----

----

| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2010 |
|---|---------------------------------------------------------------------------------------------------------------------------------------|

| o | Transition report pursuant to Section 13 or 15(d) of the Exchange Act for the transition period from |
|---|------------------------------------------------------------------------------------------------------|

|   | [           ] to [              ] |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Nevada                                 |   | 84-1421483          |
|----------------------------------------|--------|---------------------|
| (State or Other Jurisdiction of   |   | (I.R.S. Employer    |
| Incorporation or Organization)         |   | Identification No.) |

| Large accelerated filer o                                          | Accelerated filer o         |
|--------------------------------------------------------------------|-----------------------------|
| Non-accelerated filer o(Do not check if smaller reporting company) | Smaller reporting company x |

----

|            | Page                                                                                                                     |
|--------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
|                                                         |                                                                                                                     |
| PART I - FINANCIAL INFORMATION:                              |                                                                                                                     |
|                                                         |                                                                                                                     |
| Item 1.                                                      | Condensed Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009                             | 3 |
|                                                         |                                                                                                                     |   |
|                                                         | Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009 (Unaudited)           | 5 |
|                                                         |                                                                                                                     |   |
|                                                         | Condensed Consolidated Statement of Changes in Equity for the Three Months Ended March 31, 2010 0 and 2009 (Unaudited)   | 6 |
|                                                         |                                                                                                                     |   |
|                                                         | Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and March 31, 2009 (Unaudited) | 7 |
|                                                         |                                                                                                                     |   |
|                                                         | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                         | 8 |
|                                                         |                                                                                                                     |   |
| Item 2.                                                      | Management’s Discussion and Analysis of Financial Condition and Results of Operations                              | 16 |
|                                                         |                                                                                                                     |   |
| Item 3.                                                      | Quantitative and Qualitative Disclosures About Market Risk                                                               | 23 |
|                                                         |                                                                                                                     |   |
| Item 4.                                                      | Controls and Procedures                                                                                                  | 24 |
|                                                         |                                                                                                                     |   |
| PART II - OTHER INFORMATION:                                 |                                                                                                                     |
|                                                         |                                                                                                                     |
| Item 1.                                                      | Legal Proceedings                                                                                                        | 24 |
|                                                         |                                                                                                                     |   |
| Item 1A.                                                     | Risk Factors                                                                                                             | 25 |
|                                                         |                                                                                                                     |   |
| Item 2.                                                      | Unregistered Sales of Equity Securities and Use of Proceeds                                                              | 25 |
|                                                         |                                                                                                                     |   |
| Item 3.                                                      | Defaults Upon Senior Securities                                                                                          | 25 |
|                                                         |                                                                                                                     |   |
| Item 4.                                                      | (Removed and Reserved)                                                                                                   | 25 |
|                                                         |                                                                                                                     |   |
| Item 5.                                                      | Other Information                                                                                                        | 25 |
|                                                         |                                                                                                                     |   |
| Item 6.                                                      | Exhibits                                                                                                                 | 25 |
|                                                         |                                                                                                                     |   |
| SIGNATURES                                                   | 25                                                                                                                       |

----

FINANCIAL INFORMATION

AND DECEMBER 31, 2009

|                                                                                                    |   | March 31,2010 |       |   | December 31,2009 |   |
|---------------------------------------------------------------------------------------------------------|--------|---------------|------------|--------|------------------|--------|
|                                                                                                    |   | (Unaudited)   |       |   |             |   |
|                                                                                                    |   |          |       |   |             |   |
| CURRENT ASSETS                                                                                          |   |          |       |   |             |   |
| Cash and cash equivalents                                                                               |   | $             | 4,499,878  |   |             | $      | 3,783,631 |   |
| Accounts receivable, net of allowance for doubtful accounts of $339,638 and $343,629, respectively |   |          | 2,467,333  |   |             |   | 3,352,751 |   |
| Inventories                                                                                             |   |          | 4,055,047  |   |             |   | 4,124,141 |   |
| Trading securities                                                                                      |   |          | 2,393,808  |   |             |   | 2,312,048 |   |
| Deferred taxes                                                                                          |   |          | 147,270    |   |             |   | 148,710 |   |
| Other current assets                                                                                    |   |          | 247,957    |   |             |   | 225,112 |   |
| Total Current Assets                                                                                    |   |          | 13,811,293 |   |             |   | 13,946,393 |   |
|                                                                                                    |   |          |       |   |             |   |   |   |
| PROPERTY, PLANT AND EQUIPMENT, NET                                                                      |   |          | 1,728,851  |   |             |   | 1,741,594 |   |
|                                                                                                    |   |          |       |   |             |   |   |   |
| OTHER ASSETS                                                                                            |   |          |       |   |             |   |   |   |
| Funds in respect of employee rights upon retirement                                                     |   |          | 814,404    |   |             |   | 780,960 |   |
| Deferred taxes                                                                                          |   |          | 27,499     |   |             |   | 25,659 |   |
| Refundable deposits for the purchase of a business (Note 2)                                             |   |          | 2,022,799  |   |             |   | 1,993,696 |   |
|          Total Other Assets                                |   |          | 2,864,702  |   |             |   | 2,800,315 |   |
|                                                                                                    |   |          |       |   |             |   |   |   |
| TOTAL ASSETS                                                                                            |   | $             | 18,404,846 |   |             | $      | 18,488,302 |   |

