due from officer                                                                          | (75,343)            
|Inventory                                                                                 | (335,895)           
|Deposits and other assets                                                                 | (456,876)           
|Accounts payable                                                                          | 242,508             
|Accrued expenses                                                                          | 46,600              
|Accrued expensesrelated parties                                                          | 35,758              
|Accrued registration obligation                                                           |                    
|Income taxes payable                                                                      | 82,834              
|Deferred taxes                                                                            | (98,398)            
|Deferred revenues                                                                         | (1,109,461)         
|Net cash (used in) operating activities                                                   | (5,419,553)         
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |                     
|Purchase of property and equipment                                                        | (400,993)           
|Proceeds from sale of property and equipment                                              |                    
|Cash acquired with acquisition of subsidiary/variable interest entity                     |                    
|Net cash (used in) investing activities                                                   | $          (400,993)

(continued on next page)



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



8



---







|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements Of Cash flow
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | For the Years Ended  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | December 31,
2006    
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                      
|Proceeds from exercise of options and warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | $          710,000   
|Proceeds from issuance of common stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 4,000,000            
|Proceeds from sale of series B preferred stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                     
|Proceeds from sale of convertible debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 5,000,000            
|Payment of offering costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | (1,100,034)          
|Payment in exchange for cancellation of previously issued common stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                     
|Proceeds from issuance of convertible debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                     
|Payments on convertible debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                     
|Payment on notes payablerelated party                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                     
|Net cash provided by financing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 8,609,966            
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 3,067                
|NET INCREASE  IN CASH AND CASH EQUIVALENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 2,792,487            
|CASH AND CASH EQUIVALENTS, Beginning of period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 666,505              
|CASH AND CASH EQUIVALENTS, End of period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | $       3,458,992    
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                      
|Interest paid                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | $                   
|Income taxes paid                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | $                   
|Supplemental Schedule of Non-Cash Investing and Financing Activities:
During the year ended December 31, 2006 the Company (1) issued 165,505 shares of common stock to consultants and professionals for services valued at $151,556; (2) issued 425,745 shares of commons stock for legal settlements valued at $354,928; and (3) issued 2,272,727 shares of common stock in connection with the acquisition of Universal Guardian Systems, Ltd.(formerly MeiDa Information Technology, Ltd.), valued at $3,000,000.
During the year ended December 31, 2005 the Company (1) issued 199,926 shares of common stock to consultants and professionals for services valued at $251,856; (2) issued 50,000 shares of common stock upon the exercise of warrants for which the exercise price was paid via services valued at $62,500; (3) issued 1,143,905 shares of common stock upon the cashless exercise of 1,385,000 options/warrants; (4) recognized an expense of $12,516 related to the re-pricing of 1,250,000 warrants; (5) recognized discounts on the issuance of convertible notes payable in the amount of $500,000; (6) issued 250,000 warrants to the placement agent in connection with the issuance of the convertible debentures that were valued at $519,937; (7) converted 12,817 shares of Universal Guardian Corporation series A preferred stock valued at $16,021 into 12,817 shares of the companys common stock; and (8) issued 1,000,000 warrants to consultants for services valued at $1,266,917.





9



---







|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
|--------------------------------------------------------------------------------------------------------------------------------------------





1.

NOTE 1  REFERENCESS, ORGANIZATION AND BUSINESS

References

Unless the context requires otherwise, the Company and similar terms collectively refer to Universal Guardian Holdings, Inc. and its subsidiaries, while the term Universal Holdings refers to Universal Guardian Holdings, Inc. in its individual corporate capacity.  The terms common shares, preferred shares, seriesA preferred shares and seriesB preferred shares used in these financial statement refer to the Companys common stock, par value $0.001 per share, blank check preferred stock, par value $.001 per share, series A convertible preferred stock, par value $0.001 per share; and series B convertible preferred stock, par value $0.001 per share, respectively.  The term UGC series A preferred shares refers to series A convertible preferred stock, par value $0.001 per share, issued by the Companys Universal Guardian Corporation subsidiary.

Line of Business

The Company is a holding company which provides security products, systems and services to mitigate terrorist, criminal and security threats for governments and businesses worldwide through its various operating subsidiaries, broken-down into three different operating groupthe UG Services Group, the UG Products Group, and the UG Systems Group.

UG Services Group

The Companys service group of operating subsidiaries (collectively the UG Services Group), provide comprehensive risk mitigation solutions as well as tactical and strategic security services to protect commercial and government personnel and assets worldwide. These services include threat assessment, risk analysis, country risk management, business intelligence, corporate investigations, information assurance, kidnap and ransom insured services, as well as tactical security including executive and diplomatic protection.  The Company provides these services through various operating subsidiaries in the group which consist of Universal Guardian Services PTE, Ltd., formerly known as Secure Risks Singapore, PTE.(UG Services); Secure Risks, Ltd (Secure Risks); Universal Guardian Services, Ltd., formerly known Secure Risks-Strategic Security Solutions International Ltd. (SSSI); Secure Risks Pakistan, Ltd.; and Secure Risks Asia Pacific, Ltd. The companies comprising the UG Services Group deliver services through regional branch offices located in London, Kabul, Pakistan, Hong Kong, Singapore, Dubai and Los Angeles (Newport Beach).  The vast majority of the Companys revenues from January 1, 2004 to date have been generated by the UG Services Group from operations outside of the United States.

UG Products Group

The Companys products group of operating subsidiaries (collectively the UG Products Group), focus on designing, producing and marketing non-lethal or less-lethal personal protection devices and projectiles for use by military, law enforcement, private security and consumer personal protection markets throughout the world.  The Company has recently completed development of two products which the Company is currently introducing to the market. The



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





first of these products, the Cobra StunLightTM, is a heavy-duty high-intensity LED flashlight designed to provide escalating use-of-force options to the user by illuminating its target and launching a laser-aimed, ballistic stream OC (pepper spray) which causes temporarily blindness, respiratory breathing difficulty and a burning sensation of the skin that can debilitate assailants from safe stand-off distances up to 20 feet.

The second product, the Riot DefenderTM, is for use by law enforcement and military as a non-lethal use-of-force compliance tool for suspects and to control civil disturbances. The Riot DefenderTM, is a semi-automatic projectile launcher which can debilitate an assailant using its RiotBallTM proprietary and patent pending frangible projectile at an effective range of more than 50 feet.  A frangible projectile is one which breaks-up upon impact, thereby reducing the risk of injury to the suspect. The Riot DefenderTM is designed to have the capacity of ten projectiles in the pistol configuration, and 180 projectiles in the carbine configuration, and can be equipped with a laser-aiming device for better precision and accuracy. The device can use several projectile variants, including OC powder, marking powder and inert powder. Each projectile has a specific use ranging from temporarily incapacitating individual suspects to crowd control. The Company is currently developing international manufacturing, sales and marketing channels to facilitate the introduction of these products to targeted markets.

The Company has recently shipped the Cobra StunLightTM to several law enforcement agencies and distributors in Australia, France, Germany, Mexico, Saudi Arabia, Singapore, Turkey and the United States for testing, evaluation and purchase. The Company has recently completed a pilot program for the Cobra StunLightTM with the Los Angeles Sheriff’s Departments, resulting in the Department approving the purchase of the Cobra StunLightTM by its deputies.  The Company is currently conducting a similar pilot program with the San Diego County Sheriff’s Department.

As between the various subsidiaries in the group, Shield Defense Corporation (SDC) focuses on sales and marketing activities in the United States and Canada; Shield Defense Europe GmbH (SDE) focuses on sales and marketing activities in the European market; and Universal Guardian Products, Ltd. (UG Products) focuses on supervising the manufacturing of the Cobra StunLightTM and the Riot DefenderTM products, research and development activities on the Cobra StunLightTM and the Riot DefenderTM products, as well as sales to rest of the world.

UG Systems Group

The Company’s Systems Group of operating subsidiaries (collectively the UG Systems Group), provide proprietary integrated and interoperable asset tracking and monitoring systems for use in government and commercial global supply chain logistics, inter-modal transportation, maritime and seaport security. The Company is in the process of introducing to market its Total Asset GuardianTM (“TAG”) platform which provides multifaceted solutions for global asset tracking, asset visibility and data management throughout the supply chain.

The TAG platform is comprised of a proprietary software application and processes which provide secure supply chain data collection, real-time network and security monitoring and notification. The TAG platform is a scaleable system that can be deployed on a global basis.  Our TAGeasyTM e-commerce RFID label system is a subscription-based system that provides pre-printed RFID labels and delivers them to Department of Defense and retail suppliers.  The TAGstationTM is a hosted-system designed to provide on-site RFID capability for small to medium-sized government and retail suppliers.   TAGcentralTM consists of an enterprise level software application for major international retailers and government suppliers. In addition to



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





the revenue generated upon the licensing and/or sale of these systems, each solution provides recurring revenue based upon subscription fees.

On October 1, 2006 the Company entered into a Joint Venture Agreement with Spheres Technologies, a Saudi Arabian company (Spheres), to form Universal Guardian (Saudi Arabia) to market and distribute the Companys products, systems and services within the Kingdom of Saudi Arabia.  Spheres Technologies possesses a Class A license to provide security products and systems to commercial and government agencies in the Saudi Arabia.  Spheres plans to transfer existing contracts to Universal Guardian (Saudi Arabia).

Organization

Universal Holdings was incorporated under the laws of Delaware during 1989 under the name Guideline Capital Corporation.  Effective September 13, 1999, pursuant to a Share Exchange and Reorganization Agreement, the Company acquired all of the issued and outstanding shares of Hollywood Partners, Inc., and changed its name to Hollywood Partners.com, Inc.

On December 6, 2002, the Company changed its name from Hollywood Partners.com to Universal Guardian Holdings, Inc.  Effective December 31, 2002, pursuant to a Share Exchange and Reorganization Agreement between the Company and Guardian Corporation, the former shareholders of Guardian Corporation acquired 11,300,000 newly issued common shares.  At the date of consummation of this transaction, these shareholders effectively controlled 70% of the Companys outstanding common shares and 69.1% of the Companys total capital stock after taking into consideration outstanding shares of series A preferred stock. Since the shareholders of Guardian Corporation obtained control of the Company, according to FASB Statement No. 141, Business Combinations, this acquisition was treated as a recapitalization for accounting purposes, in a manner similar to reverse acquisition accounting.  In accounting for this transaction:  (1) Guardian Corporation is deemed for accounting purposes to be the purchaser and surviving company.  Accordingly, Guardian Corporations net assets are included in the balance sheet at their historical book values and the results of operations of Guardian Corporation have been presented in these financial statements for the comparative prior period; and (2) control of the net assets and business of the Company was acquired by the shareholders of Guardian Corporation effective December 31, 2002.  This transaction has been treated for accounting purposes as a purchase of the assets and liabilities of the Company by Guardian Corporation.  The historical cost of the Companys net liabilities assumed by Guardian Corporation was $103,855.

