---

---

# UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

|x | Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act
                    of 1934 for the quarterly period ended September 30, 2009
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Commission file number:
0-30105

DEFENSE
INDUSTRIES INTERNATIONAL, INC.
(Exact Name of
Registrant as Specified in Its Charter)

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

8 Brisel Street
Industrial Zone
Sderot 87711, Israel
(Address of Principal
Executive Offices)
(011) 972-8-689-1611
(Registrants
Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last
Report)

Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the
registrant is large accelerated filer, an accelerated filer, or a non-accelerated filer.
See of accelerated filer and large accelerated filer in Rule 12b-2 of the
Exchange Act.

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

Indicate  by check  mark  whether
 the  registrant  is a shell  company  (as  defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of November 10, 2009 the issuer
had 28,150,535 shares of Common Stock, par value $0.0001, outstanding.



---

---



# DEFENSE INDUSTRIES
INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX

|                                |                                                                                                                                   | Page
|------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | ----
|
|
|
|
|PART I - FINANCIAL INFORMATION:
|                               
|Item 1.                         | Condensed Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and December 31, 2008                                  | 3   
|                               
|                                | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited)       | 5   
|                               
|                                | Condensed Consolidated Statement of Changes in Equity for the Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited) | 6   
|                               
|                                | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2009 and 2008 (Unaudited)                 | 8   
|                               
|                                | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                  | 10  
|                               
|Item 2.                         | Management's Discussion and Analysis of Financial Condition and Results of Operations                                             | 20  
|                               
|Item 3.                         | Quantitative and Qualitative Disclosures About Market Risk                                                                        | 29  
|                               
|Item 4T.                        | Controls and Procedures                                                                                                           | 29  
|                               
|PART II - OTHER INFORMATION:   
|                               
|Item 1.                         | Legal Proceedings                                                                                                                 | 29  
|                               
|Item 1A.                        | Risk Factors                                                                                                                      | 30  
|                               
|Item 6.                         | Exhibits                                                                                                                          | 30  
|                               
|SIGNATURES                      | 31                                                                                                                               

2

---

---

PART I  FINANCIAL INFORMATION:

Item 1.

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

# CONDENSED CONSOLIDATED
BALANCE SHEETS
AS OF SEPTEMBER 30,
2009 (UNAUDITED) AND DECEMBER 31, 2008

ASSETS

|                                                            | September 30,
2009 | December 31,
2008
|----------------------------------------------------------- | ------------------ | -----------------
|
|
|
|
|CURRENT ASSETS                                              |                    |                  
|Cash and cash equivalents                                   |                    |                  
|Restricted bank deposits                                    |                    |                  
|Accounts receivable, net of allowance for doubtful accounts |                    |                  
|of $296,389 and $298,354, respectively                      |                    |                  
|Inventories                                                 |                    |                  
|Trading securities                                          |                    |                  
|Deferred taxes                                              |                    |                  
|Other current assets                                        |                    |                  
|                                                            |                    |                  
|Total Current Assets                                        |                    |                  
|                                                            |                    |                  
|                                                            |                    |                  
|PROPERTY, PLANT AND EQUIPMENT, NET                          |                    |                  
|                                                            |                    |                  
|                                                            |                    |                  
|OTHER ASSETS                                                |                    |                  
|Funds in respect of employee rights upon retirement         |                    |                  
|Deferred taxes                                              |                    |                  
|Refundable deposits for the purchase of a business (Note 2) |                    |                  
|                                                            |                    |                  
|Total Other Assets                                          |                    |                  
|                                                            |                    |                  
|                                                            |                    |                  
|TOTAL ASSETS                                                |                    |                  
|                                                            |                    |                  

The accompanying notes are an
integral part of the condensed consolidated financial statements.

3

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

# CONDENSED CONSOLIDATED
BALANCE SHEETS
AS OF SEPTEMBER 30,
2009 (UNAUDITED) AND DECEMBER 31, 2008

LIABILITIES AND EQUITY

|                                                        | September 30,
2009 | December 31, 2008
|------------------------------------------------------- | ------------------ | -----------------
|
|
|
|
|CURRENT LIABILITIES                                     |                    |                  
|Accounts payable                                        |                    |                  
|Accounts payable - related parties                      |                    |                  
|Short-term debt                                         |                    |                  
|Common stock to be issued                               |                    |                  
|Other current liabilities                               |                    |                  
|                                                        |                    |                  
|Total Current Liabilities                               |                    |                  
|                                                        |                    |                  
|                                                        |                    |                  
|LONG-TERM LIABILITIES                                   |                    |                  
|Long-term portion of debt                               |                    |                  
|Liability for employee rights upon retirement           |                    |                  
|                                                        |                    |                  
|                                                        |                    |                  
|Total Long-Term Liabilities                             |                    |                  
|                                                        |                    |                  
|                                                        |                    |                  
|TOTAL LIABILITIES                                       |                    |                  
|                                                        |                    |                  
|                                                        |                    |                  
|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 shares     |                    |                  
|authorized, 29,200,535 shares issued and 28,150,535     |                    |                  
|shares outstanding at September 30, 2009 and 28,991,111 |                    |                  
|shares issued and 27,941,111 shares outstanding at      |                    |                  
|December 31, 2008                                       |                    |                  
|Additional paid-in capital                              |                    |                  
|Treasury stock (1,050,000 shares at cost)               |                    |                  
|Retained earnings                                       |                    |                  
|Accumulated other comprehensive (loss) income           |                    |                  
|                                                        |                    |                  
|Total Equity                                            |                    |                  
|                                                        |                    |                  
|                                                        |                    |                  
|TOTAL LIABILITIES AND EQUITY                            |                    |                  
|                                                        |                    |                  

The accompanying notes are an
integral part of the condensed consolidated financial statements.

4

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

# CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

|                                                                   | For the Three Months Ended
 September 30, | For the Nine Months Ended
September 30,
|------------------------------------------------------------------ | ----------------------------------------- | ---------------------------------------
|
|
|
|
|NET REVENUES                                                       |                                           |                                        
|                                                                   |                                           |                                        
|COST OF SALES                                                      |                                           |                                        
|                                                                   |                                           |                                        
|                                                                   |                                           |                                        
|GROSS PROFIT                                                       |                                           |                                        
|                                                                   |                                           |                                        
|                                                                   |                                           |                                        
|OPERATING EXPENSES (INCOME)                                        |                                           |                                        
|Selling                                                            |                                           |                                        
|General and administrative                                         |                                           |                                        
|Compensation from government (Note 5)                              |                                           |                                        
|                                                                   |                                           |                                        
|Total Operating Expenses                                           |                                           |                                        
|                                                                   |                                           |                                        
|INCOME FROM OPERATIONS                                             |                                           |                                        
|                                                                   |                                           |                                        
|                                                                   |                                           |                                        
|OTHER (EXPENSES) INCOME                                            |                                           |                                        
|Financial expenses                                                 |                                           |                                        
|Financial income                                                   |                                           |                                        
|Other income (expenses), net                                       |                                           |                                        
|                                                                   |                                           |                                        
|Total Other (Expenses) Income                                      |                                           |                                        
|                                                                   |                                           |                                        
|                                                                   |                                           |                                        
|INCOME (LOSS) BEFORE INCOME TAXES                                  |                                           |                                        
|                                                                   |                                           |                                        
|Income tax expenses (benefits)                                     |                                           |                                        
|                                                                   |                                           |                                        
|                                                                   |                                           |                                        
|NET INCOME  (LOSS) BEFORE EXTRAORDINARY INCOME                     |                                           |                                        
|                                                                   |                                           |                                        
|Extraordinary income, net of tax                                   |                                           |                                        
|                                                                   |                                           |                                        
|                                                                   |                                           |                                        
|NET INCOME (LOSS)                                                  |                                           |                                        
|                                                                   |                                           |                                        
|Net loss (income) attributable to noncontrolling interest          |                                           |                                        
|                                                                   |                                           |                                        
|                                                                   |                                           |                                        
|NET INCOME (LOSS) attributable to controlling interest             |                                           |                                        
|                                                                   |                                           |                                        
|                                                                   |                                           |                                        
|Net income (loss) per share attributable to controlling interest   |                                           |                                        
|from continuing operations - basic and diluted                     |                                           |                                        
|Net extraordinary income per share attributable to controlling     |                                           |                                        
|interest - basic and diluted                                       |                                           |                                        
|                                                                   |                                           |                                        
|                                                                   |                                           |                                        
|Net income (loss) per share attributable to controlling interest - |                                           |                                        
|basic and diluted                                                  |                                           |                                        
|                                                                   |                                           |                                        
|                                                                   |                                           |                                        
|Weighted average number of shares outstanding - basic and diluted  |                                           |                                        
|                                                                   |                                           |                                        

