GENERAL

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

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

Except for historical information, the material contained in this Management's Discussion and Analysis is forward-looking. Our actual results could differ materially from the results discussed in the forward-looking statements, which include certain risks and uncertainties. These risks and uncertainties include the rate of market development and acceptance of our "intelligent imaging informatics" ("3i™") technology (particularly for our PinPoint™ and Signature Mapping™ products), 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 firms' reports on the consolidated financial statements included herein as of December 31, 2008 and for the year then ended, as well as for December 31, 2007, and for each of the two years in the period ended December 31, 2007, contains an explanatory paragraph wherein they express an opinion that there is substantial doubt about our ability to continue as a going concern.

OVERVIEW

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

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

Guardian's core technology is an "intelligent imaging informatics" ("3i™") engine that is capable of extracting embedded knowledge from digital images, and has the capacity to analyze and detect image anomalies. The technology is not limited by type of digital format. It can be deployed across divergent digital sources such as still images, x-ray images, video and hyper-spectral imagery. To date, the technology has been tested in the area of threat detection for baggage scanning at airports, for bomb squad applications and the detection of tuberculosis by analyzing digital images of stained sputum slides captured through a photo microscopy system. 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 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™

Our 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 various distribution methods.

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. 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. To date the marketplace has placed a premium on the newest innovations in hardware technology and has failed to grasp how a threat detection software solution can succeed.

A major joint initiative between the Department of Homeland Security (DHS) and the National Electrical Manufacturers Association (NEMA) is expected to open a path to both increase the interoperability of security equipment as well as provide a mechanism to use third party threat detection software as part of the screening solution. This enabling initiative is the Digital Imaging and Communications in Security (DICOS) standard, similar to the Digital Imaging and Communications in Medicine (DICOM) standard. With a defined standard for the output of each screening device, complimentary automated threat detection software can be appended to any x-ray equipment. The schedule for publication of this standard is being driven by the expected purchase by DHS/TSA of new security screening equipment for over 400 US airports. Guardian is the co-chair of one of the three NEMA working groups drafting the DICOS standard.

As highlighted below in the NEMA article, "DICOS - Homeland Security Spending Keeps on Growing" - Published Friday, January 16, 2009 11:05 AM by HYPE Harry Massey, expenditures for security solutions are increasing. Management believes Guardian is well positioned to be a third party solution provider leveraging the standard output of all future security equipment procured by the US Government.
"Global homeland security spending has received a major boost in light of recent international terrorist events, as countries look at new ways to thwart terrorists and secure borders. Spending in the industry is expected to triple to $178 billion by 2015. Security-related spending will include more sophisticated information technology and the protection of other vulnerable terrorist targets.
With the initial focus on airport security, NEMA has stepped up its outreach to DHS and TSA. Currently developing DICOS, the new NEMA standard will capture scans of checked baggage so that scans can be read by threat detection software. The new standard will facilitate interoperability of security-imaging equipment. With DHS/TSA expected to purchase new equipment for over 400 U.S. airports, NEMA members have joined with DHS to develop the standard. With Phase 1 of DICOS expected to be completed this year, NEMA has begun looking at other modalities. The security industry is looking at border, rail, seaport, industrial and nuclear plant security."

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.

Guardian continues to perform research and development activities in accordance with the terms of its February 17, 2009 extension for two years 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 and February 12, 2008,

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™. 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.

We completed 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.

In July 2008, we submitted to DHS 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 received a pre-application review by the Staff of the Office of SAFETY Act Implementation. Our final application for designation valuation will be submitted in 2009.

We are in discussions with a security company in South Africa as well as the government to provide our PinPoint™ technology.

We submitted proposals for locations within the U.S. that are designated 'high threat targets" to provide PinPoint™ for private facility security. These opportunities would permit Guardian to have deployed sites in a public facility as well as other advantages. We will continue to pursue opportunities for the deployment of our PinPoint™ product.

During 2008, we received three export licenses for demonstration purposes as we pursue opportunities in Saudi Arabia, India and South Africa.