Guardian Corporation was incorporated under the laws of the state of Nevada on March 28, 2001. Guardian Corporation was in the business of protecting human life and military, government and commercial assets, by providing services, systems and technology to detect, assess and defend against security and terrorists threats worldwide.

Prior to the share exchange transaction, the Company had 4,848,014 and 600 common shares and series A preferred shares outstanding, respectively, and 1,779,875 common share purchase options/warrants outstanding.  Guardian Corporation had 11,300,000 and 350,000 common shares and series A preferred shares outstanding, respectively, and 2,175,000 common share purchase options/warrants outstanding.  Pursuant to the transaction, the 11,300,000 Guardian Corporation common shares were converted into 11,300,000 Universal Holdings common shares.  Additionally, the Company agreed that the 350,000 Guardian Corporation series A preferred shares outstanding could be converted into common shares of the Company on a one for one basis, and that the 2,175,000 Guardian Corporation common share purchase options/warrants



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





outstanding could be exercised for a like number of Universal Holdings common share purchase options/warrants on the same terms.

2.

NOTE 2  PRESENTATION; SIGNIFICANT ACCOUNTING POLICIES

Going Concern; Managements Plans

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate the Companys continuation as a going concern.  The Company incurred a net loss for the year ended December 31, 2006 of $8,396,950, used cash for operating activities of $5,419,553 for the year ended December 31, 2006 and at December 31, 2006, had an accumulated deficit of $24,463,040.  While the Companys UG Services Group has generated significant increases in revenue and gross profit over the past several fiscal years, these gains have been offset by significant continuing selling, general and administrative costs attributable to supporting the Companys UG Products and UG Systems Groups pending the delayed introduction of their products and services to market.  As a consequence of those continuing costs and delays, the Company now anticipates that it will need to raise approximately $2 million in additional capital to fully execute its plan of operation over the next twelve months, including ramping-up sales of UG Products and UG Systems Group products and services in order to generating revenues to make a significant contribution toward covering their proportionate share of selling, general and administrative costs.  We are currently airing Cobra StunLightTM infomercials and commercials on local and national television in the United States.  The Company will seek to raise the additional capital required through the public or private sale of debt or equity securities, the procurement of advances on contracts or licenses, funding from joint-venture or strategic partners, debt financing or short-term loans, or a combination of the foregoing.  The Company may also seek to satisfy indebtedness without any cash outlay through the private issuance of debt or equity securities.  The Company currently does not have any binding commitments for, or readily available sources of, additional financing. The Company cannot give any assurance that it will be able to secure the additional cash or working capital it may require to continue its operations.  Should the Company be unable to raise the additional working capital required to fully execute its plan of operation over the next twelve months, the Company may be forced to reduce or suspend its operations in the meantime.  The foregoing circumstances raise substantial doubt about the Companys ability to continue as a going concern in the event it is unable to raise the additional capital required. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned active  operating subsidiaries:   Universal Guardian Services PTE, Ltd. (formerly known as Secure Risks Singapore, PTE.); Secure Risks Ltd. (Secure Risks); Secure Risks-Strategic Security Solutions International Ltd. (SSSI); Secure Risk Pakistan, Ltd.; Secure Risks Asia Pacific, Ltd.; Universal Guardian Products, Ltd., formerly known as Shield Defense International Ltd. (UG Products); Shield Defense Corporation (SDC.; Shield Defense Europe GmbH (SDE); ISR Systems Corporation (ISR Systems); and Universal Guardian Systems, Ltd., formerly known as MeiDa Information Technologies, Ltd. (UG Systems).  UG Systems was treated as a variable



13



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





interest entity from October 7, 2005 to January 1, 2006.  ); The accompanying consolidated financial statements also include the accounts of the Companys two inactive subsidiaries Shield Defense Technologies, Inc  and Shield Defense (Macao) Ltd.  The accompanying consolidated financial statements also include the accounts of the Companys dormant 88.7%-owned subsidiary Universal Guardian Corporation (including its dormant wholly-owned subsidiary, The Harbour Group, Inc.).  All material inter-company accounts and transactions have been eliminated.  Secure Risks has pledged to Universal Holdings the shares of SSSI owned by Secure Risks as security for intercompany loans and advances made by Universal Holdings to both of those subsidiaries.

Reclassification

Certain reclassifications have been made to the balances as of December 31, 2005 to conform to the December 31, 2006 presentation.

Intellectual Property

The intellectual property acquired with the acquisition of UG Systems is being amortized over seven years.  Annual amortization of intellectual property is expected to be approximately $466,000.  Amortization expense amounted to $466,156 and $0 for the years ended December 31, 2006 and 2005, respectively.

Stock Based Compensation

The Company adopted SFAS No. 123 (Revised 2004), Share Based Payment(SFAS No. 123R), under the modified-prospective transition method on January 1, 2006.  SFAS No. 123R requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value.  Share-based compensation recognized under the modified-prospective transition method of SFAS No. 123R includes share-based compensation based on the grant-date fair value determined in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation,for all share-based payments granted prior to and not yet vested as of January 1, 2006 and share-based compensation based on the grant-date fair-value determined in accordance with SFAS No. 123R for all share-based payments granted after January 1, 2006. SFAS No. 123R eliminates the ability to account for the award of these instruments under the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and allowed under the original provisions of SFAS No. 123.  Prior to the adoption of SFAS No. No. 123, the Company accounted for its stock option plans using the intrinsic value method in accordance with the provisions of APB Opinion No. 25 and related interpretations.

Primarily as a result of adopting SFAS No. 123R, the Company recognized $3,189,842 in share-based compensation expense for the year ended December 31, 2006.  There were 3,550,000 new employee options granted during the year ended December 31, 2006.  The expense recognized of $3,189,842 relates to the vesting of options issued to employees prior to January 1, 2006 and the options issued during the year ended December 31, 2006 that vested during the same period.  The impact of this share-based compensation expense on the Companys basic and diluted earnings per share was $0.07 per share.  The fair value of the Companys stock options was estimated using the Black-Scholes option pricing model.

For periods presented prior to the adoption of SFAS No. 123R, pro forma information regarding net income and earnings per share as required by SFAS No. 123R has been determined as if the



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





Company had accounted for its employee stock options under the original provisions of SFAS No. 123.  The fair value of these options was estimated using the Black-Scholes option pricing model.  For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options vesting period.  The pro forma expense to recognize during the year ended December 31, 2005 is as follows:

|Net loss attributed to common stockholders:                                |  |                      
|-------------------------------------------------------------------------- |  | ---------------------
|As reported                                                                |  | $     (6,483,766)    
|Compensation recognized under APB 25                                       |  |                     
|Compensation recognized under SFAS 123                                     |  | (3,361,726)          
|Pro forma                                                                  |  | $     (9,845,492)    
|Basic and diluted loss attributed to common stockholders per common share: |  |                      
|As reported                                                                |  | $              (0.17)
|Pro forma                                                                  |  | $              (0.25)



The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the years ended December 31, 2006 and 2005:  risk-free interest rate of 4.5% and 4.5%; dividend yields of 0% and 0%; volatility factors of the expected market price of the Companys common shares of  163% and 340%; and a weighted average expected life of the options of 5 and 10 years, respectively.

Use of 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 the reported amounts of revenue and expenses during the reporting periods.  As of December 31, 2006, the Company used estimates in determining the realization of its accounts receivable, fixed assets, intangible assets, accrued expenses, and the fair value of equity instruments issued for services.  Actual results could differ from these estimates.

Fair Value of Financial Instruments

For certain of the Companys financial instruments, none of which are held for trading purposes, including cash, accounts receivable, notes payable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their short maturities.

The amounts shown for notes payable also approximate fair value because current interest rates and terms offered to the Company for similar debt are substantially the same.

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company defines cash equivalents as all highly liquid debt instruments purchased with a maturity of three months or less, plus all certificates of deposit.



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





Inventory

Inventories are stated at the lower of cost or market on a first-in, first-out basis.  The Companys inventory balance at December 31, 2006 principally consists of Cobra StunLightsTM available for sale.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and accounts receivables.  The Company places its cash with high quality financial institutions and at times may exceed the FDIC $100,000 insurance limit.  The Company has not experienced a loss in such accounts.  The Company extends credit based on an evaluation of the customers financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customers financial condition.  The Company monitors its exposure for credit losses and maintains allowances for anticipated losses, as required.  For the year ended December 31, 2006, 91% of the Companys revenue was generated from 14 customers.  For the year ended December 31, 2005, 95% of the Companys revenue was generated from 17 customers.

The Company conducts substantial operations outside of the United States in Singapore, Indonesia and Afghanistan.  The following table contains a summary of the respective operations in those locales:

|                   |  | United States       |  | Foreign             |  | Total              
|------------------ |  | ------------------- |  | ------------------- |  | -------------------
|Total Assets       |  | $        4,936,285  |  | $     11,079,538    |  | $       16,015,823 
|Revenues           |  | $           537,185 |  | $     21,303,545    |  | $      21,840,730  
|Net Income/ (Loss) |  | $       (9,209,752) |  | $           812,802 |  | $       (8,396,950)



Included in the Companys contracts are contracts with International Relief and Development, Inc. (IRD), the U.S. Army and CDM Constructors, each of which contract (or set of contracts) would constitute more than 10% of the Companys revenues.



Impairment of Long-Lived Assets

In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.  No impairment loss was recorded in 2006 or 2005.

Property and Equipment

Property and equipment are stated at cost.  Depreciation is computed using the straight-line method based on estimated useful lives from 3 to 7 years.  Expenditures for maintenance and



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





repairs are charged to operations as incurred while renewals and betterments are capitalized.  Gains and losses on disposals are included in the results of operations.

Intangible Assets

Intangible assets consist of goodwill purchased in connection with the acquisition of SSSI.  In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company evaluates intangible assets and other long-lived assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows.  Recoverability of intangible assets and other long-lived assets is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles.  If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss.  No impairment was recorded in 2006 or 2005.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts resulting from the inability, failure or refusal of customers to make required payments.  The Company determines the adequacy of this allowance by regularly reviewing the accounts receivable aging and applying various expected loss percentages to certain accounts receivable categories based upon historical bad debt experience.  The Company generally writes-off accounts receivable balances deemed uncollectible.

Revenue Recognition

The Company generates revenue by providing business risk solutions and strategic and tactical security services to protect governmental and commercial assets worldwide.  Generally, the Company enters into contracts with its customers to provide certain services.  When an initial set up fee is charged, this fee is recognized as revenue over the terms of the contracts.  The Company recognizes revenue for the service fee on a monthly basis as services are performed.  Revenue, billed monthly, is only recognized if the Company deems that collection is probable and other criteria of SFAS No. 48, ETIF 00-21 and SAB No. 104 are met.