The accompanying notes are an
integral part of the condensed consolidated financial statements.

5

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

# CONDENSED CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY
FOR THE NINE AND THREE MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

|                                          | Common Stock | Treasury Stock | Additional
Paid-In
Capital | Retained
Earnings | Accumulated
Other
Comprehensive
Income
(Loss) | Total
Comprehensive
Income | Total
Shareholders'
Equity | Noncontrolling
Interest | Total Equity
|----------------------------------------- | ------------ | -------------- | -------------------------- | ----------------- | --------------------------------------------- | -------------------------- | -------------------------- | ----------------------- | ------------
|
|
|
|
|Balance as of January 1, 2009             |              |                |                            | 28,991,111        |                                               | $                          | 2,899                      |                         |             
|                                          |              |               
|Common stock issued to acquire Rizzo Inc  |              |                |                            | 209,424           |                                               |                            | 21                         |                         |             
|                                          |              |               
|Comprehensive income:                     |              |               
|                                          |              |               
|Net income                                |              |                |                            | -                 |                                               |                            | -                          |                         |             
|                                          |              |               
|Foreign currency translation loss         |              |                |                            | -                 |                                               |                            | -                          |                         |             
|                                          |              |                |                            |                   |                                               |                            |                            |                         |             
|                                          |              |               
|Total comprehensive income                |              |                |                            |                   |                                               |                            |                            |                         |             
|                                          |              |                |                            |                   |                                               |                            |                            |                         |             
|                                          |              |               
|Balance as of September 30, 2009          |              |                |                            | 29,200,535        |                                               | $                          | 2,920                      |                         |             
|                                          |              |                |                            |                   |                                               |                            |                            |                         |             
|                                          |              |               
|Balance as of January 1, 2008             |              |                |                            | 28,867,272        |                                               | $                          | 2,886                      |                         |             
|                                          |              |               
|Common stock issued to acquire Rizzo Inc. |              |                |                            | 123,839           |                                               |                            | 13                         |                         |             
|                                          |              |               
|Comprehensive income:                     |              |               
|                                          |              |               
|Net income                                |              |                |                            | -                 |                                               |                            | -                          |                         |             
|                                          |              |               
|Foreign currency translation gain         |              |                |                            | -                 |                                               |                            | -                          |                         |             
|                                          |              |                |                            |                   |                                               |                            |                            |                         |             
|                                          |              |               
|Total comprehensive income                |              |                |                            |                   |                                               |                            |                            |                         |             
|                                          |              |                |                            |                   |                                               |                            |                            |                         |             
|                                          |              |               
|Balance as of September 30, 2008          |              |                |                            | 28,991,111        |                                               | $                          | 2,899                      |                         |             
|                                          |              |                |                            |                   |                                               |                            |                            |                         |             

6

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

# CONDENSED CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY
FOR THE NINE AND THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

|                                  | Common Stock | Treasury Stock | Additional
Paid-In
Capital | Retained
Earnings | Accumulated
Other
Comprehensive
Income
(Loss) | Total
Comprehensive
Income | Total
Shareholders'
Equity | Noncontrolling
Interest | Total Equity
|--------------------------------- | ------------ | -------------- | -------------------------- | ----------------- | --------------------------------------------- | -------------------------- | -------------------------- | ----------------------- | ------------
|
|
|Balance as of July 1, 2009        |              |                |                            | 29,200,535        |                                               | $                          | 2,920                      |                         | $           
|                                  |              |               
|Comprehensive income:             |              |               
|                                  |              |               
|Net income                        |              |                |                            | -                 |                                               |                            | -                          |                         |             
|                                  |              |               
|Foreign currency translation gain |              |                |                            | -                 |                                               |                            | -                          |                         |             
|                                  |              |                |                            |                   |                                               |                            |                            |                         |             
|                                  |              |               
|Total comprehensive income        |              |                |                            |                   |                                               |                            |                            |                         |             
|                                  |              |                |                            |                   |                                               |                            |                            |                         |             
|                                  |              |               
|Balance as of September 30, 2009  |              |                |                            | 29,200,535        |                                               | $                          | 2,920                      |                         |             
|                                  |              |                |                            |                   |                                               |                            |                            |                         |             
|                                  |              |               
|                                  |              |               
|Balance as of July 1, 2008        |              |                |                            | 28,991,111        |                                               | $                          | 2,899                      |                         |             
|                                  |              |               
|Comprehensive income:             |              |               
|                                  |              |               
|Net income                        |              |                |                            | -                 |                                               |                            | -                          |                         |             
|                                  |              |               
|Foreign currency translation gain |              |                |                            | -                 |                                               |                            | -                          |                         |             
|                                  |              |                |                            |                   |                                               |                            |                            |                         |             
|                                  |              |               
|Total comprehensive income        |              |                |                            |                   |                                               |                            |                            |                         |             
|                                  |              |                |                            |                   |                                               |                            |                            |                         |             
|                                  |              |               
|Balance as of September 30, 2008  |              |                |                            | 28,991,111        |                                               | $                          | 2,899                      |                         |             
|                                  |              |                |                            |                   |                                               |                            |                            |                         |             

The
accompanying notes are an integral part of the condensed consolidated financial
statements.