----

|                                                                                                                                                              |   | March 31,2010 |       |   | December 31, 2009 |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|------------|--------|-------------------|--------|
|                                                                                                                                                              |   | (Unaudited)   |       |   |              |   |
|                                                                                                                                                              |   |          |       |   |              |   |
| CURRENT LIABILITIES                                                                                                                                               |   |          |       |   |              |   |
| Accounts payable                                                                                                                                                  |   | $             | 1,600,272  |   |              | $      | 1,408,741 |   |
| Accounts payable – related parties                                                                                                                          |   |          | 455,078    |   |              |   | 462,968 |   |
| Short-term debt                                                                                                                                                   |   |          | 659,550    |   |              |   | 876,554 |   |
| Other current liabilities                                                                                                                                         |   |          | 966,891    |   |              |   | 1,047,771 |   |
| Total Current Liabilities                                                                                                                                         |   |          | 3,681,791  |   |              |   | 3,796,034 |   |
|                                                                                                                                                              |   |          |       |   |              |   |   |   |
| LONG-TERM LIABILITIES                                                                                                                                             |   |          |       |   |              |   |   |   |
| Long-term portion of debt                                                                                                                                         |   |          | 279,020    |   |              |   | 268,250 |   |
| Deferred tax liability                                                                                                                                            |   |          | 231,536    |   |              |   | 229,191 |   |
| Liability for employee rights upon retirement                                                                                                                     |   |          | 956,046    |   |              |   | 911,440 |   |
| Total Long-Term Liabilities                                                                                                                                       |   |          | 1,466,602  |   |              |   | 1,408,881 |   |
|                                                                                                                                                              |   |          |       |   |              |   |   |   |
| TOTAL LIABILITIES                                                                                                                                                 |   |          | 5,148,393  |   |              |   | 5,204,915 |   |
|                                                                                                                                                              |   |          |       |   |              |   |   |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                     |   |          |       |   |              |   |   |   |
|                                                                                                                                                              |   |          |       |   |              |   |   |   |
| EQUITY                                                                                                                                                            |   |          |       |   |              |   |   |   |
| Preferred stock, $0.0001 par value, 50,000,000 shares       authorized, none issued and outstanding                                 |   |          | ---        |   |              |   | --- |   |
| Common stock, $0.0001 par value, 250,000,000 sharesauthorized, 29,200,535 shares issued and 28,150,535 shares outstanding at March 31, 2010 and December 31, 2009 |   |          | 2,920      |   |              |   | 2,920 |   |
| Additional paid-in capital                                                                                                                                        |   |          | 2,997,370  |   |              |   | 2,997,370 |   |
| Treasury stock (1,050,000 shares at cost)                                                                                                                         |   |          | (252,000   | )      |              |   | (252,000 | ) |
| Retained earnings                                                                                                                                                 |   |          | 9,921,763  |   |              |   | 10,176,352 |   |
| Accumulated other comprehensive income                                                                                                                            |   |          | 586,400    |   |              |   | 358,745 |   |
| Total Equity                                                                                                                                                      |   |          | 13,256,453 |   |              |   | 13,283,387 |   |
|                                                                                                                                                              |   |          |       |   |              |   |   |   |
| TOTAL LIABILITIES AND EQUITY                                                                                                                                      |   | $             | 18,404,846 |   |              | $      | 18,488,302 |   |

