ANNUAL REPORT

                                                                                                                 April 16, 2001

Dear Stockholder,

This past year has been another record one for us, with both sales and earnings setting new highs.  At $.42 per share our earnings this year increased 50% over the $.28 of the previous year, and revenue was up 14%.  Sales of the Guardian Laboratories division, which accounts for approximately 85% of the company’s revenues, were up 22%.  For the first time revenue exceeded $10 million, and earnings after taxes exceeded $2 million.

The following charts graphically illustrate the steady growth we have experienced over the past few years:

In addition to the steady increases in revenue and earnings, we have also continued to strengthen our balance sheet, with a current ratio (current assets vs. current liabilities) of 7.8 to 1, up from 6.9 to 1 in 1999.  We continue to be virtually debt free while maintaining a $700,000 line of credit with our main bank in the event additional funding is ever needed.  Our cost of sales as a percentage of sales decreased to 48% in 2000 from 54% in 1999 as we were able to increase our production while keeping our overhead down.    

In July 2000 we entered into an expanded marketing agreement with ISP, which markets our personal care products in the U.S. , Canada , Mexico , South and Central America , parts of Europe and most of Asia .  This new agreement replaces two previous marketing agreements we had in place with ISP for domestic and foreign distribution of our products, and expands ISP’s marketing efforts into new territories. ISP’s sales of our products increased substantially in the past year, with some of that increase being attributable to rapidly growing sales of our core products in Mainland China .  Our customers in China now number in the hundreds, and their requirements for our products grew steadily over this past year.  We also saw a significant increase in sales in Europe , particularly in France through our French distributor Sederma, a subsidiary of Croda International.

Most of the growth in our sales was attributable to our Lubrajel® line of water-based moisturizing gels, which is our most important product line.  We expect Lubrajel sales to continue to grow not only in the cosmetic industry, but for medical uses as well as we continue to develop new markets for this product line.

While we are very pleased that our Lubrajel sales have continued to increase, we are not just relying on that product line to generate our future growth.   This past year saw the introduction of Confetti™ II Dermal Delivery Flakes, the successor to our original Confetti Dermal Essentials product.  Confetti is a proprietary product line that incorporates various oil soluble ingredients into colorful flakes that can be suspended in clear water-based formulations to create products that retain their clarity and are both colorful and functional.  The original Confetti had inherent limitations that prevented it from being used in certain formulations.  Confetti II overcomes most of these limitations, allowing the product to be used in a much wider variety of formulations.

We are continuing to work with a major personal care products company headquartered in the United Kingdom that is in the process of substituting Lubrajel Fluid, a special grade of Lubrajel made specifically for them, into one of their globally marketed personal care product lines.  We have been working with them steadily over the past few years to fine-tune the formula so that it would be compatible with all of the product lines into which they would like to incorporate our product.  We believe that we have now achieved that goal.  While we previously shipped product to them for incorporation into product earmarked for parts of Europe , we are now in the process of shipping the final formulation to four of their locations in different parts of the world for testing and pilot runs.  We are hopeful that by the end of this year they will begin full-scale production using our product on a worldwide scale.

As you may recall, we test marketed our Razoride™ shaving gel on the Internet last year, and received some very favorable comments from some of the customers who tried it.  Razoride is a non-foaming gel that has unique lubricating properties, excellent after-feel, and, because it contains no soaps, solvents, or dyes, is hypoallergenic. We are now working in several areas to see if we can develop a market for this product.  We have entered into a contract with a company that places product with all of the major catalog companies.  They will be developing promotional materials for us and submitting them to the appropriate catalogs.  There will be no cost to us for their efforts unless the product is placed and sales occur.  We are also pursuing leads generated for us by an outside business consulting firm, The Kline Group.  They generated a list and made initial contacts with several companies across the U.S. that expressed some interest in marketing the product.  We are now following up on those leads.  We are also continuing to sell Razoride in bulk to two companies selling the product for special non-consumer uses, and we have developed a new non-alcohol based skin sanitizer for one of those companies.  We are hopeful that these products may be just the first of many products we may be developing for this company.

In the medical area we have contracted with Boston University to perform some preliminary clinical trials on the use of Clorpactin^®, our powerful chlorine-based antimicrobial, for the treatment of gingivitis.  The researchers at Boston University are in the process of obtaining approval from their Institutional Review Board to proceed with the project, and once that happens we expect to have results in a couple of months.  If the tests are positive we will then decide whether we are going to proceed with further clinical trials on our own, or use those results to locate a partner to work with us to obtain regulatory approval for the treatment of gingivitis, as well as possibly expanding the uses to other periodontal diseases.

In regard to our work with Sonarite^®, we are continuing our efforts to develop a formulation that is as effective as our original Sonarite formulation.  This product was originally developed by us as a treatment for snoring, and a preliminary clinical study showed that it had some efficacy in treating mild to moderate sleep apnea as well.  Unfortunately that original formulation can no longer be produced due to the discontinuation of one of the key raw materials, and we have been trying to find a suitable substitute ever since.  Until we develop a new formulation that is as effective as the original one we will not be able to proceed further with this project.

We are continuing our efforts to streamline our Eastern Chemical subsidiary by reducing inventory levels.  This has been an ongoing process over the past few years, and our ultimate goal is to have the Eastern inventory consist only of fast moving items to make it more marketable in the event we once again decide to actively look for a buyer for that operation.  Since inventory levels were the major obstacle to a sale of Eastern when we looked into this a few years ago, by reducing inventory we believe that we will have a much greater chance of selling the operation if and when the time comes to do so.

As most of you probably know by now, in October we were notified by Forbes Magazine that we had been chosen one of the “200 BEST SMALL COMPANIES IN AMERICA ”.  This is the first time our company has appeared on this list, and we believe that it is an indication of the excellent progress we have made over the past few years in increasing revenue, earnings, and financial strength.  To be eligible for inclusion on this list a company needed to have sales of between $5 million and $350 million, at least a 5% annual growth in revenue and earnings-per-share over the past five years, and total net income in excess of $1 million over the past four fiscal quarters.  United-Guardian was 120th overall on the list, but were 78th for earnings growth rate over the past five years, which averaged 40% per year.  As a result of our excellent financial results over this past year this earnings growth figure will now be even higher, and we are hopeful that we will be included on the Forbes list again this year.

We are very pleased with the progress we have made in increasing our earnings while keeping our costs in check.  We are continuing to expand the marketing of our products while endeavoring to streamline our operations even further.  With the many projects we are working on we expect to continue our growth in revenue and earnings with minimal increases in operating costs.   Since most of our earnings growth has come from increases in sales of our existing core products, as some of our new projects come to fruition we are well positioned to increase our sales significantly.  We are very excited about our growth potential over the next few years, and are confident that the steady growth we have experienced over the past seven years will continue.

                                                                                    Sincerely,

                                                                                 
                                                                                    Dr. Alfred R. Globus
                                                                                    Chairman and CEO