The Company generally recognizes product revenue upon delivery or shipment of product unless there are significant post-delivery obligations or collection is not considered probable at the time of sale.  When significant post-delivery obligations exist, revenue is deferred until such obligations are fulfilled.

The Company recognizes revenue related to the Companys software arrangements pursuant to the provisions of Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9, and related interpretations, as well as the SEC Staff Accounting Bulletin No. 104 Revenue Recognition.

Software Related Revenue Recognition:

The Company earns revenue from software licenses, post-contract customer support (PCS or maintenance), hardware, and software related services.  PCS includes telephone support, bug fixes, and rights to upgrades on a when-and-if available basis.  The Company provides services



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





that range from installation, training, and basic consulting to software modification and customization to meet specific customer needs.  In software arrangements that include rights to multiple software products, specified upgrades, PCS, and/or other services, the Company allocates the total arrangement fee among each deliverable based on the relative fair value of each.

The Company typically enters into multiple element arrangements, which include software licenses, software services, PCS and occasionally hardware.  The majority of the Companys software arrangements are multiple element arrangements, but for those arrangements that include customization or significant modification of the software, or where software services are otherwise considered essential to the functionality of the software in the customers environment, the Company uses contract accounting and applies the provisions of SOP 81-1.  No such revenues have been recognized through December 31, 2006.

If the arrangement does not require significant modification or customization, revenue is recognized when all of the following conditions are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the Companys fee is fixed or determinable; and collectibility is probable.

For multiple element arrangements, each element of the arrangement is analyzed and the Company allocates a portion of the total arrangement fee to the elements based on the fair value of the element using vendor-specific evidence of fair value (VSOE), regardless of any separate prices stated within the contract for each element.  Fair value is considered the price a customer would be required to pay if the element was sold separately based on the Companys historical experience of stand-alone sales of these elements to third parties.  For PCS, the Company uses renewal rates for continued support arrangements to determine fair value.  For software services, the Company uses the fair value charged to customers when those services are sold separately.  In software arrangements in which the Company has the fair value of all undelivered elements but not of a delivered element, the residual method is applied as allowed under SOP 98-9 in accounting for any element of a multiple-element arrangement involving software that remains undelivered such that any discount inherent in a contract is allocated to the delivered element.  Under the residual method, if the fair value of all undelivered elements is determinable, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element(s) and is recognized as revenue assuming the other revenue recognition criteria are met.  In software arrangements in which the Company does not have VSOE for all undelivered elements, revenue is deferred until fair value is determined or all elements for which the Company does not have VSOE have been delivered.  Alternatively, if sufficient VSOE does not exist and the only undelivered element is services that do not involve significant modification or customization of the software, the entire fee is recognized over the period during which the services are expected to be performed.  No such revenues have been recognized through December 31, 2006.

Software Licenses

The Company recognizes the revenue allocable to software licenses and specified upgrades upon delivery of the software product or upgrade to the customer, unless the fee is not fixed or determinable or collectibility is not probable. If the fee is not fixed or determinable, including new customers whose payment terms are three months or more from shipment, revenue is generally recognized as payments become due from the customer.  If collectibility is not considered probable, revenue is recognized when the fee is collected.  Arrangements that include



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





software services, such as training or installation, are evaluated to determine whether those services are essential to the products functionality.

A majority of the Companys software arrangements will involve off-the-shelf software.  The Company considers software to be off-the-shelf software if it can be added to an arrangement with minor changes in the underlying code and it can be used by the customer for the customers purpose upon installation.  For off-the-shelf software arrangements, the Company recognizes the software license fee as revenue after delivery has occurred, customer acceptance is reasonably assured, that portion of the fee represents a non-refundable enforceable claim and is probable of collection, and the remaining services such as training are not considered essential to the products functionality.

For arrangements that include customization or modification of the software, or where software services are otherwise considered essential, the Company recognizes revenue using contract accounting.  The Company generally uses the percentage-of-completion method to recognize revenue from these arrangements.  The Company measures progress-to-completion primarily using labor hours incurred, or value added.  The percentage-of-completion methodology generally results in the recognition of reasonably consistent profit margins over the life of a contract since the Company has the ability to produce reasonably dependable estimates of contract billings and contract costs.  The Company uses the level of profit margin that is most likely to occur on a contract.  If the most likely profit margin cannot be precisely determined, the lowest probable level of profit in the range of estimates is used until the results can be estimated more precisely.  These arrangements are often implemented over an extended time period and occasionally require us to revise total cost estimates.  Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in the Companys cost estimates.  Changes to total estimated contract costs, if any, are recorded in the period they are determined.  Estimated losses on uncompleted contracts are recorded in the period in which the Company first determines that a loss is apparent.  No such revenues have been recognized through December 31, 2006.

Software Services

Some of the Companys software arrangements will include services considered essential for the customer to use the software for the customers purposes.  For these software arrangements, both the software license revenue and the services revenue are recognized as the services are performed using the percentage-of-completion contract accounting method.  When software services are not considered essential, the fee allocable to the service element is recognized as revenue as the Company performs the services.  No such revenues have been recognized through December 31, 2006.

Deferred Revenue

Certain contracts include need assessment analysis fees which are charged to the customer.  For revenue recognition purposes, the Company defers these fees and amortizes these fees into income on a straight-line basis over the life of the contract in accordance with EITF 00-21.



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





Advertising and Marketing Costs

The Company expenses costs of advertising and marketing as incurred.  Advertising and marketing expense for the years ended December 31, 2006 and 2005 were $1,072,669 and $141,907, respectively.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes.  Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences.

Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Loss Per Share

In accordance with SFAS No. 128, Earnings Per Share, the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding.  Diluted loss per common share is computed similar to basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.  At December 31, 2006 and 2005, the only potential dilutive securities were 10,755,000 and 7,760,000 common stock options, 7,692,308 shares of common stock issuable upon the conversion of outstanding convertible debentures and 13,275,826 and 7,015,812 common stock warrants/other options, respectively.  The Companys potential dilutive securities also included eight shares of common stock that are issuable upon the conversion of the Companys series A convertible preferred stock.  In addition at each of December 31, 2006 and 2005, the Company had outstanding 18,714 shares of Guardian Corporations series A preferred stock that can be converted into 18,714 shares of the Companys common stock, respectively.  Due to the net loss, none of the potentially dilutive securities were included in the calculation of diluted earnings per share since their effect would be anti-dilutive.

Comprehensive Income

SFAS No. 130, Reporting Comprehensive Income, requires the reporting of comprehensive income (loss) in addition to net income (loss) from operations. Comprehensive income (loss) is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income (loss).

The following table presents the components of other comprehensive income (loss):

|Years ended December 31, (net of tax) |  | 2006          |  | 2005           
|------------------------------------- |  | ------------- |  | ---------------
|Foreign Currency Translation Gain     |  | $       3,067 |  | $        55,487





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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





Recently Issued Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 155, Accounting for Certain Hybrid Financial Instruments.  SFAS No. 155 amends SFAS No 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.  SFAS No. 155, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.  SFAS 155 is effective for all financial instruments acquired or issued after the beginning of the Companys first fiscal year that begins after September 15, 2006.  Management believes that this statement will not have a significant impact on the Companys consolidated financial statements.

In March 2006, the FASB issued SFAS 156 Accounting for Servicing of Financial Assets.SFAS No. 156 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities.  This statement: (1) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract, (2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; (3) permits an entity to choose the amortization method or fair value measurement method for each class of separately recognized servicing assets and servicing liabilities; (4) at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under SFAS 115, provided that the available-for-sale securities are identified in some manner as offsetting the entitys exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.   SFAS No 156 is effective as of the beginning of the Companys first fiscal year that begins after September 15, 2006.  Management believes that this statement will not have a significant impact on the Companys consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. SFAS No 157 is effective for fiscal years beginning after November 15, 2007. Management has not determined the effect, if any, the adoption of this statement will have on the Companys consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans−An amendment of FASB Statements No. 87, 88, 106, and 132(R)".  One objective of this standard is to make it easier for investors, employees, retirees and other parties to understand and assess an employer's financial position and its ability to



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





fulfill the obligations under its benefit plans. SFAS No. 158 requires employers to fully recognize in their financial statements the obligations associated with single−employer defined benefit pension plans, retiree healthcare plans, and other postretirement plans.  SFAS No. 158 requires an employer to fully recognize in its statement of financial position the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.  This statement also requires an employer to measure the funded status of a plan as of the date of its year−end statement of financial position, with limited exceptions.  SFAS No. 158 requires an entity to recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS No. 87.  This statement requires an entity to disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation.  The Company is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures for fiscal years ending after December 15, 2006.  Management believes that this statement will not have a significant impact on the Companys consolidated financial statements.

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No.109. Interpretation No. 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information.  The amount of tax benefits to be recognized for a tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.  Tax benefits relating to tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met or certain other events have occurred.  Previously recognized tax benefits relating to tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.  Interpretation No. 48 also provides guidance on the accounting for and disclosure of tax reserves for unrecognized tax benefits, interest and penalties and accounting in interim periods.  Interpretation No. 48 is effective for fiscal years beginning after December 15, 2006.  The change in net assets as a result of applying this pronouncement will be a change in accounting principle with the cumulative effect of the change required to be treated as an adjustment to the opening balance of retained earnings on January 1, 2007, except in certain cases involving uncertainties relating to income taxes in purchase business combinations.  In such instances, the impact of the adoption of Interpretation No. 48 will result in an adjustment to goodwill.  While the Company analysis of the impact of adopting Interpretation No. 48 is not yet complete, it does not currently anticipate it will have a material impact on the Companys consolidated financial statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, (SAB 108),which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment.  The Company adopted SAB 108 in the fourth quarter of 2006 with no impact on its consolidated financial statements.



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





In December 2006, the FASB issued FASB Staff Position (FSP) EITF 00-19-2, Accounting for Registration Payment Arrangements.  EITF 00-19-2 addresses an issuer's accounting for registration payment arrangements.  This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies.  The guidance in EITF 00-19-2 amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to include scope exceptions for registration payment arrangements.  EITF 00-19-2further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles (GAAP) without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement.   EITF 00-19-2 is effective for fiscal year beginning after December 15, 2006.  The Company has determined that this FSP will not have an impact on its December 31, 2006 financial statements.

NOTE 3  ACQUISITIONS

Universal Guardian Systems, Ltd.