----

2009 (UNAUDITED)

|                                                                                |   | For the Three MonthsEnded March 31, |       |
|-------------------------------------------------------------------------------------|--------|-------------------------------------|------------|
|                                                                                |   | 2010                                |       |   | 2009 |   |
|                                                                                |   |                                |       |   |   |   |
| NET REVENUES                                                                        |   | $                                   | 2,993,731  |   |   | $ | 5,813,288 |   |
|                                                                                |   |                                |       |   |   |   |   |   |
| COST OF SALES                                                                       |   |                                | 2,390,352  |   |   |   | 4,321,560 |   |
|                                                                                |   |                                |       |   |   |   |   |   |
| GROSS PROFIT                                                                        |   |                                | 603,379    |   |   |   | 1,491,728 |   |
|                                                                                |   |                                |       |   |   |   |   |   |
| OPERATING EXPENSES                                                                  |   |                                |       |   |   |   |   |   |
| Selling                                                                             |   |                                | 115,772    |   |   |   | 183,776 |   |
| General and administrative                                                          |   |                                | 697,409    |   |   |   | 529,894 |   |
|         Total Operating Expenses            |   |                                | 813,181    |   |   |   | 713,670 |   |
|                                                                                |   |                                |       |   |   |   |   |   |
| INCOME (LOSS) FROM OPERATIONS                                                       |   |                                | (209,802   | ) |   |   | 778,058 |   |
|                                                                                |   |                                |       |   |   |   |   |   |
| OTHER INCOME (EXPENSES)                                                             |   |                                |       |   |   |   |   |   |
| Financial expenses                                                                  |   |                                | (127,892   | ) |   |   | (32,687 | ) |
| Financial income                                                                    |   |                                | 37,858     |   |   |   | 473,712 |   |
| Other income (expenses), net                                                        |   |                                | 50,372     |   |   |   | 164,204 |   |
|          Total Other Income (Expenses) |   |                                | (39,662    | ) |   |   | 605,229 |   |
|                                                                                |   |                                |       |   |   |   |   |   |
|  INCOME (LOSS) BEFORE INCOME TAXES                                             |   |                                | (249,464   | ) |   |   | 1,383,287 |   |
|                                                                                |   |                                |       |   |   |   |   |   |
| Income tax expenses                                                                 |   |                                | (5,125     | ) |   |   | (284,851 | ) |
|                                                                                |   |                                |       |   |   |   |   |   |
| NET INCOME (LOSS)                                                                   |   | $                                   | (254,589   | ) |   | $ | 1,098,436 |   |
|                                                                                |   |                                |       |   |   |   |   |   |
| Net income (loss) per share - basic and diluted                                     |   | $                                   | (0.009     | ) |   | $ | 0.039 |   |
|                                                                                |   |                                |       |   |   |   |   |   |
| Weighted average number of shares outstanding - basic and diluted                   |   |                                | 28,150,535 |   |   |   | 27,941,111 |   |

----

AND 2009 (UNAUDITED)

