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

General

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

This discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition, intangible assets, and contingencies. We base our estimates on historical experience, where available, and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

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

Our independent registered public accounting firm's report on the consolidated financial statements included in our annual report on Form 10-K for each of the three years in the period ended December 31, 2007, contains an explanatory paragraph wherein they express an opinion that there is substantial doubt about our ability to continue as a going concern.

Overview

Guardian Technologies International, Inc. was incorporated in the State of Delaware in February 1996. Guardian is a technology company that designs and develops imaging informatics solutions for delivery to its target markets:
aviation/homeland security and healthcare. The Company utilizes imaging technologies and analytics to create integrated information management technology products and services that address critical problems in healthcare and homeland security for corporations and governmental agencies. Each product and service can improve the quality and response time of decision-making, organizational productivity, and efficiency within the enterprise. Our product suite integrates, streamlines, and distributes business and clinical information and images across the enterprise.

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

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

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

Aviation/Homeland Security Technology Solution - PinPoint

The PinPoint™ product is an "intelligent imaging informatics" (3i™) technology for the detection of guns, explosives, and other threat items contained in baggage in the airport environment or for building security applications.
PinPoint can identify threat items, notify screeners of the existence of threat items, and speed the security process by eliminating unnecessary baggage checks, provide the screener with an instantaneous second opinion, and reduce processing time spent on false positives (baggage selected for security review that contains no threat items). We market and seek to license the PinPoint™ product primarily to the United States Transportation Services Administration (TSA) for use in airports, the Federal Protection Services for use in federal buildings and to foreign governments and airport authorities. We compete with manufacturers of baggage screening, luggage and large parcel screening, people screening for weapons and explosive detection, container and vehicle screening, and cargo screening equipment and certain software companies and academic institutions that are developing solutions to detect threat items. It is also our intent to distribute the product through these manufacturers.

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

Information regarding the amount of the TSA's annual budget allocated for the purchase of software solutions that are able to detect threat items at US airports and other similar facilities, such as PinPoint™, is not readily discernible from publicly available information or independent research reports. However, we estimate, based upon information derived from the fiscal year ended September 30, 2006 and the fiscal year ended September 30, 2007 United States Department of Homeland Security (DHS) budgets, that the DHS budget allocation for FY 2006 for software solutions that are able to detect threat items at U.S. airports and other facilities, such as PinPoint™, was approximately .77% of the DHS' $41.1B budget, and that the budget allocation for the proposed FY 2007 DHS budget will be approximately 2.25%. In addition, we estimate that the worldwide market for solutions such as PinPoint™ is approximately twice the United States' Homeland Security budget.

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

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

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

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

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

Recent Developments - PinPoint

Guardian continues to perform research and development activities in accordance with the terms of its February 12, 2008 extension of the Cooperative Research and Development Agreement ("CRDA") with the Transportation Security Administration ("TSA") that was initially signed on August 18, 2006, and previously renewed on August 8, 2007, with the United States Department of Homeland Security Science and Technology Directorate, for testing and validation of the PinPoint™ product capabilities at the Transportation Security Labs (TSL). The project began on September 5, 2006 for explosive image collection, which is being followed by refinement of the development and testing of PinPoint™. Also, through the date of this filing, the Company has completed the third phase of the CRDA process with the US Department of Homeland Security. While TSA certification is not absolutely essential to the acceptance of Guardian's PinPoint™ product, we believe that having TSA certification and a business relationship with the TSA is important to our strategic growth plans, as the relationship represents an important opportunity to obtain contracts for the licensing of our baggage scanning applications and for future aviation and transportation security applications and solutions that we develop or enhance. However, significant development risks still exist for adapting the PinPoint product to various types of scanning equipment in different countries.

We are engaged in the negotiations of the final terms and conditions of a funded research and development contract with the U.S. Department of Homeland Security ("DHS"). As part of the project, we have also entered into a Mutual Non-Disclosure Agreement with DHS. The scope of work is focused on the expansion of PinPoint's capabilities to include the detection of certain TSA specified explosives for future deployment on both existing and future deployed scanners.
Although there can be no assurances, the contract should be completed in the next thirty days and the underlying work completed over the first quarter of next year.

In July 2008, we submitted to DHS, their Science and Technology group, under the auspices of the Support Anti-terrorism by Fostering Effective Technologies Act of 2002 (the "SAFETY Act"), a pre-application for designation valuation, a type of certification under the SAFETY Act. In late August 2008, we participated in a review of the pre-application with the Staff of the Office of SAFETY Act Implementation. Our final application for designation valuation was submitted in October 2008.

We have been solicited by and are in the early stage of discussions with a security company in South Africa to provide our PinPoint technology to governmental agencies and the mining industry. The security company currently generates approximately $40M in annual revenue, and would act as a regional distributor of our security products. We have also met with and continue to have discussions with the Chinese National Police Research Institute in Shanghai for the deployment of our PinPoint product on a mobile drug detection scanner.
Further, their interest also includes a joint venture with Guardian for the engineering and manufacturing of a more sophisticated scanner for baggage inspection. Although there can be no assurances that an agreement will be reached and we may be required by the US Department of Commerce to seek another partner.

We made a proposal to the Sears Tower in Chicago to provide PinPoint for security at the facility. We are in discussions with their security provider Johnson Controls, in refining the proposal. This opportunity would permit Guardian to have a deployed site with access to actual images in a public facility and other advantages. We have also been solicited and made proposals to an airport in Yemen, and are in the process of submitting several proposals to various European countries. Although there can be no assurances, we will continue to pursue opportunities for the deployment of our PinPoint product.

We submitted an application in October 2008 to India for the establishment of a Liaison Office. Our representative, who will become an employee of Guardian, has already developed relationships with the aviation ministry and other government officials, as well as equipment scanning manufacturer. This activity is setting the foundation to formally pursue opportunities in India for governmental and corporate facilities for our PinPoint product.

During 2008, we received three export licenses for demonstration purposes as we pursue opportunities in Saudi Arabia, India and South Africa. Such opportunities were at the three countries' requests. An export license was granted in March 2007 for the purpose of the final phase of the Russian Federation certification process. As a result, in June 2007, the Company completed the necessary laboratory study by an accredited Russian laboratory, which in October 2007, provided a full report to the Russian Federation representing the final step in the certification process. We now await the Russian Federation's approval of our application as the final step in the certification process. In support of our anticipated certification approval, we received in September 2008, an export license for commercial purposes in Russia.

In January 2007, the Company performed an initial successful Proof of Concept test in Madrid, Spain. Working with TEDAX, the national bomb technicians' organization of the Spanish Government, the Company returned to Madrid on October 8, 2007, and collected images of various configurations, artful concealments, and threat weights of specific explosives of interest to the Spanish Government. Upon the development and integration of these specific detection algorithms, the Company awaits confirmation for a return to Madrid for a final live test of PinPoint™ that is currently expected to be in the first quarter of 2009.

Healthcare 3i Technology Solution - "Tissue Characterization" advancing Medical Computer Aided Detection (Medical CAD)

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

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

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

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

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

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

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

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

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

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The imaging modality used to create the image,

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Location within the image,

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Shape or texture, and

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

Clinical Experience and Medical Accomplishments

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

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

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Neurological imaging through the detection and quantification of:

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acute intracranial hemorrhage using non-contrast CT,

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normal pressure hydrocephalus,

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multiple sclerosis using MRI.

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

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

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