On October 7, 2005 the Companys ISR Systems subsidiary acquired all the issued and outstanding common stock of UG Systems (then known as MeiDa Information Technology, Ltd.) from its stockholders pursuant to a Share Exchange Agreement and Plan of Reorganization entered into on August 31, 2005.  Pursuant to the terms of that agreement, the Company paid UG Systems shareholders a total of 2,272,727 Universal Holdings common shares, payable in two tranches, 1,000,000 shares delivered at the closing on October 7, 2005, and the balance delivered on January 30, 2006.  The fair market value of the common shares issued in this transaction was $3,000,000 in the aggregate, or $1.32 per share, based on the volume average weighted price (VAWP) of the Companys common shares on the OTCBB for the 15 days preceding the entering into of the agreement.  For the transaction to be legally binding in Hong Kong, the Company was required to file and pay a stamp duty tax for the transfer of UG Systems shares to the Company.  As a result the Company did not issue the initial 1,000,000 shares that were to be issued on October 7, 2005.  The stamp duty tax was filed and paid in January 2006 at which time the transaction closed, the UG Systems shares were transferred to the Company and the 2,272,727 shares of the Company were issued to the former UG Systems shareholders.  This transaction has been accounted for by the purchase method of accounting; accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on the estimated fair values at the date of acquisition.  The Company had not completed this transaction until 2006, but has effectively controlled UG Systems since October 7, 2005. Therefore, from the period from October 7, 2005 to January 1, 2006, the Company has accounted for UG Systems as a variable interest entity.

The fair value of the assets acquired and liabilities assumed and allocation of the purchase price is summarized as follows:



|Cash                   | $             240
|---------------------- | -----------------
|Property and equipment | 5,435            



23



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UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

For The Years Ended December 31, 2006 and 2005

(continued)







|Intellectual property     | 3,263,085    
|------------------------- | -------------
|Accounts payable          | (108,101)    
|Other current liabilities | (160,659)    
|Purchase price            | $   3,000,000



NOTE 4  PROPERTY AND EQUIPMENT

The cost of property and equipment at December 31, 2006 consisted of the following:

|Machinery and equipment       | $         607,580
|----------------------------- | -----------------
|Armored vehicles              | 946,973          
|Office equipment              | 698,639          
|                              | 2,253,192        
|Less accumulated depreciation | (1,002,982)      
|                              | $      1,250,210 



Depreciation expense for the years ended December 31, 2006 and 2005 was $522,603 and $420,794, respectively.

3.

NOTE 5  RELATED PARTY TRANSACTIONS

Accrued Expenses  Related Party

Accrued expenses  related party consist of amounts due directors and management of the Companys Universal Guardian Services PTE, Ltd and ISR Systems subsidiaries.

Due From Officer

Due From Officer at December 31, 2006 of $75,343 consists of an over-reimbursement of travel expenses to the Companys CEO.  The over-reimbursement was discovered subsequent to December 31, 2006 and the officer made arrangements to repay this amount immediately following the discovery of the overpayment.

4.

NOTE 6  CONVERTIBLE DEBENTURES

On January 14, 2005, as part of a single transaction, the Company sold short-term convertible debentures in the amount of $250,000 to The Hunter Fund Ltd. (Hunter Fund), $150,000 to IKZA Holding Corp. (IKZA) and $100,000 to Loman International SA (Loman).  The Company was obligated to pay the aggregate $500,000 in principal on the debentures, together with interest accrued thereon at the annualized rate of 24%, in cash to the debenture holders on June 30, 2005.  This amount was paid in full on February 8, 2005.

As additional consideration for the purchase of the debenture, the Company also granted to Hunter Fund, IKZA and Loman common share purchase warrants entitling them to



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





purchase 125,000, 75,000 and 50,000 common shares, respectively, at the price of $2 per share.  These warrants lapse if unexercised by January 14, 2010.  In accordance with EITF 00-27, the Company first determined the value of the debenture and the fair value of the detachable warrants issued in connection with this debenture.  The estimated value of the warrants of $519,937 was determined using the Black-Scholes option pricing model and the following assumptions:  term of 5 years, a risk free interest rate of 3.5%, a dividend yield of 0% and volatility of 342%.  The face amount of the debenture of $500,000 was proportionately allocated to the debenture and the warrants in the amounts of $245,113 and $254,887, respectively.  The value of the debenture was then allocated between the debenture and the beneficial conversion feature, which amounted to $0 and $245,113, respectively.  The combined total discount was $500,000 and was being amortized over the term of the debenture. The entire debenture was repaid in February 2005 and the entire discount was charged to financing cost in the first quarter of 2005.

The aforesaid private placement was effected through Hunter World Markets, Inc. (Hunter), as placement agent.  Under the terms of the placement agency agreement, Hunter was paid $40,000 in cash and issued common share purchase warrants entitling it to purchase 250,000 restricted common shares at $2 per share that were valued at $519,937.  These warrants were valued using the Black-Scholes option pricing model using the following assumptions:  term of 5 years, a risk-free interest rate of 3.5%, a dividend yield of 0% and volatility of 342%.  The value of these warrants was charged to financing costs during the first quarter of 2005.  In addition, the Company agreed to reduce the exercise price on 625,000 common share warrants previously issued to Hunter in May 2004 from $1.50 to $1 per share, and on an additional 625,000 common share warrants previously issued at that time from $2 to $1.25 per share.  In the event the volume average weighted price for the common shares exceeds $5 per share five consecutive days, the exercise prices will revert to that originally agreed upon.  The Company recognized an expense of $12,516 related to the re-pricing of these warrants during the year ended December 31, 2005.

On December 4 and 8, 2006, the Company sold a total of $5,000,000 of convertible debentures to a total of 43 accredited investors in a $2 million-$5 million minimum-maximum private placement facilitated through the Maxim Group, LLC (Maxim Group), an NASD member Broker Dealer.  Interest on outstanding principal of the debentures accrues at the rate of 6% per annum (increased to 12% for so long as the company is in default under the terms of the debenture), and payable quarterly commencing March 31, 2007.  Outstanding principal on the debentures is payable 24 months from the closing date, subject to acceleration in the event of certain defaults or breaches of continuing covenants.  The holders of the debentures may convert unpaid principal on the debentures into common shares at the rate of $0.65 per share, equal to 80% of the VWAP for the Companys common shares for the ten trading day period prior to the first closing.  Universal Holdings may also elect to pay interest in common shares in lieu of cash at a conversion rate equal to 80% of the VWAP for the Companys common shares for the ten trading day period preceding the interest payment date.  As additional consideration for the purchase of the debenture, Universal Holdings also granted to the debenture holder stock purchase warrants entitling them to purchase a total of 3,846,159 common shares at the price of $0.81 per share, or 125% of the conversion price for the debenture.  These warrants contain cashless exercise provisions in the event the underlying shares are not registered with the SEC and lapse if unexercised five years from the closing date.  In the case of certain non-exempt issuances of securities below the conversion and exercise prices for the debenture and warrants, the holders of those securities will also entitled to full-ratchet anti-dilution protection for a period of one year, and standard weighted-average anti-dilution protection thereafter. As compensation for acting as placement agent for the offering, the Company agreed to pay Maxim Group a cash placement fee equal to 8% of the gross proceeds from the offering.  The Company further agreed to grant Maxim Group a five-year stock purchase warrant, exercisable at $0.65 per share, entitling it to



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





purchase 769,231 common shares at $0.65 per share.  Maxim Group subsequently assigned this warrant to its principal member, Maxim Partners LLC.  The Company also agreed to pay Maxim Group a non-accountable expense allowance equal to 3% of the gross proceeds from the offering, and to reimburse Maxim Group for its expenses and legal fees incurred in connection with this offering, but not to exceed $15,000.

The warrants and conversion feature in the above transaction are not considered derivative instruments that need to be bifurcated from the original security since the convertible debentures have a floor on the conversion price which means the Company can determine the maximum shares that could be issued upon conversion.  Therefore, in accordance with EITF 00-27, the Company first determined the value of the debenture and the fair value of the detachable warrants issued in connection with this debenture.  The estimated value of the warrants of $2,223,827 was determined using the Black-Scholes option pricing model and the following assumptions:  term of 5 years, a risk free interest rate of 4.5%, a dividend yield of 0% and volatility of 96%.  The face amount of the debenture of $5,000,000 was proportionately allocated to the debenture and the warrants in the amounts of $3,461,228 and $1,538,772, respectively.  The value of the debenture was then allocated between the debenture and the beneficial conversion feature, which amounted to $928,225 and $2,533,003, respectively.  The combined total discount is $4,071,775 and is being amortized over the term of the debenture. During the year ended December 31, 2006, the Company amortized a total of $143,024 of this discount as other expense in the accompanying consolidated statements of operations.

The aforesaid private placement was effected through Maxim Group, as placement agent.  Under the terms of the placement agency agreement, Maxim Group was paid $550,000 in cash and issued to grant Maxim Group a five-year stock purchase warrant, exercisable at $0.65 per share, entitling it to purchase 769,231 common shares at $0.65 per share that were value at $444,762.  These warrants were valued using the Black-Scholes option pricing model using the following assumptions:  term of 5 years, a risk-free interest rate of 4.5%, a dividend yield of 0% and volatility of 96%.  In addition, the Company also paid $22,837 in costs associated with this offering.  The total offering cost of $1,017,599 have been capitalized as debt issue costs in the accompanying consolidated balance sheet and are being amortized to interest expense over the term of the debentures.  During the year ended December 31, 2006, the Company amortized $35,983 of the debt issue costs into interest expense.

The Company is obligated to register the common stock underlying the conversion of these convertible debentures and the exercise of the warrants under a registration rights agreement.  The Company is required to file a registration statement within 30 days of the closing date and the registration statement is to be declared effective by the SEC with 90 days of the closing date (120 days if the registration statement is reviewed by the SEC).  Failure to file the registration statement or have it declared effective by the SEC will result in a penalty of 1% of the outstanding principal amount of the convertible debenture for each 30 day period the Company is not in compliance with the registration rights agreement.  The Company filed a registration statement with the SEC on January 16, 2007, which was reviewed by the SEC.  The filing of the registration statement was not within the initial 30 days following the closing; however, due to an additional funding of $1,000,000 in January 2007, the Company obtained an extension to this initial deadline to January 15, 2007.  The Company expects the registration statement to be declared effective within 120 days of the closing date; and therefore; will not incur any penalties under the registration rights agreement.  In accordance with FSP EITF 00-19-2, upon the closing of this transaction the Company did not believe it was probable that a registration penalty will be incurred; therefore, the Company did not factor in a registration penalty in the allocation of the proceeds of the convertible debenture.  As of December 31, 2006 the Company continues to



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





expect the registration statement to be declared effective within 120 days of the closing date, and therefore will not incur any penalties under the registration rights agreement.  In accordance with FSP EITF 00-19-2, the Company has not recorded a registration rights penalty to earnings as of December 31, 2006.