|                              |   | Common Stock |       |   | Treasury Stock |   |   | Additional Paid-In |   |   | Retained  |   |   | Accumulated Other Comprehensive |     |   | Total Comprehensive |   |      | Total         |   |
|-----------------------------------|--------|--------------|------------|--------|----------------|--------|--------|--------------------|--------|--------|-----------|--------|--------|---------------------------------|----------|--------|---------------------|--------|-----------|---------------|--------|
|                              |   | Shares       |       |   | Dollars        |   |   | Shares             |   |   | Dollars   |   |   | Capital                         |     |   | Earnings            |   |      | Income (Loss) |   |   | Loss |   |   | Equity |   |
|                              |   |         |       |   |           |   |   |               |   |   |      |   |   |                            |     |   |                |   |      |          |   |   |   |   |   |   |   |
| Balance as of January 1, 2010     |   |         | 29,200,535 |   |           | $      | 2,920  |               |   |   | 1,050,000 |   |   | $                               | (252,000 | )      |                | $      | 2,997,370 |          |   | $ | 10,176,352 |   |   | $ | 358,745 |   |   |   |   |   | $ | 13,283,387 |   |
|                              |   |         |       |   |           |   |   |               |   |   |      |   |   |                            |     |   |                |   |      |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive loss:               |   |         |       |   |           |   |   |               |   |   |      |   |   |                            |     |   |                |   |      |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                              |   |         |       |   |           |   |   |               |   |   |      |   |   |                            |     |   |                |   |      |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                          |   |         | -          |   |           |   | -      |               |   |   | -         |   |   |                            | -        |   |                |   | -         |          |   |   | (254,589 | ) |   |   | - |   |   | $ | (254,589 | ) |   |   | (254,589 | ) |
|                              |   |         |       |   |           |   |   |               |   |   |      |   |   |                            |     |   |                |   |      |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency translation gain |   |         | -          |   |           |   | -      |               |   |   | -         |   |   |                            | -        |   |                |   | -         |          |   |   | - |   |   |   | 227,655 |   |   |   | 227,655 |   |   |   | 227,655 |   |
|                              |   |         |       |   |           |   |   |               |   |   |      |   |   |                            |     |   |                |   |      |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive loss          |   |         |       |   |           |   |   |               |   |   |      |   |   |                            |     |   |                |   |      |          |   |   |   |   |   |   |   |   |   | $ | (26,933 | ) |   |   |   |   |
|                              |   |         |       |   |           |   |   |               |   |   |      |   |   |                            |     |   |                |   |      |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of March 31, 2010      |   |         | 29,200,535 |   |           | $      | 2,920  |               |   |   | 1,050,000 |   |   | $                               | (252,000 | )      |                | $      | 2,997,370 |          |   | $ | 9,921,763 |   |   | $ | 586,400 |   |   |   |   |   |   | $ | 13,256,453 |   |
|                              |   |         |       |   |           |   |   |               |   |   |      |   |   |                            |     |   |                |   |      |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                              |   |         |       |   |           |   |   |               |   |   |      |   |   |                            |     |   |                |   |      |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2009     |   |         | 28,991,111 |   |           | $      | 2,899  |               |   |   | 1,050,000 |   |   | $                               | (252,000 | )      |                | $      | 2,957,391 |          |   | $ | 9,654,086 |   |   | $ | 236,503 |   |   |   |   |   |   | $ | 12,598,879 |   |
|                              |   |         |       |   |           |   |   |               |   |   |      |   |   |                            |     |   |                |   |      |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive loss:               |   |         |       |   |           |   |   |               |   |   |      |   |   |                            |     |   |                |   |      |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                              |   |         |       |   |           |   |   |               |   |   |      |   |   |                            |     |   |                |   |      |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                        |   |         | -          |   |           |   | -      |               |   |   | -         |   |   |                            | -        |   |                |   | -         |          |   |   | 1,098,436 |   |   |   | - |   |   | $ | 1,098,436 |   |   |   | 1,098,436 |   |
|                              |   |         |       |   |           |   |   |               |   |   |      |   |   |                            |     |   |                |   |      |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency translation loss |   |         | -          |   |           |   | -      |               |   |   | -         |   |   |                            | -        |   |                |   | -         |          |   |   | - |   |   |   | (1,191,637 | ) |   |   | (1,191,637 | ) |   |   | (1,191,637 | ) |
|                              |   |         |       |   |           |   |   |               |   |   |      |   |   |                            |     |   |                |   |      |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive loss          |   |         |       |   |           |   |   |               |   |   |      |   |   |                            |     |   |                |   |      |          |   |   |   |   |   |   |   |   |   | $ | (93,201 | ) |   |   |   |   |
|                              |   |         |       |   |           |   |   |               |   |   |      |   |   |                            |     |   |                |   |      |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of March 31, 2009      |   |         | 28,991,111 |   |           | $      | 2,899  |               |   |   | 1,050,000 |   |   | $                               | (252,000 | )      |                | $      | 2,957,391 |          |   | $ | 10,752,522 |   |   | $ | (955,134 | ) |   |   |   |   |   | $ | 12,505,678 |   |