7

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

# CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

|                                                                      | For the Nine Months
Ended September 30,
|--------------------------------------------------------------------- | ---------------------------------------
|
|
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                 |                                        
|Net income                                                            |                                        
|Less - extraordinary income, net of tax                               |                                        
|                                                                      |                                        
|                                                                      |                                        
|                                                                      |                                        
|                                                                      |                                        
|Adjustments to reconcile net income to net cash provided by operating |                                        
|activities:                                                           |                                        
|Items not affecting cash:                                             |                                        
|Depreciation and amortization                                         |                                        
|Gain from sale of property, plant and equipment                       |                                        
|Provision for doubtful accounts                                       |                                        
|Deferred taxes                                                        |                                        
|Net unrealized gain on trading securities                             |                                        
|Accrued interest and exchange rate differences of long-term debt      |                                        
|Accrued interest and exchange rate differences on payments for the    |                                        
|purchase of a business                                                |                                        
|Accrued interest and exchange rate differences on deposits            |                                        
|                                                                      |                                        
|Changes in assets and liabilities:                                    |                                        
|Decrease in accounts receivable                                       |                                        
|Decrease (increase) in inventories                                    |                                        
|Decrease (increase) in trading securities                             |                                        
|Increase in related parties accounts                                  |                                        
|Decrease (increase) in other current assets                           |                                        
|(Increase) decrease in funds in respect of employee rights            |                                        
|upon  retirement                                                      |                                        
|(Decrease) increase in accounts payable                               |                                        
|Increase in deferred income                                           |                                        
|(Decrease) increase in other current liabilities                      |                                        
|Increase in liability for employee rights upon retirement             |                                        
|                                                                      |                                        
|Net cash provided by (used in) Operating Activities                   |                                        
|Cash provided by extraordinary items                                  |                                        
|                                                                      |                                        
|                                                                      |                                        
|                                                                      |                                        
|                                                                      |                                        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                 |                                        
|Investment in short-term bank deposit                                 |                                        
|Redemption of restricted bank deposits                                |                                        
|Purchases of property, plant and equipment                            |                                        
|Proceeds from sale of property, plant and equipment                   |                                        
|Refundable deposit for purchase of a business                         |                                        
|                                                                      |                                        
|Net cash provided by (used in) Investing Activities                   |                                        
|                                                                      |                                        
|                                                                      |                                        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                 |                                        
|Short-term debt, net                                                  |                                        
|Proceeds from long-term debt                                          |                                        
|Repayment of long-term debt                                           |                                        
|Redemption of related party creditors                                 |                                        
|                                                                      |                                        
|Net cash used in Financing Activities                                 |                                        
|                                                                      |                                        
|                                                                      |                                        
|EFFECT OF CHANGES IN EXCHANGE RATES ON CASH AND CASH EQUIVALENTS      |                                        
|                                                                      |                                        
|                                                                      |                                        
|NET INCREASE IN CASH AND CASH EQUIVALENTS                             |                                        
|                                                                      |                                        
|CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                       |                                        
|                                                                      |                                        
|                                                                      |                                        
|CASH AND CASH EQUIVALENTS - END OF PERIOD                             |                                        
|                                                                      |                                        
|                                                                      |                                        
|INTEREST PAID                                                         |                                        
|                                                                      |                                        
|                                                                      |                                        
|TAXES PAID                                                            |                                        
|                                                                      |                                        

8

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

# CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

# SUPPLEMENTAL SCHEDULE OF
NON-CASH ACTIVITIES:

Pursuant to the agreement signed on
February 28, 2005 to acquire the business of Rizzo Inc. (doing business as Owen Mills
Company), on June 8, 2009 and March 18, 2008 the Company issued 209,424 and 123,839
shares of common stock, respectively, having a fair value of $40,000 each at the date of
issuance to the former shareholders of Rizzo Inc.

The accompanying notes are an
integral part of the condensed consolidated financial statements.

9

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

# NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENT
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

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

| | A. | The
accompanying unaudited interim consolidated financial statements as of
          September 30, 2009 and for the three and nine month periods 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, 2008, except as
otherwise stated below.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 and nine months periods ended September 30,
2009,           are not necessarily indicative of the results that may be expected for
the year           ending December 31, 2009. The interim financial statements should be
read in           conjunction with the Companys annual financial statements as of
December           31, 2008 and for the year then ended and the accompanying notes
thereto.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
interim financial statements include the accounts of Defense Industries International,
Inc., its wholly owned subsidiaries, Export Erez USA, Inc., Rizzo Inc. (doing business as
Owen Mills Company), Export Erez, Ltd. (Export Erez), Mayotex, Ltd. (Mayotex),
Dragonwear Trading Ltd. (Dragonwear), and Achidatex Nazareth Elite (1977)
Ltd. (Achidatex), (assets and liabilities  100% as of September 30,
2009 and December 31, 2008, respectively, and operations  100% and 76% in the three
and nine months ended September 30, 2009, and 2008, respectively).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
significant inter-company accounts and transactions have been eliminated in
consolidation.
| | ----------------------------------------------------------------------------------------------

10

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

# NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENT
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

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

| | Basic
net income per share of common stock is computed based on the weighted average number of
shares of common stock outstanding during the period. Diluted net income per share of
common stock is computed based on the weighted average number of shares of common stock
and common stock equivalents outstanding during the period. For the three and nine months
ended September 30, 2009 and 2008 common stock equivalents to purchase 202,500 shares of
common stock were not included in diluted income (loss) per share because their effect is
anti-dilutive.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Effective
January 1, 2008, the Company adopted Accounting Standards Accounting Standards Codification
(ASC) Topic 820Fair Value Measurements and Disclosures, that pertain to the
standard formerly known as FSP No. FAS 157-4Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly. This provides additional
requirements for estimating fair value when the volume and level of market activity for
an asset or liability have decreased significantly, and includes additional information
on circumstances that indicate when a transaction or market are not orderly. Factors to
consider in determining whether there has been a significant decrease in the volume and
level of activity include transaction frequency and volume, substantial variation in
market quotations, abnormal risk premiums or bid-ask spreads, and a significant decline
in market activity and the availability of market information.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ASC
Topic 820 clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. SFAS 157 also requires disclosure about how fair value is
determined for assets and liabilities and establishes a hierarchy for which these assets
and liabilities must be grouped, based on significant levels of inputs, as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ------- | -----------------------------------------------------------------------

| | The
Companys trading securities and bank deposits are measured at fair value based on
quoted market prices in active markets for identical assets (Level 1).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys funds in respect to employees rights upon retirement are measured at
fair value based upon unobservable inputs (Level 3).
| | ----------------------------------------------------------------------------------------------------------------------------------------

11

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

# NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENT
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

| | G. | Recent
accounting pronouncements
| | -- | --------------------------------

| | Following
are summaries of accounting pronouncements that were either recently adopted or may
become applicable to the Companys consolidated financial statements. It should be
noted that effective with the quarter ended September 30, 2009, titles and
references to accounting standards have been updated to reflect Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) and Accounting Standards
Update (ASU) references, where applicable.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Recently
Adopted Pronouncements
| | -------------------------------

| | The
provisions of ASC Topic 810Consolidation, that pertain to the standard formerly
known as Statement of Financial Accounting Standards (SFAS) No. 160Noncontrolling
Interests in Consolidated Financial Statementsan amendment of Accounting
Research Bulletin (ARB) No. 51. This standard establishes new accounting and
reporting requirements for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financial statements and separate from
the parents equity. The amount of net income attributable to the noncontrolling
interest is included in consolidated net income on the face of the income statement. The
standard clarifies that changes in a parents ownership interest in a subsidiary
that do not result in deconsolidation are equity transactions if the parent retains its
controlling financial interest. In addition, this standard requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or
loss will be measured using the fair value of the noncontrolling equity investment on the
deconsolidation date. The standard also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling interest. The Company
adopted this standard as of January 1, 2009. The adoption of this standard did not
have a material impact on the Companys consolidated financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ASC
Topic 805Business Combinations, (formerly known as SFAS No. 141(R)).
This standard requires the acquirer in a business combination to recognize the assets
acquired, the liabilities assumed, contractual contingencies, and contingent
consideration at their fair values as of the acquisition date. Additionally, this
standard requires acquisition costs to be expensed as incurred, restructuring costs to be
expensed in the period subsequent to the acquisition date, and changes in deferred tax
asset valuation allowances and income tax uncertainties after the acquisition date to
impact tax expense. The acquirer in an acquisition implemented in stages is required to
recognize the identifiable assets and liabilities, as well as the noncontrolling interest
in the acquiree, at the full amounts of their fair values. This standard was effective
for business combinations with an acquisition date after December 31, 2008. The
adoption of this standard did not have an impact on the Companys consolidated
financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

# NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENT
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

| | The
provisions of ASC Topic 805Business Combinations, that pertain to the standard
formerly known as FASB Staff Position (FSP) No. FAS 141(R)-1Accounting for
Assets Acquired and Liabilities Assumed in a Business  Combination that Arise from
Contingencies. This standard amends and clarifies previously existing rules and
requires an acquirer to recognize at fair value, at the acquisition date, an asset
acquired or liability assumed in a business combination that arises from a contingency if
the fair value can be determined during the measurement period. If an acquisition date
fair value cannot be determined during the measurement period, it must still be
recognized if it is probable the asset existed or a liability had been incurred and it
can be reasonably estimated. This standard also increases the disclosure requirements of
the acquirer to include the nature and the financial effects of the contingencies on its
financial statements. This standard was effective for assets or liabilities arising from
contingencies in business combinations with an acquisition date after December 31,
2008. The adoption of this standard did not have an impact on the Companys
consolidated financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
provisions of ASC Topic 260Earnings Per Share, that pertain to the standard
formerly known as FSP No. EITF 03-6-1Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities. This
standard applies to the calculation of earnings per share (EPS) for share-based payment
awards with rights to dividends or dividend equivalents. Unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and should be included in the computation of
EPS pursuant to the two-class method. This standard was effective for the Company
beginning January 1, 2009 with retrospective adjustment to previously reported EPS
data for comparative purposes. The adoption of this standard did not have a material
impact on the Companys consolidated financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
provisions of ASC Topic 320InvestmentsDebt and Equity Securities, that
pertain to the standard formerly known as FSP No. FAS 115-2 and FAS 124-2Recognition
and Presentation of Other-Than-Temporary  Impairments. This standard changes
the requirements for recognizing other-than-temporary impairments for debt securities,
modifies the presentation of other-than-temporary losses in the income statement and
expands the disclosure requirements relating to impairments of debt and equity
securities. This standard specifies that if a company does not have the intent or need to
sell a debt security prior to recovery, the security is not considered
other-than-temporarily-impaired unless there is a credit loss. If impairment to a
security is recognized because of a credit loss, a company is required to recognize the
credit loss component of the impairment of the debt security in earnings and the
remaining portion of the impairment loss in other comprehensive income. The standard was
effective for interim and annual periods ending after June 15, 2009. The adoption of
this standard did not have a material impact on the Companys consolidated financial
statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

# NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENT
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

| | Recently
Issued Pronouncements
| | ------------------------------

| | SFAS
No. 167Amendments to FASB Interpretation FIN No. 46(R). This standard
amends the requirements for variable interest entities in ASC Topic 810 (FIN No. 46(R)Consolidation
of Variable Interest Entities) by changing how a reporting entity determines when to
consolidate an entity that is insufficiently capitalized or is not controlled through
voting (or similar rights). The determination is based on, among other things, the other
entitys purpose and design and the reporting entitys ability to direct the
activities of the other entity that most significantly impact the other entitys
economic performance. The standard also requires a company to provide additional
disclosures about its involvement with variable interest entities and any significant
changes in risk exposure due to that involvement. The standard is effective as of the
beginning of an entitys first annual reporting period that begins after November 15,
2009. The Company has not yet determined the impact of this standard on its consolidated
financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ASU
No. 2009-05Fair Value Measurements and Disclosures (Topic 820)Measuring
Liabilities at Fair Value. This ASU provides additional requirements for measuring a
liability at fair value. When a quoted price in an active market for the identical
liability is not available, a reporting entity is required to use a valuation technique
that uses the quoted price for similar liabilities traded or quoted prices for an
identical liability or similar liabilities traded as an asset. An entity may also use a
valuation technique that is consistent with the principles of Topic 820 such as an income
or market approach. This ASU is effective for the first reporting period beginning after
August 27, 2009. The Company has not yet determined the impact of this ASU on its
consolidated financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ASU
No. 2009-14Revenue Recognition (Topic 605)Multiple-Deliverable
Revenue Arrangementsa consensus of the FASB Emerging Issues Task Force. This
ASU addresses the accounting for multiple-deliverable arrangements to enable vendors to
account for products or services (deliverables) separately rather than a combined unit.
It establishes a hierarchy for determining the selling price for each deliverable. The
selling price used for each deliverable should be based on vendor-specific objective
evidence if available, third-party evidence if vendor-specific objective evidence is not
available, or estimated selling price if neither vendor-specific objective evidence nor
third-party evidence is available. This ASU also clarifies existing requirements that the
allocation of revenue is based on entity-specific assumptions rather than assumptions of
a marketplace participant. This ASU is effective for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010. The
adoption of this ASU is not expected to have material impact on the Companys
consolidated financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

# NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENT
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

|NOTE 2 |  | TENTATIVE ACQUISITIONS
|------ |  | ----------------------

| | On
December 17, 2008, Mayotex entered into an agreement with Sarino Crystal Technologies
Ltd. and Sarino Optronics Ltd. (Sarino) to cooperate in the manufacture of
optical grade Germanium crystals and sales of optical and infra-red night vision products
utilizing the Germanium crystals (the Sarino Agreement). As of the balance
sheet date, Isorad Ltd.s (Isorad) board of directors has not approved
the Isorad Agreement as discussed below.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the Sarino Agreement and subject to the approval of the Isorad Agreement:
| | -------------------------------------------------------------------------------------

| | (1)
           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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2)
           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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3)
           Mayotex agreed to provide Mayosar with a loan of up to $2 million. Such loan
          will bear interest at the rate of Libor + 2%, and is payable from profits
          generated by Mayosar.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of September 30, 2009, Mayotex provided loans of $1 million to Sarino and $0.9 million to
Mayosar. Such payments are recognized as refundable deposits pending resolution of the
Isorad Agreement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Isorad
Agreement (subject to approval):
| | ---------------------------------------

| | On
December 21, 2008, Mayosar, through its wholly owned subsidiary Isorad IR Optics Ltd., (Optics),
entered into an agreement to purchase the Germanium Crystals Business of Isorad,
consisting of certain know-how, equipment, inventories and production activities of
Germanium Crystals for lenses used in infra-red night vision system applications (Isorad
Agreement). As of September 30, 2009, this agreement has not been executed.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

# NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENT
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

| | Pursuant
to the Isorad Agreement, Optics is to pay royalties of 3% out of sales for a period of 15
years commencing the effective date of the Isorad Agreement ( the Effective Date),
with a minimum amount of approximately $125,000 payable per year during the first 18
months or until the date of completion of the transfer of the site of the Germanium
Crystals Business, whichever is earlier (this payment includes a reimbursement of costs
for the usage of the site and equipment in this initial period), and approximately
$50,000 per year during the following years of the royalties payment period.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the Isorad Agreement, Isorad was granted the right to acquire 5% of the share capital
of Optics on a fully diluted basis for their nominal value during the 24 month period
beginning on the Effective Date. If the Israeli Government does not approve the 5%
purchase of the Optics shares by Isorad within twelve (12) months of the Effective Date,
the right to acquire the shares will expire and Isorad will be entitled to a payment of
$75,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the event of an allotment of shares to Isorad, representing 5% of Optics share
capital, Mayosar will issue to Mayotex additional shares of Mayosar on a pro rata basis,
in order for Mayotex to retain a 50.01% indirect interest in Optics share capital.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Optics
has the right during the four year period following the Effective Date to redeem and
purchase from Isorad its option to purchase 5% of its shares and to cancel its commitment
to pay royalties under the Isorad agreement, in consideration of a fixed payment of
$750,000, less all royalties paid to Isorad through that date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
is currently assessing its legal position in order to clarify the matter regarding the
validity of the transaction with Isorad. Management is of the opinion, based on legal
advice received, that the amounts paid under the Sarino and Isorad agreements will be
fully refundable to the Company in the event that the Isorad Agreement is not consummated.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Consist
of:
| | -----------

| |                   | September 30, 2009 | December 31, 2008
| | ----------------- | ------------------ | -----------------
|
|
|
|
| | Raw materials (1) |                    |                  
| | Work in progress  |                    |                  
| | Finished goods    |                    |                  
| |                   |                    |                  
| |                   |                    |                  
| |                   |                    |                  

| | (1)
          As of December 31, 2008, includes advanced payment to purchase inventory for
          $513,447.
| | --------------------------------------------------------------------------------------------------------------