The Company agreed to register with the SEC the common shares issuable upon conversion of principal and interest under the debenture or the exercise of the warrants in each private placement.  In the event the Company fails to file a registration statement with the SEC within thirty days of the final closing date, or in the event such registration statement is filed but is not declared effective by the SEC within 90 days of the final closing date (or 120 days if subject to SEC or NASD review), then the Company will generally be obligated (with certain exceptions) to pay to each debenture holder damages in cash equal to 1% of his or her purchase price for each thirty-day period of such failure, or partial period thereof, subject to a 4% cap.  The debenture holders for the first private placement later agreed to extend the date to file the initial registration statement with the SEC until January 15, 2007, and the Company electronically submitted to the SEC on that date a registration statement covering both offerings.  The SEC has since reviewed that registration statement, and the Company anticipates that it will file an amended registration statement and that such registration statement will be declared effective prior to the 120-day date.

In accordance with FSP EITF 00-19-2, upon the closing of this transaction, the Company did not believe it was probable that a registration penalty would be incurred; therefore, the Company did not factor in a registration penalty in the allocation of the proceeds of the convertible debenture.  The Company continues to expect the registration statement to be declared effective within 120 days of the closing date, and therefore does expect it will incur any penalties under the registration rights agreement.  In accordance with FSP EITF 00-19-2, the Company has not recorded a registration rights penalty to earnings as of December 31, 2006.

The carrying amount of the convertible debentures at December 31, 2006 is as follows:

|Face amount of convertible debentures                             | $      5,000,000
|----------------------------------------------------------------- | ----------------
|Discount related to warrants                                      | (1,538,772)     
|Discount related to conversion feature                            | (2,533,003)     
|Amortization of discounts during the year ended December 31, 2006 | 143,024         
|Carrying amount at December 31, 2006                              | $      1,071,249



5.

NOTE 7  STOCKHOLDERS EQUITY

Series A Convertible Preferred Stock

At December 31, 2006, the Company had 600 series A convertible preferred shares outstanding.

The series A preferred shares carry a 7% cumulative dividend, and are convertible into common shares at the Companys discretion if its common shares trading at $120 per share ($6 per share pre-split) for five consecutive days.  The series A preferred shares are non-voting, carry no redemption rights, and carry a $300,000 liquidation preference, in additional to the payment of cumulative dividends.  As of December 31, 2006, there was $148,750 of dividends in arrears with respect to these shares.



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





These shares were originally issued in or about December 1999 to Triple Tree, an affiliate of Terra Listed, Ltd.  In connection with that purchase, the Company purchased 4,100 shares of Triple Tree.  Based upon corporate minutes accompanying the transaction, the Company has the right to convert the 600 series A preferred shares outstanding into eight common shares pursuant based an $80 per share conversion rate.  The Company also believes that Triple Tree may owe the Company up to $200,000 in connection with a put right and guarantee provided by Triple Tree to the Company in connection with Triple Tree shares purchased by the Company.  The Company reserves its rights to cancel some or all of the series A preferred shares and the dividends accrued to date on those shares in connection with Triple Trees obligation.

Series B Convertible Preferred Stock

At December 31, 2006, the Company had no series B convertible preferred shares outstanding.

On August 17, 2005, as part of a single private placement, the Company sold (1) 4,250 unregistered shares of series B convertible preferred stock to Monarch Pointe Fund, Ltd. (Monarch) for the sum of $425,000, and (2) 1,000 unregistered shares of series B convertible preferred stock to Mercator Momentum Fund III, LP (Mercator Fund III) for the sum of $100,000.  The 5,250 series B preferred shares were convertible at the option of the holders into a total of 480,505 common shares in the ordinary course of conversion, or 533,862 common shares in the event of a default with respect to the Companys obligations under the subscription agreement governing the sale of those shares.

The series B preferred shares carried a $525,000 liquidation preference, are entitled to participate with the Companys common shares with respect to dividends on an as-if converted basis The series B preferred shares were non-voting, did not accrue dividends (other than the aforesaid right to participate with common shares), and carry no redemption rights.

The holders of the series B preferred shares also had certain contractual rights separate from those inherent to those shares.  Specifically, under the terms of the subscription agreement, the Company was prohibited from using the proceeds of this transaction for payment of any dividends or other sums to holders of series A preferred shares, or from reducing or retiring any insider note or convertible debt held by an officer or director of the Company.  The Company was also prohibited from entering into any debt or equity financing without the prior written approval of Monarch and Mercator Fund III until the common shares underlying the series B preferred shares are registered.  The Company was also obligated to afford Monarch and Mercator Fund III a right of first refusal with respect to any capital raising financing (as opposed to joint ventures, acquisitions, compensatory or other non-capital raising financings) in which the Company sells debt or equity securities for cash until the earlier of August 17, 2006 or the conversion of the series B preferred shares.

As part of the transaction, the Company paid to Mercator Advisory Group, LLC (MAG), as investment advisor for the purchasers, the sum of $12,000 in cash to cover due diligence and legal fees.  The issuance of the series B preferred stock was convertible into shares of common stock at a rate of $1.09 per share which resulted in the recognition of a beneficial conversion feature at the date of the series B shares were issued.  The Company calculated the beneficial conversion feature to be $99,657 which has been recorded directly to accumulated deficit.

On April 18, 2006, the holders of the series B preferred shares converted all of those shares into 480,505 common shares.



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





Common Stock

For The Year Ended December 31, 2006

In January 2006, the Company issued 2,272,727 shares of common stock in connection with the acquisition of UG Systems.  The value of these shares was $3,000,000.

In February 2006, the Company issued 28,894 shares of common stock for payment of legal and consulting services valued at $31,041.

In February 2006, Paulson Investment Company, Inc. exercised its share purchase warrant to purchase 1,420,000 common shares at $0.50 per share, resulting in gross proceeds to the Company of $710,000.

On April 20, 2006, the board of directors approved the grant of common share purchase options to various employees entitling them to purchase a total of 1,205,000 common shares at the price of $1.09 per share.  Certain of these options vest on December 31, 2006, and lapse to the extent not exercised on April 20, 2011, whereas others vest on December 31, 2006, and lapse to the extent not exercised on April 20, 2016.

On May 9, 2006, the Company issued 72,168 shares of common stock for payment of legal and consulting services valued at $66,681.

On May 12, 2006, the Company granted to Mr. Clifford Roths firm, The Wells-Roth Group, as compensation for Mr. Clifford Roth joining the Companys board of advisors, a common share purchase option entitling it to purchase 100,000 restricted common shares at the exercise price of $0.95 per share.  One-half of these options vest on each of the first and second anniversaries of the grant date, respectively.  These options lapse to the extent unexercised on May 11, 2011.  These options were valued at $89,210 using the Black-Scholes option pricing model using the following assumptions: term of 5 years, a risk-free interest rate of 4.5%, a dividend yield of 0% and volatility of 163%.  The value of these options is being amortized to expenses over the two year vesting period of the options.

On May 24, 2006, the Company granted to Messrs. Mel R. Brashears and Michael D. Bozarth, in their capacity as directors of Universal Holdings, common share purchase options entitling each of them to purchase 300,000 restricted common shares at the exercise price of $0.84 per share.  These options vested on December 31, 2006, and lapse to the extent unexercised on May 24, 2016.

On May 24, 2006, the Company granted to Messrs. Michael J. Skellern and Mark V. Asdourian, in their capacity as executive officers of Universal Holdings, common share purchase options entitling each of them to purchase 300,000 restricted common shares at the exercise price of $0.84 per share.  These options vested on September 8, 2006, and lapse to the extent unexercised on May 24, 2016.

On June 1, 2006, the Company granted to Rear Admiral Stephen Johnsons firm SBS Consulting, Inc., as compensation for Rear Admiral Johnson providing services as director of strategic development, a common share purchase option entitling it to purchase 100,000 restricted common shares at the exercise price of $0.83 per share.  One-half of these options vest on each of the first and second anniversaries of the grant date, respectively.  These options lapse to the extent unexercised on May 31, 2011.    These options were valued at $77,942 using the



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





Black-Scholes option pricing model using the following assumptions: term of 5 years, a risk-free interest rate of 4.5%, a dividend yield of 0% and volatility of 163%.  The value of these options is being amortized to expenses over the two year vesting period of the warrant.

On June 10, 2006, the Company granted to an employee, a common share purchase option entitling him to purchase 100,000 restricted common shares at the exercise price of $0.90 per share.  One-third of these options vest on the first through third anniversaries of the grant date, respectively.  These options lapse to the extent unexercised on June 10, 2011.

On June 11, 2006, the Company issued a total of 175,745 shares of common stock for payment of a legal settlement valued at $159,928.

On June 20, 2006, the Company closed a private placement pursuant to which it sold (1) a total of 5,333,351 common shares, and (2) five-year stock purchase warrants entitling the holders to purchase a total of 2,666,681 common shares at $ 1.121⁄2 per share, to forty accredited investors in consideration of gross cash proceeds of $4,000,000.  As part of that transaction, the Company paid the following compensation to Paulson Investment Company, Inc., as placement agent for the offering:  (1) cash compensation in the amount of $400,000, representing 10% of the gross proceeds of the offering; (2) a non-accountable expense allowance in the amount of $120,000, representing 3% of the gross proceeds of the offering; and (3) a five-year placement agent warrant entitling Paulson to purchase a total of 266,669 units at the price of $1.50 per unit, each unit comprised of two common shares and a five-year stock purchase warrant entitling Paulson to purchase one common share at $1.121⁄2 per share.  The Company may accelerate the term of the aforesaid stock purchase warrants in the event that the fair market value of the common shares equals or exceeds $1.50 for five consecutive trading days.  In any such event, the holder of the warrant will have thirty days from notice to exercise the warrant.

On June 12, 2006, the Company granted to Mr. Keith Winsell, in his capacity as Vice President of Marketing pursuant to the terms of his employment agreement, a common share purchase option entitling him to purchase 100,000 restricted common shares at the exercise price of $0.90 per share. One-third of these options vest on the first through third anniversaries of the grant date, respectively.  These options lapse to the extent unexercised on June 12, 2011.

On June 9, 2006, the Company granted to Mr. Kenneth A. Merchant, as an inducement for joining its board of directors, a common share purchase option entitling him to purchase 300,000 restricted common shares at the exercise price of $0.84 per share, reflecting the fair market value of the shares as of the date of the Companys offer for Mr. Merchant to join the board.  These options vested on December 31, 2006, and lapse to the extent unexercised on June 22, 2016.