----

AND 2009 (UNAUDITED

|                                                                                                 |   | For the Three MonthsEnded March 31, |      |
|------------------------------------------------------------------------------------------------------|--------|-------------------------------------|-----------|
|                                                                                                 |   | 2010                                |      |   | 2009 |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                |   |                                |      |   |   |   |
| Net income (loss)                                                                                    |   | $                                   | (254,589  | ) |   | $ | 1,098,436 |   |
|                                                                                                 |   |                                |      |   |   |   |   |   |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities:             |   |                                |      |   |   |   |   |   |
| Items not effecting cash:                                                                            |   |                                |      |   |   |   |   |   |
| Depreciation and amortization                                                                        |   |                                | 144,606   |   |   |   | 136,867 |   |
| Provision for doubtful accounts                                                                      |   |                                | (9,058    | ) |   |   | 5,631 |   |
| Deferred taxes                                                                                       |   |                                | 1,024     |   |   |   | 27,197 |   |
| Net unrealized (gain) on trading securities                                                          |   |                                | (18,686   | ) |   |   | (105,578 | ) |
| Gain from the disposal of Dragonwear Trading Ltd.                                                    |   |                                | (13,717   | ) |   |   | --- |   |
| Gain from settlement of long term note                                                               |   |                                | (8,968    | ) |   |   |   |   |
| Accrued interest and exchange rate differences of long-term debt                                     |   |                                | 1,685     |   |   |   | (1,263 | ) |
| Accrued interest and exchange rate differences on refundable deposits for the purchase of a business |   |                                | (15,320   | ) |   |   | (112,090 | ) |
| Accrued interest and exchange rate differences on deposits                                           |   |                                | ---       |   |   |   | (240,761 | ) |
|                                                                                                 |   |                                |      |   |   |   |   |   |
| Changes in assets and liabilities:                                                                   |   |                                |      |   |   |   |   |   |
| Decrease (increase) in accounts receivable                                                           |   |                                | 942,143   |   |   |   | (1,052,033 | ) |
| Decrease (increase) in inventories                                                                   |   |                                | 134,069   |   |   |   | (290,005 | ) |
| (Increase) decrease in trading securities                                                            |   |                                | (24,221   | ) |   |   | 486,105 |   |
| Decrease in related parties accounts                                                                 |   |                                | (15,177   | ) |   |   | (112,990 | ) |
| (Increase) decrease in other current assets                                                          |   |                                | (17,600   | ) |   |   | 458,564 |   |
| Increase in funds in respect of employee rights upon  retirement                           |   |                                | (20,288   | ) |   |   | (38,751 | ) |
| Increase in accounts payable                                                                         |   |                                | 170,580   |   |   |   | 286,337 |   |
| (Decrease) increase in other current liabilities                                                     |   |                                | (82,935   | ) |   |   | 59,365 |   |
| Increase in liability for employee rights upon retirement                                            |   |                                | 29,219    |   |   |   | 17,696 |   |
| Net cash provided by Operating Activities                                                            |   |                                | 942,767   |   |   |   | 622,727 |   |
|                                                                                                 |   |                                |      |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                |   |                                |      |   |   |   |   |   |
| Redemption of restricted bank deposits                                                               |   |                                | ---       |   |   |   | 2,000,000 |   |
| Purchases of property, plant and equipment                                                           |   |                                | (107,817  | ) |   |   | (41,455 | ) |
| Refundable deposits for purchase of a business                                                       |   |                                | (13,782   | ) |   |   | (832,453 | ) |
| Net cash (used in)  provided by Investing Activities                                       |   |                                | (121,599  | ) |   |   | 1,126,092 |   |
|                                                                                                 |   |                                |      |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                |   |                                |      |   |   |   |   |   |
| Short-term debt, net                                                                                 |   |                                | (219,301  | ) |   |   | 166,459 |   |
| Proceeds from long-term debt                                                                         |   |                                | 85,920    |   |   |   | --- |   |
| Repayment of long-term debt                                                                          |   |                                | (78,161   | ) |   |   | (101,295 | ) |
| Redemption of related party creditors                                                                |   |                                | -         |   |   |   | (905,721 | ) |
| Net cash used in Financing Activities                                                                |   |                                | (211,542  | ) |   |   | (840,557 | ) |
|                                                                                                 |   |                                |      |   |   |   |   |   |
| EFFECT OF CHANGES IN EXCHANGE RATES ON CASH AND CASH EQUIVALENTS                                     |   |                                | 106,621   |   |   |   | (79,043 | ) |
|                                                                                                 |   |                                |      |   |   |   |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                                            |   |                                | 716,247   |   |   |   | 829,219 |   |
|                                                                                                 |   |                                |      |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS – BEGINNING OF PERIOD                                                |   |                                | 3,783,631 |   |   |   | 1,719,921 |   |
|                                                                                                 |   |                                |      |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS – END OF PERIOD                                                      |   | $                                   | 4,499,878 |   |   | $ | 2,549,140 |   |

|          |   |   |   |   |   |   |
|---------------|--------|--------|--------|--------|--------|--------|
| INTEREST PAID |   | $      | 13,430 |   |   | $      | 17,372 |   |
|          |   |   |   |   |   |   |   |   |
| TAXES PAID    |   | $      | 91,879 |   |   | $      | 210,724 |   |

----

NOTES TO CONDENSED 

| NOTE 1 | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
|--------|-----------------------------------------------------------|

|   | A. | The accompanying unaudited interim consolidated financial statements as of March 31, 2010 and for the three month period then ended (the “interim financial statements”) were prepared in a condensed form in accordance with the instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, changes in shareholders’ equity, cash flows and all the data and notes which are required when preparing annual financial statements, in conformity with generally accepted accounting principles accepted in the United States. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | The accounting principles used in the presentation of the interim financial statements are consistent with those principles used in the presentation of the latest annual financial statements. All significant accounting policies have been applied consistently with the year ended December 31, 2009. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | C. | The preparation of the interim financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. In the opinion of management, all adjustments considered necessary for fair presentation of the interim financial statements have been included. The results of operations for the three months period ended March 31, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. The interim financial statements should be read in conjunction with the Company’s annual financial statements as of December 31, 2009 and for the year then ended and the accompanying notes thereto. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | D. | Principles of Consolidation |
|--------|----|-----------------------------|

