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 StunLight™, 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 Defender™, 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 Defender™, is a semi-automatic projectile launcher which can debilitate an assailant using its RiotBall™ 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 Defender™ 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 StunLight™ 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 StunLight™ with the Los Angeles Sheriff’s Departments, resulting in the Department approving the purchase of the Cobra StunLight™ 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 StunLight™ and the Riot Defender™ products, research and development activities on the Cobra StunLight™ and the Riot Defender™ 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 Guardian™ (“ 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 TAGeasy™ 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 TAGstation™ is a hosted-system designed to provide on-site RFID capability for small to medium-sized government and retail suppliers.  TAGcentral™ 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 StunLight™

The markets for the Cobra StunLight™ 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:

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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 StunLight ^TM 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.

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

Riot Defender ^TM

The market for the Riot Defender ^TM 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 Defender ^TM 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 Guardian™ (TAG) platform

A large potential worldwide market exists for our proprietary integrated and interoperable Total Asset Guardian™ (“ 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 TAGstation™ is a hosted-system designed to provide on-site RFID capability for small to medium-sized government and retail suppliers.  TAGcentral™ 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 Guardian™ platform comprised of our TAGeasy™, TAGstation™ and TAGcentral™ 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 StunLight ^TM and Riot Defender ^TM , 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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StunLight™ 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 Guardian ^TM platform and our TAGeasy™, TAGstation™ and TAGcentral™ 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 StunLight ^TM , and are in the process of final equipment installation and pilot production runs of our RiotBall™ non-lethal frangible projectiles used by our Riot Defender ^TM .  The Riot Defender ^TM 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 StunLight ^TM  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 Defender ^TM 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.