On June 9, 2006, the Company granted to Mr. Kenneth A. Merchant, as an inducement for chairing the audit committee of its board of directors, a common share purchase option entitling him to purchase 100,000 restricted common shares at the exercise price of $0.90 per share, reflecting the fair market value of the shares as of the date of Mr. Merchant formally joining the board.  These options were fully vested upon grant, and lapse to the extent unexercised on June 22, 2016.

On August 21, 2006, the Company granted to Mr. Randall A. Jones, in his capacity as Chief Financial Officer pursuant to the terms of his employment agreement, a common share purchase option entitling him to purchase 300,000 restricted common shares at the exercise price of $0.90 per share. One-third of these options vest on the first through third anniversaries of the grant date, respectively.  These options lapse to the extent unexercised on August 21, 2011.  In



30



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





December 2006, Mr. Jones was terminated as the Companys Chief Financial Officer and these options were canceled.

On August 21, 2006, the Company granted to Mr. Michael J. Skellern, in his capacity as an executive officer of Universal Holdings, a common share purchase option entitling him to purchase 200,000 restricted common shares at the exercise price of $0.90 per share, reflecting the fair market value of the shares as of the date of grant.  These options vest on September 8, 2006, and lapse to the extent unexercised on August 28, 2016.

On September 13, 2006, the Company issued 27,777 shares of common stock for payment of consulting services valued at $25,000.

In November, 2006 the Company issued 26,666 shares of common stock as partial payment of outstanding invoices for the production of its infomercial that will begin television broadcast in early December 2006 valued at $21,333.

In December 2006, the Company issued a total of 10,000 shares of common stock for payment of services valued at $7,500.

In December 2006, the Company issued a total of 250,000 shares of common stock for payment of a legal settlement  valued at $195,000.

On December 14, 2006, the Company granted to Rocco Diina, as compensation for joining the board of advisors, a common share purchase option entitling him to purchase 100,000 restricted common shares at the exercise price of $0.79 per share.  One-half of these options vest on each of the first and second anniversaries of the grant date, respectively.  These options lapse to the extent unexercised on December 14, 2011.    These options were valued at $55,551 using the Black-Scholes option pricing model using the following assumptions: term of 5 years, a risk-free interest rate of 4.5%, a dividend yield of 0% and volatility of 96%.  The value of these options is being amortized to expenses over the two year vesting period of the warrant.

For The Year Ended December 31, 2005

On January 4, 2005, as part of a single transaction, the Company sold 100,000 restricted common shares to Mr. Michael Weiss in a private placement for cash for total gross proceeds of $100,000.  As part of that transaction, the Company issued to Mr. Weiss fully vested common share purchase warrants entitling him to purchase, through January 4, 2010, 25,000 common shares at $2 per share and an additional 25,000 shares at $2.50 per share.

In January 2005, the Company granted to a consultant as compensation for providing legal services in connection with regulatory and other approvals relating to the marketing of the Companys products, fully vested common shares purchase options entitling him to purchase 100,000 shares of common stock at the exercise price of $1.60 per share that were valued at $159,942.  These options vest in equal amounts at the end of the first through twelfth month of the provision of services by the consultant.  These options expire January 11, 2010.  These warrants were valued using the Black-Scholes option pricing model using the following assumptions: term of 5 years, a risk-free interest rate of 3.5%, a dividend yield of 0% and volatility of 317%.  The value of these warrants was being amortized into expense over the twelve month period of the contract.



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





On February 7, 2005, as part of a single private placement, the Company sold (1) a total of 1,884,375 common shares together with common share purchase warrants entitling the holder to purchase 753,750 restricted common shares to Monarch Pointe Fund, Ltd. (Monarch) for the sum of $3,015,000, and (2) a total of 928,125 common shares together with common share purchase warrants entitling the holder to purchase 371,250 restricted common shares to Mercator Momentum Fund, LP (Mercator Fund) for the sum of $1,485,000. As part of that transaction, the Company paid to Mercator Advisory Group, LLC (MAG), as investment advisor agent, the sum of $265,000 in cash for due diligence and legal fees and common share purchase warrants entitling it to purchase 281,250 restricted common shares.  One-half of the aforesaid warrants issued to Monarch, Mercator Fund and MAG are exercisable at $2.40 per share, while the balance are exercisable at $2 per share.  These warrants lapse if unexercised on February 7, 2008.

In April 2005, the Company granted to a consultant as compensation for providing accounting and financial related services common shares purchase options entitling him to purchase 100,000 shares of common stock at the exercise price of $1.40 per share that were valued at $99,759.  These options vest quarterly in equal amounts over a two year period.  These options expire April 28, 2010.  These options were valued using the Black-Scholes option pricing model using the following assumptions: term of 2 years, a risk-free interest rate of 4.2%, a dividend yield of 0% and volatility of 147%.  The value of these options is being amortized into expense over the twenty-four month vesting period.

On April 1, 2005, the Company cancelled 51,908 unissued shares of common stock previously reserved for issuance to the prior shareholders of ISR Systems in payment of the $20,000 purchase price for their shares in ISR Systems as a result of the election by those shareholders of their right to require payment in cash in lieu of Company shares.

On August 28, 2005, the Company issued 18,519 shares of common stock with a value of $25,000 in settlement of litigation.

In August 2005, the Company granted to two consultants as compensation for providing investor relation services common shares purchase options entitling them to purchase an aggregate of 800,000 shares of common stock at exercise prices ranging from $1.35 to $1.85 per share.  These options expire in August 2007.  These options were valued at $1,007,216 using the Black-Scholes option pricing model using the following assumptions:  term of 2 years, a risk-free interest rate of 4.5%, a dividend yield of 0% and volatility of 341%.  The value of these options is being amortized into expense over the term of the consulting agreement.

On September 9, 2005, the Company issued 50,000 shares of common stock upon the exercise of common share purchase options.

On October 6, 2005, the Company sold 100,000 shares of common stock to Mr. Michael D. Bozarth, a director, for gross proceeds of $99,000, representing a 10% discount to market.

On December 14, 2005, the Company sold 1,420,000 unregistered common shares to Paulson Investment Company, Inc. in a private placement for cash for total gross proceeds of $710,000.  As part of that transaction, the Company issued to Paulson Investment Company fully vested common share purchase warrants entitling it to purchase 1,420,000 common shares at $0.50 per share.  These warrants were exercised in February 2006.

During the year ended December 30, 2005, the Company issued 199,926 common shares to consultants and professionals for services valued at $251,856.  During that year, the Company



32



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





also issued 1,622,205 common shares upon the exercise of options and warrants:  50,000 shares for which the exercise price was paid for by services valued at $62,500; 1,143,905 shares upon the cashless exercise of 1,385,000 options and warrant shares; and 428,300 shares for $284,638 in cash.

Also during the year ended December 31, 2005, holders of the UGC series A preferred shares converted 12,817 of those shares into 12,817 common shares of the Company.

Series A Preferred Stock of Subsidiary - Universal Guardian Corporation

At December 31, 2005, Guardian Corporation had 18,714 UGC series A preferred shares outstanding.  This has been presented on the accompanying financial statements in a manner similar to minority interest.

Description of Stock Plans

Universal Guardian Holdings, Inc. 2005 Stock Incentive Plan

On September 1, 2005, the Companys board of directors adopted, and on October 6, 2005 the Companys shareholders ratified, the Universal Guardian Holdings, Inc. 2005 Stock Incentive Plan (the 2005 Plan).  The purpose of the plan is to provide the company with a shareholder-approved vehicle to attract, retain and motivate employees, directors and non-employee consultants upon whose judgment, initiative and effort the successful conduct of the Companys business will be largely dependent, and to align their interests with those of shareholders by providing incentive compensation opportunities tied to the performance of the Companys common shares and by promoting increased ownership in the Companys common shares by such persons.  The 2005 Plan was adopted with the intent to replace the 2002 Plan and 2003 Plan described below.

Under the 2005 Plan, a total of 10,000,000 common shares will be available for issuance through the grant of a variety of common share-based awards under the plan.  Types of awards that may be granted under the 2005 Plan include stock awards, restricted stock awards and non-qualified and incentive stock options.  As of December 31, 2006, there were 3,580,000 common shares reserved for issuance and outstanding but unexercised common share purchase options under the 2005 Plan and 6,169,132 shares available for issuance.

Universal Guardian Holdings, Inc. 2002 Stock Compensation Program

On September 19, 2002, the Companys board of directors and shareholders adopted the Universal Guardian Holdings, Inc. 2002 Stock Compensation Program, formerly known as the Hollywood Partners.com 2002 Stock Compensation Program (the 2002 Stock Program), pursuant to which a total of 10,000,000 common shares were initially made available for issuance.  Effective as of October 6, 2005, as a result of the adoption of the 2005 Plan by the Companys shareholders, no further grants will be made under the 2002 Stock Program.

Universal Guardian Holdings, Inc. 2003 Incentive Equity Stock Plan

On April 21, 2003, the Companys board of directors adopted the Universal Guardian Holdings, Inc. 2003 Incentive Equity Stock Plan (the 2003 Stock Plan), pursuant to which a total of 10,000,000 common shares were initially made available for issuance.  As a result of the adoption of the 2005 Plan by the Companys shareholders on October 6, 2005, no further grants will be made under the 2003 Stock Plan.



33



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





Stand-Alone Compensatory Grants

From time to time the Companys board of directors grants common share purchase options or warrants to selected directors, officers, employees, consultants and advisors in payment of goods or services provided by such persons on a stand-alone basis outside of any of the Companys formal stock plans.  The terms of these grants are individually negotiated.  As of December 31, 2006, there were a total of 9,857,120 shares reserved for issuance under various outstanding but unexercised compensatory common share purchase options granted on a stand-alone basis.

Summary Of Options Granted to Directors, Officers and Employees

The following table summarizes compensatory options granted to directors, officers and other employees for the periods or as of the dates indicated, both under the aforesaid stock plans and in the form of free-standing grants:

|                               | Options Granted |  | Weighted
Average
Exercise
Price
|------------------------------ | --------------- |  | -------------------------------
|Balance, December 31, 2004     | 8,900,000       |  | $        0.59                  
|Exercised                      | (1,640,000)     |  | $        0.34                  
|Cancelled                      | (1,700,000)     |  | $        0.72                  
|Granted                        | 2,200,000       |  | $        1.01                  
|Balance, December 31, 2005     | 7,760,000       |  | $        0.73                  
|Exercised                      |                |  | $                             
|Cancelled                      | (555,000)       |  | $        0.78                  
|Granted                        | 3,550,000       |  | $        0.95                  
|Balance, December 31, 2006     | 10,755,000      |  | $        0.80                  
|Exercisable, December 31, 2006 | 10,049,999      |  | $        0.78                  



The weighted average remaining contractual life of compensatory options outstanding for directors, officers and employees is 4.91 years at December 31, 2006.  The intrinsic value of the outstanding options at December 31, 2006 was $1,398,000.  The exercise price for compensatory options outstanding for directors, officers and employees at December 31, 2006 were as follows:



34



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------







|Number of
Options |  | Exercise
 Price
|----------------- |  | ---------------
|300,000           |  | $0.01          
|1,000,000         |  | $0.12          
|2,550,000         |  | $0.47 - $0.54  
|465,000           |  | $0.75 - $0.79  
|3,215,000         |  | $0.84  $1.02  
|2,950,000         |  | $1.09 - $1.20  
|275,000           |  | $1.50  $10.00 
|10,755,000        |  |                



For compensatory options granted to directors, officers and employees during the year ended December 31, 2006 where the exercise price equaled the stock price at the date of the grant, the weighted-average fair value of such options was $0.89 and the weighted-average exercise price of such options was $0.95.  No options were granted during the year ended December 31, 2006, where the exercise price was less than the stock price at the date of the grant or the exercise price was greater than the stock price at the date of grant.