----

|   | E. | Per share data |
|--------|----|----------------|

|   | F. | Fair value |
|--------|----|------------|

|   | Level 1 | Quoted prices in active markets for identical assets or liabilities; |
|--------|---------|----------------------------------------------------------------------|

|   | Level 2 | Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------|

|   | Level 3 | Unobservable inputs, such as discounted cash flow models or valuations. |
|--------|---------|-------------------------------------------------------------------------|

----

|   | H. | Recent accounting pronouncements issued and adopted in the reported period |
|--------|----|----------------------------------------------------------------------------|

| NOTE 2 | PENDING ACQUISITION |
|--------|---------------------|

----

----

| NOTE 3 | INVENTORIES |
|--------|-------------|

|              |   | March 31, 2010 |      |   | December 31, 2009 |   |
|-------------------|--------|----------------|-----------|--------|-------------------|--------|
|              |   |           |      |   |              |   |
| Raw materials (1) |   | $              | 2,794,787 |   |              | $      | 2,597,759 |   |
| Work in progress  |   |           | 551,867   |   |              |   | 642,132 |   |
| Finished goods    |   |           | 708,393   |   |              |   | 884,250 |   |
|              |   |           |      |   |              |   |   |   |
|              |   | $              | 4,055,047 |   |              | $      | 4,124,141 |   |

----

| NOTE 4 | SEGMENT INFORMATION AND CONCENTRATIONS |
|--------|----------------------------------------|

|   | A. | Sales and Income from Operations: |
|--------|----|-----------------------------------|

|                                       |   | Civilian |      |   | Military |   |    |   |   |
|--------------------------------------------|--------|----------|-----------|--------|----------|--------|---------|--------|--------|
|                                       |   | Local    |      |   | Export   |   |    | Local  |   |   | Export |   |   | Consolidated |   |
|                                       |   |     |      |   |     |   |    |   |   |   |   |   |   |   |   |
| For the three months ended March 31, 2010: |   |     |      |   |     |   |    |   |   |   |   |   |   |   |   |
|                                       |   |     |      |   |     |   |    |   |   |   |   |   |   |   |   |
|   Revenue from sales                  |   | $        | 1,033,658 |   |     | $      | 229,631 |   |   | $ | 1,165,142 |   |   | $ | 565,300 |   |   | $ | 2,993,731 |   |
|   Gross Profits                       |   |     | 179,200   |   |     |   | 25,294  |   |   |   | 272,308 |   |   |   | 126,577 |   |   |   | 603,379 |   |
|   Corporate unallocated costs         |   |     |      |   |     |   |    |   |   |   |   |   |   |   |   |   |   |   | 813,181 |   |
|   Loss from operations                |   |     |      |   |     |   |    |   |   |   |   |   |   |   |   |   |   |   | (209,802 | ) |
|                                       |   |     |      |   |     |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| For the three months ended March 31, 2009: |   |     |      |   |     |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                       |   |     |      |   |     |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   Revenue from sales                  |   | $        | 821,276   |   |     | $      | 160,459 |   |   | $ | 2,430,937 |   |   | $ | 2,400,616 |   |   | $ | 5,813,288 |   |
|   Gross Profits                       |   |     | 321,123   |   |     |   | (38,046 | )      |   |   | 523,646 |   |   |   | 685,005 |   |   |   | 1,491,728 |   |
|   Corporate unallocated costs         |   |     |      |   |     |   |    |   |   |   |   |   |   |   |   |   |   |   | 713,670 |   |
|   Income from operations              |   |     |      |   |     |   |    |   |   |   |   |   |   |   |   |   |   |   | 778,058 |   |