16

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

# NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENT
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

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

| | The
Company has two strategic business segments:  sales to the civilian market and the
military market.
| | -------------------------------------------------------------------------------------------------------

| | The
military and the civilian markets are further broken down between Israel (local) and
other (export) sales in order to better analyze trends in sales and profit margins. The
Company does not allocate assets between segments because assets are used in more than
one segment and any allocation would be impractical.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |                             | Civilian | Military |  
| | --------------------------- | -------- | -------- | -
|
|
|
|
| | For the nine months         |          |          |  
| | ended September 30, 2009:   |          |         
| |                             |          |         
| | Revenue from sales          |          |          | $
| |                             |          |         
| | Gross Profits               |          |          |  
| |                             |          |         
| | Corporate unallocated costs |          |          |  
| |                             |          |          |  
| |                             |          |         
| | Income from operations      |          |          |  
| |                             |          |          |  
| |                             |          |         
| | For the three months        |          |         
| | ended September 30, 2009:   |          |         
| |                             |          |         
| | Revenue from sales          |          |          | $
| |                             |          |         
| | Gross Profits               |          |          |  
| |                             |          |         
| | Corporate unallocated costs |          |          |  
| |                             |          |          |  
| |                             |          |         
| | Income from operations      |          |          |  
| |                             |          |          |  
| |                             |          |         
| | For the nine months         |          |         
| | ended September 30, 2008:   |          |         
| |                             |          |         
| | Revenue from sales          |          |          | $
| |                             |          |         
| | Gross Profits               |          |          |  
| |                             |          |         
| | Corporate unallocated costs |          |          |  
| |                             |          |          |  
| |                             |          |         
| | Income from operations      |          |          |  
| |                             |          |          |  
| |                             |          |         
| | For the three months        |          |         
| | ended September 30, 2008:   |          |         
| |                             |          |         
| | Revenue from sales          |          |          | $
| |                             |          |         
| | Gross Profits               |          |          |  
| |                             |          |         
| | Corporate unallocated costs |          |          |  
| |                             |          |          |  
| |                             |          |         
| | Income from operations      |          |          |  
| |                             |          |          |  

17

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

# NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENT
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

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

| |                 | Three Months Ended
September 30, | Nine Months Ended
September 30,
| | --------------- | -------------------------------- | -------------------------------
|
|
|
|
| | Israel          |                                  |                                
| | South America   |                                  |                                
| | North America   |                                  |                                
| | Europe and Asia |                                  |                                
| | Africa          |                                  |                                
| |                 |                                  |                                
| |                 |                                  |                                
| | Total Sales     |                                  |                                
| |                 |                                  |                                

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

| |                              | For the Three
Months Ended
September 30, | For the Nine
Months Ended
September 30,
| | ---------------------------- | ---------------------------------------- | ---------------------------------------
|
|
|
|
| | Customer A (Military Local)  |                                          |                                        
| | Customer B (Military Export) |                                          |                                        

|NOTE 5 |  | COMPENSATION FROM GOVERNMENT
|------ |  | ----------------------------

| | Export
Erez and Mayotex received $54,056 and $174,309, respectively, as compensation from the
Israeli Government, under the Property tax and compensation payments for war damages Regulations,
for the loss of employment days and potential revenues during the last two years due to
the security and military situation in the area in which Export Erez and Mayotex were
located. This $228,365 of compensation has been recorded as a reduction to the Companys
operating expenses.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

# NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENT
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

|NOTE 6 |  | COMMITMENTS AND CONTINGENCIES
|------ |  | -----------------------------

| | 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 $2.7
million), and claiming all rights in the patent. The Company believes that the plaintiffs
claim is unfounded and that it has substantial legal arguments to oppose the allegations.
The Company have denied any liability under the claims, have sought the dismissal of the
claims against Export Erez and Mr. Avraham Hazor because of a lack of privity, have
sought to join a third party and have submitted a counterclaim against the plaintiff for
funds owed to Achidatex. This matter is currently in its early stages, and the Company
intends to vigorously defend against the claim and to pursue the Companys
counterclaim.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 7 |  | SUBSEQUENT EVENTS
|------ |  | -----------------

| | The
Company has evaluated all events or transactions that occurred after September 30,
2009 through the filing date of this document and did not have any material recognizable
and unrecognizable subsequent events.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

---

---

Item 2. Managements Discussion
and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with the condensed consolidated financial
statements and notes included in Item 1 of Part I of this Quarterly Report and the audited
consolidated financial statements and notes thereto, and Managements Discussion and
Analysis of Financial Condition and Results of Operations for the Year Ended December 31,
2008 contained in our 2008 Annual Report on Form 10-K. The discussion and analysis which
follows may contain trend analysis and other forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with
respect to future events and financial results. These include statements regarding our
earnings, projected growth and forecasts, and similar matters that are not historical
facts.

We
remind shareholders that forward-looking statements are merely predictions and therefore
are inherently subject to uncertainties and other factors that could cause the future
results to differ materially from those described in the forward-looking statements.

The
following is managements discussion and analysis of certain significant factors
which have affected our financial position and operating results during the periods
included in the accompanying consolidated financial statements, as well as information
relating to the plans of our current management.

Overview

We
are a manufacturer and global provider of personal military and civilian protective
equipment and supplies. Our products are used by military, law enforcement, border patrol
enforcement, and other special security forces, corporations, non-governmental
organizations and individuals throughout the world.

Our
main products include body armor, bomb disposal suits, bullet proof vests and jackets,
ballistic wall coverings, bullet proof ceramic and polyethylene panels, V.I.P. car
armoring and lightweight armor kits for vehicles, personal military equipment, dry storage
systems, liquid logistic products, tents and other camping and travel gear.

While
we believe that current international tensions, the war on terrorism, and the continuing
conflict in Iraq are all likely to result in additional interest in our products, and that
the demand for our products will continue to grow, the recent global economic turmoil and
the instability in the financial markets may result in reduction in governmental spending
for military and security budgets. We expect to address the growth indication by offering
a comprehensive array of high quality branded security products that meet our
customers increasingly complex security products requirements. We intend to enhance
our position in the industry through additional strategic acquisitions that will broaden
our portfolio of products.

# Material Trends

Local
Military Market. After the war between Israel and the Hezbollah in Lebanon in July and
August of 2006, increased orders from the Israeli Ministry of Defense increased the demand
for our products in this market. We benefited from this trend for the remainder of 2006
and through 2007. During 2008 the demand for our products decreased compared to the same
period of 2007, but was significantly higher than in 2006. During the first nine months of
2009 the demand for our products increased due to the ongoing violence as well as tensions
between Israel and several of its neighboring states. We believe that the demand for our
products from the Israeli Ministry of Defense will decrease in the fourth quarter of
2009,.

As
of November 3, 2009, we had a backlog of firm orders from the Israeli Ministry of Defense
of approximately $0.7 million, including orders of approximately $0.2 million that we
received subsequent to September 30, 2009. In the nine month periods ended September 30,
2009 and 2008, sales to the Israeli Ministry of Defense were $5.9 millionand $4.0
million, accounting for 45.9% and 32.8% of our sales, respectively.