For compensatory options granted to directors, officers and employees during the year ended December 31, 2005 where the exercise price equaled the stock price at the date of the grant, the weighted-average fair value of such options was $1.08 and the weighted-average exercise price of such options was $1.02.  No options were granted during the year ended December 31, 2005, where the exercise price was less than the stock price at the date of the grant or the exercise price was greater than the stock price at the date of grant.

Summary of Warrants Granted

The following table summarizes warrants granted for the periods or as of the dates indicated, including both compensatory options/warrants (referred to herein as warrants) granted to consultants under the aforesaid stock plans and in the form of free-standing grants as well as non-compensatory warrants sold or granted.



|                           | Warrants  |  | Weighted
Average
Exercise
Price
|-------------------------- | --------- |  | -------------------------------
|Balance, December 31, 2004 | 3,187,862 |  | $        1.41                  
|Exercised                  | (223,300) |  | $        0.94                  
|Cancelled                  | (325,000) |  | $        2.90                  
|Granted                    | 4,376,250 |  | $        1.45                  
|Balance, December 31, 2005 | 7,015,812 |  | $        1.27                  



35



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UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

For The Years Ended December 31, 2006 and 2005

(continued)







|Exercised                      | (1,420,000) |  | $        0.50
|------------------------------ | ----------- |  | -------------
|Cancelled                      | (702,062)   |  | $        0.98
|Granted                        | 8,382,076   |  | $        0.92
|Balance, December 31, 2006     | 13,275,826  |  | $        1.15
|Exercisable, December 31, 2006 | 13,275,826  |  | $        1.15



The weighted average remaining contractual life of the common share purchase warrants outstanding is 3.88 years at December 31, 2006.   The intrinsic value of the outstanding warrants at December 31, 2006 was $328,000.  The exercise price for common share purchase warrants outstanding at December 31, 2006 were as follows:

|Number of
Warrants |  | Exercise
 Price
|------------------ |  | ---------------
|300,000            |  | $0.19          
|400,000            |  | $0.35          
|5,348,726          |  | $0.75  $0.83  
|3,845,850          |  | $0.95  $1.25  
|3,381,250          |  | $1.35  $2.50  
|13,275,826         |  |                



During the years ended December 31, 2006 and 2005, the Company issued a total of 300,000 and 1,000,000 common share purchase warrants to a consultant for services valued at $490,513 and $1,266,917, respectively.

6.

NOTE 8  INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax liabilities and assets as of December 31, 2006 are as follows:



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------







|                                |  | United States     |  | Foreign               
|------------------------------- |  | ----------------- |  | ----------------------
|Deferred tax assets:            |  |                   |  |                       
|Net operating loss carryforward |  | $   6,759,462     |  | $                    
|Stock compensation              |  | 1,275,937         |  |                      
|Accrued vacation                |  | 20,398            |  |                      
|Less valuation allowance        |  | (8,055,797)       |  |                      
|                                |  |                   |  |                       
|Deferred tax liabilities -      |  | -                 |  | -                     
|Net deferred tax liability      |  | $                |  | $                    -



The Components of deferred income tax expense (benefit) are as follows:

|United States                        
|-------------------------------------
|                                     
|Accrued legal                        
|Accrued salaries and related benefits
|Stock compensation                   
|Allowance for bad debts              
|Inventory reserve                    
|Net operating loss carryforward      
|Increase in valuation allowance      
|Income tax expense                   



|Foreign                        
|-------------------------------
|                               
|Accelerated capitol allowance  
|Income tax reclaimable in UK   
|Net operating loss carryforward
|                               
|Current year tax payable       
|Income tax (benefit) expense   





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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





Following is a reconciliation of the amount of income tax expense (benefit) that would result from applying the statutory federal income tax rates to pre-tax income and the reported amount of income tax expense (benefit):

|                                                   | United States        |  | Foreign             
|-------------------------------------------------- | -------------------- |  | --------------------
|                                                   | December 31,
2006    |  | December 31,
2005   
|Tax benefit (expense) at federal statutory rates   | $   (3,131,316)      |  | $    (2,195,160)    
|Income exempt from tax earned in certain countries |                     |  |                    
|Accrued officer salary                             |                     |  | 7,575               
|Accrued vacation                                   | 17,338               |  | 6,814               
|Depreciation                                       |                     |  |                    
|Meals and entertainment                            | 7,254                |  | 3,074               
|Financing costs                                    |                     |  | 367,191             
|Other non deductible expenses                      |                     |  |                    
|Registration penalty expense                       |                     |  | 15,300              
|Capitol allowances                                 |                     |  |                    
|Stock based compensation                           | 1,100,102            |  | 88,298              
|Tax loss utilized                                  |                     |  |                    
|Foreign tax                                        |                     |  |                    
|Other                                              |                     |  |                    
|Increase in valuation allowance                    | 2,006,622            |  | 1,706,908           
|Income tax expense                                 | $                   |  | $                  



At December 31, 2006, the Company has provided a valuation allowance for the United States deferred tax assets since management has not been able to determine that the realization of that asset is more likely than not.  The net change in valuation allowance for the years ended December 31, 2006 and 2005 was an increase of $3,640,139 and $1,888,750, respectively.  United States net operating loss carryforwards of approximately $16,900,000 expire starting in 2016.



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





7.

NOTE 9  COMMITMENTS AND CONTINGENCIES

Leases

The Company currently leases its corporate office space located in Newport Beach, California under a non-cancelable operating lease that expires on July 31, 2007.  The Companys Universal Guardian Services PTE, Ltd  subsidiary currently leases its principal executive offices located in Singapore.  This lease agreement expires on May 31, 2008.

Future minimum lease payments under non-cancelable operating leases with initial or remaining terms of one year or more are as follows:

|                         | Operating
 Leases
|------------------------ | -----------------
|Year ending December 31, |                  
|2007                     | $         143,146
|2008                     | 40,356           
|                         | $         183,502



Litigation

On July 5, 2005, the Companys Secure Risks subsidiary received a demand from solicitors for Mr. John Chase, a former Secure Risks employee, claiming that the termination of Mr. Chases employment breached the terms of his written employment agreement.  By reason of this alleged breach, the plaintiff claims he is entitled to statutory damages under English law as well as contract damages for the full term of the agreement.  It is the Companys position the termination of the plaintiffs employment conformed with the terms and conditions of his employment agreement and did not constitute a breach.  Secure Risks retained a UK solicitor who responded to the plaintiffs demand.  The plaintiff then filed a claim with the Employment Tribunal, an administrative agency which hears labor disputes in England and Wales.  Secure Risks filed a timely response to the plaintiffs claims.  On September 21, 2006, the Employment Tribunal convened a pre-hearing review and case management conference.  The Tribunal concluded that Mr. Chase was entitled to the governing unfair dismissal statutes and set the matter for a full hearing on March 7, 2007.

On January 11, 2005, the Company received a cease and desist letter from Pepperball Technologies, Inc. claiming that its prospective manufacture of frangible projectiles for the Python (now named Riot Defender) Projectile Launcher infringes on Pepperballs patents, and further claiming that the prior President of the Companys UG Products subsidiary, Mr. Dennis M. Cole, who was previously employed by Pepperball, violated his at will employment agreement by providing the Company with alleged trade secrets.  The frangible projectiles that will be manufactured by the Company are protected by a patent originally issued to the U.S. Navy on November 14, 2000 (U.S. Patent No. 6,145,441).  The U.S. Navy granted Guardian Corporation the exclusive right to sell and market projectiles using this patented technology for the life of the patent pursuant to an agreement dated November 19, 2002.  In January, 2004, Guardian Corporation renewed its exclusive license to the U.S. Navys patent for 14 years.  The Company has received non-infringement opinions from patent counsel confirming that the Companys manufacture and sale of the frangible projectiles will not infringe upon Pepperballs



39



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





intellectual property rights.  To date, the Company has yet to sell any frangible projectiles which undermines any claims of damages which may be asserted by Pepperball.  On January 28, 2005 the Company responded to Pepperballs correspondence and is prepared to vigorously defend its claims if necessary.  In reply, Pepperball is demanding that the Company provide it with exemplars of the Companys products so that they may make an independent determination as to whether the design of the frangible projectiles infringes on their patents.  The Company is taking the matter under advisement.

The Company is involved in certain legal proceedings and claims that arise in the normal course of business.  Management does not believe that the outcome of these matters will have a material adverse effect on the Companys financial position or results of operations.

Settlements

On June 3, 2004, the Companys Guardian Corporation subsidiary entered into a stipulated settlement with its former landlord, AC Pacific View, whereby Guardian Corporation agreed to pay the sum of $200,000 to AC Pacific View on or before December 31, 2004 in full satisfaction of all of Guardian Corporations obligations arising under a terminated lease.  In the event payment was not made by that date, AC Pacific View would be entitled to enter judgment against Guardian Corporation for the sum of $200,000, less any amounts paid.   Guardian Corporation has not paid this amount to date, and is insolvent but for the potential recovery of damages in connection with the termination of Guardian Corporations subcontract with Northern NEF. AC Pacific View has noticed Guardian Corporations default under the stipulation but has yet to enter judgment, and Guardian Corporation is presently negotiating an extension of time in respect to the entry of judgment.  Management does not believe that the judgment, if filed by AC Pacific View, will be enforceable against Universal Holdings or any other subsidiary of Universal Holdings other than Guardian Corporation.

On March 30, 2006, the Company entered into a settlement agreement with MAG Capital, LLC (MAG) and its affiliates settling all claims relating to its purported failure to give MAG a right of first refusal in connection with the Companys December 2005 private placement with Paulson Investment Company, Inc.  Under that agreement, the Company issued 175,745 common shares valued at $159,928 to MAG and its affiliates, and has accrued for reimbursement $5,000 for attorneys fees.  In consideration for this issuance, MAG and its affiliates released and waived all of its rights of first refusal with respect to the Companys offering of any securities at $0.70 or more.