----

|   | B. | Geographic Areas – revenues: |
|--------|----|------------------------------------|

|                                                  |   | Three Months EndedMarch 31, |      |
|-------------------------------------------------------|--------|-----------------------------|-----------|
|                                                  |   | 2010                        |      |   | 2009 |   |
|                                                  |   |                        |      |   |   |   |
| Israel                                                |   | $                           | 2,198,800 |   |   | $ | 3,252,213 |   |
| South America                                         |   |                        | 218,360   |   |   |   | 754,527 |   |
| North America                                         |   |                        | 230,945   |   |   |   | 160,459 |   |
| Europe and Asia                                       |   |                        | 343,449   |   |   |   | 459,734 |   |
| Africa                                                |   |                        | 2,177     |   |   |   | 1,186,355 |   |
|                                                  |   |                        |      |   |   |   |   |   |
|        Total Sales |   | $                           | 2,993,731 |   |   | $ | 5,813,288 |   |

|   | C. | Single Customer Exceeding 10% of Sales: |
|--------|----|-----------------------------------------|

|                         |   | For the three months ended March 31, 2010 |      |   | For the three months ended March 31, 2009 |   |
|------------------------------|--------|-------------------------------------------|-----------|--------|-------------------------------------------|--------|
|                         |   |                                      |      |   |                                      |   |
|                         |   |                                      |      |   |                                      |   |
| Customer A (Military Local)  |   | $                                         | 1,139,476 |   |                                      | $      | 2,430,937 |   |
| Customer B (Military Export) |   |                                      | 2,177     |   |                                      |   | 1,063,923 |   |

----

| NOTE 5 | COMMITMENTS AND CONTINGENCIES |
|--------|-------------------------------|

|   | A. | On February 11, 2009, a lawsuit was filed in the Jerusalem District Court against the Company's subsidiaries, Export Erez USA Inc. and Achidatex, and its chief executive officer, Mr. Avraham Hazor.  The suit alleges that Achidatex materially breached its agreement with the plaintiff, dated February 22, 2000, relating to the development of inflatable mine-field crossing enabling sandals, because Achidatex allegedly failed to register patents for the technology worldwide and only registered patents in the United States. The plaintiff further claims that the defendants, jointly and severally, committed a breach of trust.  The plaintiff is seeking damages in the amount of NIS 10 million (approximately $2.4 million), and claiming for all rights in the patent. Contemporaneously with the filing of the claim, the plaintiff also filed a motion seeking an exemption from payment of the requisite court filing fee, and stated that he would withdraw the lawsuit if the motion is not granted. On March 12, 2009, Achidatex filed a request to respond to the motion and requested a 30 day extension to file its statement of defense. On May 24, 2009, Achidatex filed its statement of defense. The Company believes that it is likely that the plaintiff’s motion for an exemption from payment of the court filing fee will be granted and that the lawsuit will therefore proceed. The Company believes that the plaintiff’s claim is unfounded and intends to vigorously defend against the claim. Due to the preliminary stage of the claim, management and its legal advisors cannot currently assess the outcome or possible adverse effect on its financial position or results of operations, however, management believes the Company has substantial legal arguments to oppose the allegations. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | On April 7, 2010, a lawsuit was filed against Achidatex and another lawsuit was filed against Export Erez in the Nazareth Magistrates' Court (the "Court"), each to obtain an eviction order for the premises leased by these subsidiaries. The plaintiffs in the suits, a company owned by the former shareholders of Achidatex and a company owned by the Company's principal shareholder, allege that Achidatex and Export Erez each materially breached their respective lease agreement with the plaintiff, dated January 1, 2008. The premises from which the plaintiff seeks to evict Achidatex and Export Erez, are used by Achidatex and Export Erez to conduct their operational activities. The parties are currently attempting to settle the dispute out of court. Therefore, Achidatex and Export Erez have not yet filed their statements of defense in the above lawsuits. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| NOTE 6 | SUBSEQUENT EVENTS |
|--------|-------------------|

----

Results of Operations

----

|                                                                  |   | Three Months EndedMarch 31, |    |
|-----------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                  |   | 2010                        |    |   | 2009 |   |
|                                                                  |   |                        |    |   |   |   |
| Sales to South America                                                |   | $                           | 218,360 |   |   | $ | 754,527 |   |
| Sales to North America                                                |   |                        | 230,945 |   |   |   | 160,459 |   |
| Sales to Europe and Asia                                              |   |                        | 343,449 |   |   |   | 459,734 |   |
| Sales to Africa                                                       |   |                        | 2,177   |   |   |   | 1,186,355 |   |
|        Total Export Military Sales |   | $                           | 794,931 |   |   | $ | 2,561,075 |   |