20

---

---

Export
Military Market. Our customers in this market are military and law enforcement
organizations located mostly in South America, North America, Africa and Europe. Their
budgets fluctuate and as a result we cannot identify definite trends in these markets.

We
are continuing our efforts to strengthen our position in our existing export markets in
North America, South America, Asia and Europe and to extend our presence to new export
markets in Australia and Africa. We believe that although the demand for our products from
these markets is inconsistent, the demand is growing and that any future success in such
markets will be primarily dependant on our ability to be competitive in our pricing and
the quality of our products.

In
the first nine months of 2009, we experienced a decrease in demand for armored vehicles
from African countries. We believe that the armored car business will grow in the future
and become more significant to us. The armored car business is characterized by higher
gross margins than our traditional military products.

The
following table presents details of our export military sales during the three and nine
month periods ended September 30, 2009 and 2008:

|                            | Three Months Ended
September 30, | Nine Months Ended
September 30,
|--------------------------- | -------------------------------- | -------------------------------
|
|
|
|
|Sales to South America      |                                  |                                
|Sales to North America      |                                  |                                
|Sales to Europe and Asia    |                                  |                                
|Sales to Africa             |                                  |                                
|                            |                                  |                                
|Total Export Military Sales |                                  |                                
|                            |                                  |                                

Local
Civilian Market. In the first nine months of 2009, we experienced a decrease in demand
for our local market products. We expect this trend to continue during the remainder of
2009.

Export
Civilian Market. Since the downturn in demand that we experienced in the first quarter
of 2009 for products we market in our export civilian market, our sales levels have
returned to the higher levels of 2008. We expect this trend to continue for the remainder
of 2009.

Current
Economic Overview. We generate revenues from sales of our products to the civilian and
military markets. Accordingly, our business is affected by economic conditions. The
volatile economic conditions have slowed down our sales process and complicated our
ability to conduct transactions. The current economic climate and the uncertainty in
global economic conditions could impact the ability of our customers to make capital
expenditures, thereby affecting their ability to purchase our products. Our business and
financial performance, including collection of our accounts receivable, realization of
inventory and recoverability of assets including investments, may be adversely affected if
economic conditions deteriorate or continue to be volatile. Our profitability may also be
adversely affected by our fixed costs and the possibility that we would be unable to scale
back other costs within a time frame sufficient to match any decreases in revenue relating
to changes in market and economic conditions. The turmoil in the financial markets may
limit our ability to obtain financing for our working capital requirements.

Exchange
rate fluctuation. Exchange rate fluctuation affect our financial results in several
ways. Most of our deposits and a portion of our tradable securities are linked to the rate
of exchange between the U.S. dollar and the NIS. Accordingly, devaluation of the U.S.
dollar against the NIS is reflected as comprehensive income in our consolidated financial
statements.

21

---

---

We
develop products in Israel and sell them in Israel, North and South America, Asia, Africa
and several European countries. Our sales in Israel are denominated in NIS, while most of
our export sales are denominated in U.S. dollars. Under U.S. GAAP we report all of our
sales in U.S. dollars. Accordingly, appreciation of the U.S. dollar against the NIS
reduces our reported sales while the devaluation of the U.S. dollar against the NIS
increases our reported sales.

Our
cost of sales and operating expenses are affected in the same manner.  Most of our
purchases of raw material are made in U.S. dollars while most of our labor and other
operating expenses are in NIS, however, under U.S. GAAP we report our cost of sales and
operating expenses in U.S. dollars. Accordingly, appreciation of the U.S. dollar against
the NIS reduces our reported cost of sales and operating expenses while the
devaluation of the U.S. dollar against the NIS increases our reported cost of sales and
operating expenses.

In
the quarter ended September 30, 2009, the U.S. dollar depreciated against the NIS by
approximately 4.1%, and our financial results were negatively impacted. Because exchange
rates between the U.S. dollar and the NIS fluctuate continuously, exchange rate
fluctuations and especially larger periodic devaluations will have an impact on our
profitability and period-to-period comparisons of our results. We cannot assure you that
in the future our results of operations may not be materially adversely affected by
currency fluctuations.

# Former Operations in the
Erez Industrial Zone

During
2004, the Israeli Government decided to evacuate the Erez Industrial Zone in the Gaza
Strip, where part of our operations were located. We owned facilities, leased other
facilities and maintained equipment and inventory within this area. In 2005, we moved our
light cut and sew operation from the Erez Industrial Zone to Sderot and some
of our webbing equipment to Nazareth. In August 2005, we evacuated our remaining
operations and abandoned the buildings we owned and leased in the Erez Industrial Zone.

The
Israeli Governments decision to evacuate the Gaza Strip was supported by certain
resolutions, including the Evacuation Compensation Law that was adopted by the
Israeli Parliament to compensate the Israeli Gaza Strip settlers as well as business and
property owners in the Gaza Strip and in the Erez Industrial Zone. In February 2006, three
of our subsidiaries, Export Erez, Mayotex and Achidatex, filed claims for compensation
pursuant to the Evacuation Compensation Law. In 2006, we were notified that we would
receive advance payment in the aggregate amount of $523,000. We applied this payment
against the receivable established in 2005 and recorded the excess payment of $240,658,
net of taxes, as extraordinary gain. On February 18, 2008, Export Erez, Mayotex and
Achidatex signed definitive agreements with SELA, a government agency, established
pursuant to the Evacuation Compensation Law, for compensation of approximately $6.0
million, net of 5% related taxes, receipt of the previous advance payment and the other
associated costs.

# Tentative acquisitions

On
December 17, 2008, Mayotex entered into an agreement with Sarino Crystal Technologies Ltd.
and Sarino Optronics Ltd. (Sarino) to cooperate in the manufacture of optical
grade Germanium crystals and sales of optical and infra-red night vision products
utilizing the Germanium crystals (the Sarino Agreement). As of the balance
sheet date, Isorad Ltd.s (Isorad) board of directors has not approved
the Isorad Agreement as discussed below.

Pursuant
to the Sarino Agreement and subject to the approval of the Isorad Agreement:

| |  | 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22

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| |  | Mayotex
agreed to provide Mayosar with a loan of up to $2 million. Such loan will bear interest
at the rate of Libor + 2%, and is payable from profits generated by Mayosar.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
of September 30, 2009, Mayotex provided loans of $1 million to Sarino and $0.9 million to
Mayosar. Such payments are recognized as refundable deposits pending resolution of the
Isorad Agreement.

On
December 21, 2008, Mayosar, through its wholly owned subsidiary Isorad IR Optics Ltd.,
(Optics), entered into an agreement to purchase the Germanium Crystals
Business of Isorad, consisting of certain know-how, equipment, inventories and production
activities of Germanium Crystals for lenses used in infra-red night vision system
applications (Isorad Agreement). As of September 30, 2009, this agreement has
not been executed.

Pursuant
to the Isorad Agreement, Optics is to pay royalties of 3% out of sales for a period of 15
years commencing the effective date of the Isorad Agreement ( the Effective
Date), with a minimum amount of approximately $125,000 payable per year during the
first 18 months or until the date of completion of the transfer of the site of the
Germanium Crystals Business, whichever is earlier (this payment includes a reimbursement
of costs for the usage of the site and equipment in this initial period), and
approximately $50,000 per year during the following years of the royalties payment period.