On December 27, 2006, the Company entered into a Settlement Agreement and Mutual General Release with The Kaplan Group in respect to the complaint that was filed in the Los Angeles County Superior Court against Universal Holdings and Michael J. Skellern entitled H. Seth Kaplan, Plaintiff v. Universal Guardian Holdings, Inc.; and Michael Skellern, Defendants.  In addition to resolving that action, the Settlement Agreement included the separate claims made by Mr. Kaplan for the conveyance of 250,000 common shares purportedly earned as a finders fee upon the appointment of Mr. Michael Stannard to the Companys board of directors pursuant to an alleged independent promise made by the company.  In consideration and exchange for a full and complete release of the Company, its subsidiaries as well as all of its officers and directors which release includes a waiver of the rights afforded under Californias Civil Code section 1542, Universal Holdings agreed to issue to The Kaplan Group 250,000 registered shares of the Companys common stock valued at $195,000 which may be sold in three equal tranches every thirty days commencing January 2, 2007.  The Company issued the shares in January, 2007.



40



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





Other Commitments

Mr. Michael J. Skellern is currently employed as President and Chief Executive Officer of the Company pursuant to the terms of an executive employment agreement entered into effective October 1, 2004.  The essential terms of the employment agreement are as follows:

·

Mr. Skellern is employed under the agreement for an initial five-year initial term.  After the initial term, the agreement renews automatically for successive three-year terms, unless either Mr. Skellern or the Company provides at least one months notice prior to the expiration of the pending term of their election not to renew.

·

Mr. Skellern compensation under the agreement consists of an initial base salary of $296,570 per year, subject to annual increases as determined by the Companys board of directors, but at least 15% on each anniversary date.  As of December 31, 2006, Mr. Skellerns annual salary was $392,000.

·

Mr. Skellern is entitled to an automobile allowance of not less than $975 per month.

·

The Company is required to pay the insurance premium for a $2,000,000 life insurance policy on Mr. Skellern for the benefit of his family.

Mr. Bruce M. Braes is employed as Managing Director of Secure Risks under a service agreement with that company dated June 17, 2004.  The service agreement has an initial term of three years, although it is terminable by either party upon 90 days prior notice following the first anniversary date of the agreement.  The essential terms of the service agreement are as follows:

·

Mr. Braes is entitled to annual compensation of £100,000 per year.

·

Mr. Braes is entitled to be paid a discretionary bonus as determined by Secure Risks board of directors.  Currently, Mr. Braes participates with the other employees of Secure Risks in a bonus pool.

Mr. Herbert P. Goertz is employed as President of ISR System under an executive employment agreement with that company dated October 17, 2005.  The essential terms of the employment agreement are as follows:

·

Mr. Goertz is employed under the agreement for an initial 42 month initial term.  After the initial term, the agreement renews automatically for successive one-year terms, unless either Mr. Goertz or the Company provides at least one months notice prior to the expiration of the pending term of their election not to renew.

·

Mr. Goertzs compensation under the agreement consists of an initial base salary of $198,000 per year, subject to annual increases as determined by the Company.

·

Mr. Goertz is entitled to an automobile allowance of not less than $650 per month.



41



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





·

Mr. Goertz will also be entitled to share, with other employees of ISR Systems and its subsidiary, in a cash and option bonus plan to be established based upon gross margin and revenue targets.

Future commitments for salary agreements as disclosed in detail above consist of the following as of December 31, 2006:

|2007 | $       670,000
|---- | ---------------
|2008 | 648,800        
|2009 | 567,920        



8.

NOTE 10  SUBSEQUENT EVENTS

On January 2, 2007, the Company granted to Mr. Kevin F. Pickard, as an inducement for acting as the Companys Interim Chief Financial Officer, a common share purchase option entitling him to purchase 100,000 restricted Universal Holding common shares at the price of $0.75 per share, reflecting the fair market value of the shares as of the date of grant.  These options vest in four equal quarterly tranches commencing April 2, 2007, and lapse to the extent unexercised on January 2, 2012.

On January 11, 2007, the Company sold a total of $1,000,000 of convertible debentures to two accredited investors in a placement facilitated through the Maxim Group.  Interest on outstanding principal of the debentures accrues at the rate of 6% per annum (increased to 12% for so long as the Company is in default under the terms of the debenture), and payable quarterly commencing March 31, 2007.  Outstanding principal on the debentures is payable 24 months from the closing date, subject to acceleration in the event of certain defaults or breaches of continuing covenants. The holders of the debentures may convert unpaid principal on the debentures into common shares at the rate of $0.65 per share, equal to 80% of the VWAP for the Companys common shares for the ten trading day period prior to the first closing.  Universal Holdings may also elect to pay interest in common shares in lieu of cash at a conversion rate equal to 80% of the VWAP for the Companys common shares for the ten trading day period preceding the interest payment date.  As additional consideration for the purchase of the debenture, Universal Holdings also granted to the debenture holder stock purchase warrants entitling them to purchase a total of 769,230 common shares at the price of $0.81 per share, or 125% of the conversion price for the debenture.  These warrants contain cashless exercise provisions in the event the underlying shares are not registered with the SEC, and lapse if unexercised five years from the closing date.  In the case of certain non-exempt issuances of securities below the conversion and exercise prices for the debenture and warrants, the holders of those securities will also entitled to full-ratchet anti-dilution protection for a period of one year, and standard weighted-average anti-dilution protection thereafter. As compensation for acting as placement agent for the offering, the Company agreed to pay Maxim Group a cash placement fee equal to 8% of the gross proceeds from the offering.  The Company further agreed to grant Maxim Group a five-year stock purchase warrant, exercisable at $0.65 per share, entitling it to purchase 153,846 common shares at $0.65 per share.  Maxim Group subsequently assigned this warrant to its principal member, Maxim Partners LLC.  The Company also agreed to pay Maxim Group a non-accountable expense allowance equal to 3% of the gross proceeds from the offering, and to reimburse Maxim Group for its expenses and legal fees incurred in connection with this offering, but not to exceed $15,000.



42



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|UNIVERSAL GUARDIAN HOLDINGS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For The Years Ended December 31, 2006 and 2005
(continued)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





On February 8, 2007, Universal Holdings received correspondence from U.S. counsel representing Mr. John Chase, a former Secure Risks shareholder and employee, demanding, among other things, that Universal Holdings release from escrow 615,224 Universal Holdings common shares initially issued to Mr. Chase in exchange for his Secure Risks shares in connection with Universal Holdings acquisition of Secure Risks in June 2004, and further demanding that Universal Holdings issue an opinion letter approving the sale of a portion of these shares under SEC Rule 144, and threatening litigation should Universal Holdings fail to promptly comply with the aforesaid demands.  Shortly before receiving this demand letter, Universal Holdings received a copy of an application to the High Court of Chancery in the United Kingdom from an English law firm seeking the functional equivalent of the issuance of a subpoena duces tecum to Secure Risks on behalf of The Ackerman Group  The application was being made in connection with a lawsuit filed by The Ackerman Group against Mr. Chase, a number of other individuals as well as TAG24, Ltd., a company acquired by Secure Risks from Mr. Chase immediately before Universal Holdings acquisition of Secure Risks in contemplation and as part of that transaction.  In the lawsuit, The Ackerman Group alleges that Mr. Chase was formerly employed by The Ackerman Group, and that he formed TAG24 while so employed and used assets misappropriated from The Ackerman Group to start his new operation.  The Ackerman Group is suing Mr. Chase and TAG24 for misappropriation of company assets, including clients and customers.  These appear to be the part of the assets that Mr. Chase sold to Secure Risks as part of the series of transactions whereby Universal Holdings acquired Secure Risks.

Universal Holdings and Secure Risks are not named as defendants in The Ackerman Groups lawsuit, and have not to date been threatened with litigation by The Ackerman Group.  Nevertheless, it is possible that should The Ackerman Group prevail, the consideration received by Mr. Chase in exchange for the assets he allegedly misappropriated from The Ackerman Group may be subject to levy in an enforcement action under a variety of legal and equitable theories, including constructive trust.  In order to avoid any liability for Universal Holdings or Secure Risks as being complicit in any transfer of such assets during the pendency of such litigation, Universal Holdings has notified Mr. Chase that the company will not release any of such shares from escrow or otherwise permit any of such shares to be sold under Rule 144 or otherwise transferred during the pendency of such litigation.  It is also possible that The Ackerman Group could assert claims against Secure Risks as TAG 24s successor, which would result in equitable rights of offset against Mr. Chase.  The events also appear to violate representations and covenants personally given by Mr. Chase in connection with the transaction whereby Universal Holdings acquired Secure Risks.  Mr. Chase has not, to date, responded to Universal Holdings notification of its decision not to release the shares from escrow or to allow a transfer of the shares.  We are currently in the process of determining whether to proceed with an action to rescind the issuance of shares to Mr. Chase on the grounds of fraud.

On March 7, 2007, the Companys Secure Risks subsidiary entered into a compromise agreement settling the employment agreement termination claim originally made by Mr. Chase on July 5, 2005 for the amount of £16,750.  All claims relating to Secure Risks as described above were excluded from such settlement.





43



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SIGNATURES OF EXECUTIVE OFFICERS AND DIRECTORS

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this annual report on form 10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized on April 3, 2007.

| | UNIVERSAL GUARDIAN HOLDINGS, INC.                                                             
| | ----------------------------------------------------------------------------------------------
| | By:                                                                                           
| | Michael J. Skellern,
President and Chief Executive Officer 
(principal executive officer)     
| | By:                                                                                           
| | Kevin F. Pickard
Interim Chief Financial Officer 
(principal accounting and financial officer)



In accordance with the Exchange Act, this annual report on form 10-KSB has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

|By:                                | /s/ Michael J. Skellern                                                 |  | April 3, 2007
|---------------------------------- | ----------------------------------------------------------------------- |  | -------------
|Michael J. Skellern                | President, Chief Executive Officer and Chairman of the Board (Director) | 
|By:                                | /s/ Mel R. Brashears*                                                   |  | April 3, 2007
|Mel R. Brashears                   | Director                                                                | 
|By:                                | /s/ Michael D. Bozarth*                                                 |  | April 3, 2007
|Michael D. Bozarth                 | Director                                                                | 
|By:                                | /s/ Kenneth A. Merchant*                                                |  | April 3, 2007
|Kenneth A. Merchant                | Director                                                                | 
|* By:                              | /s/ Michael J. Skellern                                                 |  |              
|Michael J. Skellern,
Agent-In Fact |                                                                         | 





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