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

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

Healthcare Signature Mapping™ Solution

In an effort to expand upon the use of our core technology 3i™ "intelligent imaging informatics," we are migrating and adopting our threat detection algorithms and quantitative imaging capabilities for use in the imaging field of diagnostic radiology and pathology. The technology is called Signature Mapping™. Our Signature Mapping™ platform technology represents the technological basis upon which we expect all diagnostic radiology and pathology applications will be developed. Any Signature Mapping™ product introduced in the United States may 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. Within the international markets the regulatory requirements differ, specifically in South Africa, where we are testing our TBDx™ application for the detection of tuberculosis by analyzing digital images of

aurimine stained sputum slides captured through a photo microscopy system.
There may be similar regulatory requirements in foreign countries in which we seek to market and sell our healthcare CAD products.

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

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

Clinical Experience and Medical Accomplishments

While Signature Mapping™ is expected to be capable of use in a wide range of medical image analysis applications, our initial application product development efforts are focused in four areas: detection of tuberculosis by analyzing digital images of stained sputum slides captured through a photo microscopy system; breast cancer detection using x-ray mammography, MRI and ultrasound; neurological imaging analysis through the detection and quantification of acute intracranial hemorrhage using non-contrast CT, normal pressure hydrocephalus, and multiple sclerosis using MRI. In addition, chest radiography targeted at tuberculosis and silicosis detection using digital x-ray.

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

Our research to-date includes five 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. In addition a program and study for the detection of TB in stained sputum slides through a photo microscopy system at the National Health Laboratories of South Africa.

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.

Although there is no current computer-aided-detection for TB sputum microscopy analysis, which can be identified as competition to Signature Mapping™, there are substitute technologies, which in the long run could compete for sputum specimen analysis. The dipstick or biomarker approach could be considered a future competitor to Signature Mapping™. Ultimately, competition to our approach will be driven by its cost per procedure, ease-of-use, sensitivity specificity, and ability to be used by non-trained or lightly trained personnel in the point of care environment. The emerging tests are Polymerase Chain Reaction, TB Breathalyzer, Q-Beta Replicase Assay, Transcription-Medicated Amplification, Ligase Chain Reaction, Strand Displacement Amplification, Nucleic Acid Sequence-Based Amplification and Branched DNA.

LIQUIDITY AND CAPITAL RESOURCES

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

                                                          Year Ended December 31
                Category                          2008             2007             2006

Net cash provided (used) in operating
activities                                    $ (2,594,561)    $ (5,522,463)    $ (6,527,312)
Net cash provided (used) in investing
activities                                         (61,026)         (51,566)        (275,643)
Net cash provided by financing activities        2,642,975        4,942,688        5,098,208
Effect of exchange rates on cash and cash
equivalents                                         (7,747)          (4,946)             777

Net increase (decrease) in cash                  $ (20,359)      $ (636,287)    $ (1,703,970)

Net Cash Used in Operations

Net cash used in operating activities for the fiscal year ended December 31, 2008 (Fiscal 2008) was $2,594,561, compared with net cash used in operating activities of $5,522,463 during the same period for 2007 (Fiscal 2007), a decrease in the use of cash for operating activities of approximately $2,927,902 (53.0%). The decrease is due to: (i) reduced selling, general and administrative costs (other than depreciation and amortization, stock based compensation, and impairment of goodwill) of $759,177 (13.8%), a reduced cost of sales (other than amortization and impairment costs) of $6,908 (29.6%), offset by a reduction in net revenue of $183,441 (63.3%), and an increase in net other interest expense (other than noncash items) of $112,059 (30.3%); and (ii) offset by net increases in the components of operating assets and liabilities of $2,457,317, or 3,501.8%.

Net cash used in operating activities for the fiscal year ended December 31, 2007 (Fiscal 2007) was $5,522,463, compared with net cash used in operating activities of $6,527,312 during the same period for 2006 (Fiscal 2006), a decrease in the use of cash for

operating activities of approximately $1,004,849 (15.4%). The decrease is due to: (i) lower revenue and operating costs of $1,717,706 (23.5%), including a decrease in selling, general and administrative costs (other than depreciation and amortization, stock based compensation, and impairment of goodwill) of $2,083,109 (27.5%), a decrease in cost of sales (other than amortization and impairment costs) of $188,332 (89.0%), offset by a reduction in net revenue of $198,520 (40.7%), and an increase in net other interest expense (other than noncash items) of $286,901 (346.2%); and (ii) offset by net increases in the . . .