Pursuant
to the Isorad Agreement, Isorad was granted the right to acquire 5% of the share capital
of Optics on a fully diluted basis for their nominal value during the 24 month period
beginning on the Effective Date. If the Israeli Government does not approve the 5%
purchase of the Optics shares by Isorad within twelve (12) months of the Effective Date,
the right to acquire the shares will expire and Isorad will be entitled to a payment of
$75,000.

In
the event of an allotment of shares to Isorad, representing 5% of Optics share
capital, Mayosar will issue to Mayotex additional shares of Mayosar on a pro rata basis,
in order for Mayotex to retain a 50.01% indirect interest in Optics share capital.

Optics
has the right during the four year period following the Effective Date to redeem and
purchase from Isorad its option to purchase 5% of its shares and to cancel its commitment
to pay royalties under the Isorad agreement, in consideration of a fixed payment of
$750,000, less all royalties paid to Isorad through that date.

Our
management is currently assessing the Companys legal position in order to clarify
the matter regarding the validity of the transaction with Isorad. Our management is of the
opinion, based on legal advice received, that the amounts paid under the Sarino and Isorad
agreements will be fully refundable to us in the event that the Isorad Agreement is not
consummated.

# Results of Operations

Our
management views revenues, the sources of our revenues, gross profit margin and the level
of inventory compared to revenues as the key performance indicators in assessing our
companys financial condition and results of operations. While our management
believes that demand for our products will continue to grow, our business is subject to a
high degree of volatility because of the impact of geopolitical events, government
budgeting, and competition.

Three Months Ended
September 30, 2009 Compared with Three Months Ended September 30, 2008

Net
Revenues. Net revenues for the three months ended September 30, 2009 decreased to
$3,554,137 from $4,647,247 in the three months ended September 30, 2008, a decrease of
23.5%. The decrease is mainly attributable to a decrease of approximately $0.4 million in
our local civilian market segment, and a decrease of approximately $1.4 million in our
export military market segment, which was offset by an increase of approximately $0.1
million in our export civilian market segment and an increase of approximately $0.6
million in our local military market segment. The increased revenues in our local military
market segment are attributable to an increase in demand for our products from the Israeli
Ministry of Defense. The decreased revenues in our export military market and local
civilian market segments are attributable to a general decrease in demand for our products
in those markets.

23

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The
following table sets forth the breakdown of sales by segment for the three months ended
September 30, 2009 and 2008.

|                       | Three Months Ended
September 30,
|---------------------- | --------------------------------
|
|
|
|
|Local civilian market  |                                 
|Export civilian market |                                 
|Local military market  |                                 
|Export military market |                                 
|                       |                                 
|Total                  |                                 
|                       |                                 

Gross
Profit. Gross profit for the three months ended September 30, 2009 was $716,217 compared
to $972,830 for the three months ended September 30, 2008. Our gross profit margin
for the three months ended September 30, 2009 decreased to 20.2% compared to 20.9% for the
three months ended September 30, 2008. The decrease in gross profit margin is primarily
attributable to the 23.5% decrease in revenues while our cost of sales decreased by only
22.8%, which is primarily due to our fixed costs that are not revenue dependent.

Selling
Expenses. Selling expenses for the three months ended September 30, 2009 decreased by
30.8% to $153,485 from $221,866 for the three months ended September 30, 2008. The
decrease in our selling expenses was attributable primarily to the decrease in export
sales commissions and also due to the depreciation of the U.S. dollar against the NIS.

General
and Administrative Expenses. General and administrative expenses for the three months
ended September 30, 2009 decreased by 1.3% to $551,053 from $558,205 for the three months
ended September 30, 2008.

Compensation
from Israeli Government. In the second quarter of 2009, Export Erez and Mayotex
received a total of $223,913, as compensation from the Israeli Government under the
Property tax and compensation payments for war damages regulations, for the
loss of employment days and potential revenues during the last two years due to the
security and military situation in the area in which Export Erez and Mayotex are located.
We recorded $4,452 of income due to exchange rate differences in the third quarter with
respect to the compensation received from the Israeli Government.

Financial
(Expenses) Income, Net. We had financial expenses, net of $255,392 for the three months
ended September 30, 2009 compared to financial income, net of $108,206 for the three
months ended September 30, 2008. Our financial expenses are primarily due to the change in
the U.S. dollar exchange rate versus the NIS, which resulted in a loss of $254,938 for the
three months ended September 30, 2009 compared to a gain of $85,000 for the three months
ended September 30, 2008.

Other
Income (Expense), Net. We had other income, net for the three months ended September 30,
2009 of $71,999 as compared to other expense, net of $29,814 for the three months ended
September 30, 2008. Our other income in the three months ended September 30, 2009 is
attributable to a $30,330 gain derived from revaluation of funds in respect of employee
rights upon retirement, a $8,832 gain derived from sales of tradable securities and a
$32,837 unrealized gain on tradable securities. Our other expense for the three months
ended September 30, 2008 is mainly attributable to a $8,608 loss from sales of tradable
securities and a $48,191 unrealized loss on tradable securities.

Income
Tax Expense. Our income tax benefit for the three months ended September 30, 2009 was
$16,878 compared to income tax expense of $121,752 for the three months ended September
30, 2008. The decrease in income tax expense was mainly due to the loss before income
taxes in the three months ended September 30, 2009 compared to income before income taxes
in the three months ended September 30, 2008.

24

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Net
Income (Loss) Before Extraordinary Income. Net loss before extraordinary income for
the three months ended September 30, 2009 was $150,384 as compared to net income
before extraordinary income for the three months ended September 30, 2008 of $149,399.

Extraordinary
Income. We did not record any extraordinary income for the three months ended
September 30, 2009. For the three months ended September 30, 2008, we recognized and
recorded extraordinary income of $19,524, net of tax, from payments to our three
subsidiaries, Export Erez, Mayotex and Achidatex, by the Israeli Government with respect
to their evacuation from the Gaza Industrial Zone.

Net
Loss Attributable to Noncontrolling Interest. For the three months ended September
30, 2009, we did not recognize or record any income attributable to noncontrolling
interest, compared to a net loss of $23,347 attributable to noncontrolling interest for
the three months ended September 30, 2008, which loss relates to a subsidiary that is now
wholly-owned.

Net
Income (Loss). For the three months ended September 30, 2009 our consolidated net loss
attributable to controlling interest was $150,384, compared to net income of $192,270
attributable to controlling interest for the three months ended September 30, 2008.

Nine Months Ended
September 30, 2009 Compared with Nine Months Ended September 30, 2008

Net
Revenues. Net revenues for the nine months ended September 30, 2009 increased to
$12,943,562 from $12,249,635 in the nine months ended September 30, 2008, an increase of
5.7%. The increase is mainly attributable to an increase in revenues from our local
military market segment. In the period ended September 30, 2009, revenues from our local
military market segment increased by approximately $2.1 million. The increased revenues in
our local military market segment are attributable to an increase in demand for our
products. This increase was offset by a decrease of approximately $1.4 million in our
local civilian market segment. The following table sets forth the breakdown of sales by
segment for the nine months ended September 30, 2009 and 2008.

|                       | Nine Months Ended
September 30,
|---------------------- | -------------------------------
|
|
|
|
|Local civilian market  |                                
|Export civilian market |                                
|Local military market  |                                
|Export military market |                                
|                       |                                
|Total                  |                                
|                       |                                

Gross
Profit. Gross profit for the nine months ended September 30, 2009 was $2,960,570 compared
to $2,892,736 for the nine months ended September 30, 2008. This increase in gross profit
is primarily attributable to the increase in revenues from sales. Our gross profit margin
for the nine months ended September 30, 2009 decreased to 22.9% compared to 23.6% for the
nine months ended September 30, 2008.