----

----

| · | Mayotex and Sarino agreed to incorporate Mayosar, with Mayotex being the majority shareholder owning 50.1% and Sarino owning 49.9%. As majority shareholder, Mayotex will have operational control of Mayosar. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In consideration of the above, Mayotex will pay Sarino $1 million, out of which $300,000 will be non-refundable to Mayotex upon 24 months following the execution of the Isorad Agreement, and the remaining $700,000 will be earned by Sarino based on 10% of sales over $3 million and up to $10 million during the first 36 months of operations. Amounts not earned are to be refunded to Mayotex, including interest of Libor + 2% per annum. The refundable consideration is secured by Sarino’s interest in Mayosar and personal guarantees provided by Sarino Crystal Technologies Ltd.'s controlling shareholders. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Mayotex agreed to provide Mayosar with a loan in the aggregate amount of $2 million under a timetable to be determined by Mayosar’s board of directors. Such loan will bear interest at the rate of Libor + 2%, and is payable from profits generated by Mayosar. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | Three Months EndedMarch 31, |      |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-----------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 2010                        |      |   | 2009 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                        |      |   |   |   |
| Local civilian market                                                                                                                                                                                             |   | $                           | 1,033,658 |   |   | $ | 821,276 |   |
| Export civilian market                                                                                                                                                                                            |   |                        | 229,631   |   |   |   | 160,459 |   |
| Local military market                                                                                                                                                                                             |   |                        | 1,165,142 |   |   |   | 2,430,937 |   |
| Export military market                                                                                                                                                                                            |   |                        | 565,300   |   |   |   | 2,400,616 |   |
|                         Total                                                             |   | $                           | 2,993,731 |   |   | $ | 5,813,288 |   |

----

|                                                |   | Three months ended |      |
|-----------------------------------------------------|--------|--------------------|-----------|
|                                                |   | March 31, 2010     |      |   | March 31, 2009 |   |
|                                                |   |               |      |   |   |   |
| Net cash provided by operating activities           |   | $                  | 942,767   |   |   | $ | 622,727 |   |
| Net cash (used in) provided by investing activities |   |               | (121,599  | ) |   |   | 1,126,092 |   |
| Net cash used in financing activities               |   |               | (211,542  | ) |   |   | (840,557 | ) |
| Net increase in cash and cash equivalents           |   |               | 716,247   |   |   |   | 829,219 |   |
| Cash and cash equivalents at beginning of period    |   |               | 3,783,631 |   |   |   | 1,719,921 |   |
| Cash and cash equivalents at end of period          |   | $                  | 4,499,878 |   |   | $ | 2,549,140 |   |

----

----

| Contractual Obligations                                   |   |   |      |   | Payments due by Period |   |
|-----------------------------------------------------------|--------|--------|-----------|--------|------------------------|--------|
|                                                      |   | Total  |      |   | Less than 1 year       |   |   | 2 -3 years |   |   | 4 -5 years |   |   | more than 5 years |   |
| Long-term debt obligations                                |   | $      | 571,269   |   |                   | $      | 292,249 |   |   | $ | 261,065 |   |   | $ | 17,955 |   |   |   | - |   |
| Estimated interest payments on long-term debt obligations |   |   | 40,257    |   |                   |   | 24,421 |   |   |   | 15,598 |   |   |   | 238 |   |   |   | - |   |
| Operating lease obligations                               |   |   | 877,284   |   |                   |   | 512,073 |   |   |   | 365,211 |   |   |   | - |   |   |   | - |   |
| Total                                                     |   | $      | 1,488,810 |   |                   | $      | 828,743 |   |   | $ | 641,874 |   |   | $ | 18,193 |   |   |   | - |   |

| Critical Accounting Policies |
|------------------------------|

| Item 3.    Quantitative and Qualitative Disclosures About Market Risk |
|--------------------------------------------------------------------------------------|

----

rocedures

OTHER INFORMATION:

| Item 1.    Legal Proceedings |
|---------------------------------------------|

----

| Item 1A.    Risk Factors |   |
|-----------------------------------------|--------|

| Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds |
|---------------------------------------------------------------------------------------------------|

| Item 3.      Defaults Upon Senior Securities |
|-----------------------------------------------------------------------|

|     None. |
|-------------------------------|

| Item 4.      (Removed and Reserved) |
|--------------------------------------------------------------|

| Item 5.      Other Information |
|---------------------------------------------------------|

|     None. |
|-------------------------------|

| Item 6.      Exhibits |
|------------------------------------------------|

| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended. |
|------|-----------------------------------------------------------------------------------------------------------------|

| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended. |
|------|-----------------------------------------------------------------------------------------------------------------|

| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|------|--------------------------------------------------------------------------------------------------------------------------------------------|

| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|------|--------------------------------------------------------------------------------------------------------------------------------------------|

----

SIGNATURES

|                | DEFENSE INDUSTRIES INTERNATIONAL, INC.       |
|---------------------|---------------------------------------------------|
| Dated: May 17, 2010 | /S/ Uri Nissani                                   |
|                | Name: Uri Nissani                            |
|                | Title: Chief Executive Officer and President |

----

----