Selling
Expenses. Selling expenses for the nine months ended September 30, 2009 decreased by 35.4%
to $485,540 from $751,700 for the nine months ended September 30, 2008. The decrease in
our selling expenses was attributable primarily to lower commissions due to a different
mix of products sales and a decrease in sales through agents.

General
and Administrative Expenses. General and administrative expenses for the nine months ended
September 30, 2009 decreased by 9.5% to $1,537,421 from $1,699,434 for the nine months
ended September 30, 2008. This decrease is primarily attributable to a decrease in
professional services expenses.

25

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Compensation
from Israeli Government. In the second quarter of 2009, Export Erez and Mayotex received a
total of $223,913, as compensation from the Israeli Government under the Property
tax and compensation payments for war damages regulations, for the loss of
employment days and potential revenues during the last two years due to the security and
military situation in the area in which Export Erez and Mayotex are located. We recorded
$4,452 of income due to exchange rate differences in the third quarter with respect to the
compensation received from the Israeli Government.

Financial
(Expenses) Income, Net. We had financial expenses, net of $38,423 for the nine months
ended September 30, 2009 compared to financial expenses, net of $158,295 for the nine
months ended September 30, 2008. Our financial expense is primarily due to the change in
the U.S. dollar exchange rate versus the NIS, which resulted in a loss of $97,570 for the
nine months ended September 30, 2009 compared to a loss of $165,864 for the nine months
ended September 30, 2008.

Other
Income (Expense), Net. We had other income, net for the nine months ended September 30,
2009 of $293,204 as compared to other expense, net of $126,483 for the nine months ended
September 30, 2008. Our other income in the nine months ended September 30, 2009 is mainly
attributable to revaluation of funds in respect of employee rights upon retirement of
$111,570, a gain derived from sales of tradable securities of $33,512 and an unrealized
gain of $148,122 on tradable securities. Our other expense in the nine months ended
September 30, 2008 is mainly attributable to a $63,654 loss derived from sales of tradable
securities and a $101,198 unrealized loss on tradable securities offset by gain from sales
of property, plant and equipment of $38,369.

Income
Tax Expense. Our income tax expense for the nine months ended September 30, 2009 was
$341,348 compared to income tax expense of $210,756 for the nine months ended September
30, 2008. The increase in income tax expense was mainly due to the increase in our income
before income taxes in the nine months ended September 30, 2009. During the nine months
ended September 30, 2008 the Company recorded additional income tax liability in respect
of prior years under tax assessment of Israeli subsidiaries and for non-deductible
expenses for tax purposes.

Net
Income (Loss) Before Extraordinary Income. Net income before extraordinary income for the
nine months ended September 30, 2009 was $1,079,407 as compared to net loss
before extraordinary income for the nine months ended September 30, 2008 of $53,932.

Extraordinary
Income. We did not record any extraordinary income for the nine months ended September 30,
2009. For the nine months ended September 30, 2008, we recognized and recorded
extraordinary income of $4,930,065, net of tax, from payments to our three subsidiaries,
Export Erez, Mayotex and Achidatex, by the Israeli Government with respect to their
evacuation from the Gaza Industrial Zone.

Net
Income Attributable to Noncontrolling Interest. For the nine months ended September 30,
2009, we did not recognize or record any income attributable to noncontrolling interest,
compared to net income of $36,112 attributable to noncontrolling interest for the nine
months ended September 30, 2008, which is with respect to a subsidiary that is now
wholly-owned.

Net
Income. In the nine months ended September 30, 2009 our consolidated net income
attributable to controlling interest was $1,079,407, compared to $4,840,021 for the nine
months ended September 30, 2008. Our 2008 net income was attributable to the net
extraordinary income of $4,930,065 we recorded as a result of the compensatory payments we
received from the Israeli government.

# Liquidity and Capital
Resources

As
of September 30, 2009, we had $3,875,330 in cash and cash equivalents, $2,277,110 in
trading securities and working capital of $10,575,914 as compared to $1,719,921 in cash
and cash equivalents, $2,384,727 in trading securities and working capital of $10,088,528
at December 31, 2008.

Most
of our large contracts, which are Israeli Governmental contracts, are supported by letters
of credit. As a result, we believe that we have limited exposure to doubtful accounts
receivables. We have strived to balance our accounts payable and accounts receivable. We
believe that we have sufficient working capital and borrowing capability to sustain our
current level of operations for the next twelve months.

26

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Subject
to an unexpected growth in inventories as a result of future growth in sales and to a
significant change in raw material prices, we intend to use our cash flow from operations
for the acquisition of companies or equipment to expand our capabilities.

We
anticipate that our research and development expenses in 2009 will total approximately
$90,000.

On
October 30, 2008, our Board of Directors authorized a stock repurchase program, which
authorizes the use of up to $450,000 for the purchase of shares of common stock of our
company over a period of nine months. We did not purchase any shares as part of this
program, but we purchased 1,050,000 shares from our former minority shareholders in
December 31, 2008 in connection with our purchase of their minority interests.

# Cash Flows

The
following table summarizes our cash flows for the periods presented:

|                                                    | Nine months ended
|--------------------------------------------------- | -----------------
|
|
|
|
|Net cash provided by (used in) operating activities |                  
|Cash provided by extraordinary items                |                  
|Net cash provided by (used in) investing activities |                  
|Net cash used in financing activities               |                  
|Net increase in cash and cash equivalents           |                  
|Cash and cash equivalents at beginning of period    |                  
|Cash and cash equivalents at end of period          |                  

Net
cash provided by operating activities was $1,587,773 for the nine months ended September
30, 2009 as compared to $641,625 used in operating activities in the nine months ended
September 30, 2008. This was primarily provided from net income of $1,079,407, a decrease
in accounts receivable of $429,389, a decrease in inventories of $504,660 and a decrease
in trading securities of $276,488, offset by a decrease in accounts payable of $227,654
and a decrease in other current liabilities of $689,791.

Net
cash provided by investing activities was $2,042,210 for the nine months ended September
30, 2009 as compared to $2,168,942 net cash used in the nine months ended September 30,
2008. During the nine months ended September 30, 2009, $3,000,000 was provided from the
redemption of bank deposits, $52,189 was provided from the sale of fixed assets, $91,118
was used to purchase fixed assets and $918,861 was used for the purchase of a business.

Net
cash used in financing activities was $1,695,666 for the nine months ended September 30,
2009 as compared to $174,027 net cash used in financing activities for the nine months
ended September 30, 2008. During the nine months ended September 30, 2009, we incurred
additional short-term debt of $231,278, repaid $264,388 of long-term debt and paid
$1,200,000 to related parties for the purchase of their minority interest in Achidatex
and 1,050,000 of our companys shares held by them.

# Foreign Currency
Exchange Risk

We
develop products in Israel and sell them in Israel, North and South America, Asia, Africa
and several European countries. Our sales in Israel are denominated in NIS while most of
our export sales are denominated in U.S. dollars. In addition, our labor expenses are
primarily paid in NIS while our expenses for raw materials are paid in U.S. dollars and
Euros. As a result, our financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.

27

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Our
foreign currency exposure with respect to our sales is mitigated, and we expect it will
continue to be mitigated, through salaries, materials and support operations, in which
part of these costs are denominated in NIS.

In
the year ended December 31, 2008, the inflation rate in Israel was 3.8% and the NIS
appreciated in relation to the U.S. dollar at a rate of 1.14%, from NIS 3.846per
$1 on December 31, 2007 to NIS 3.802 per $1 on December 31, 2008. In the nine months
ended in September 30, 2009 inflation in Israel was 3.42% while the NIS appreciated in
relation to the U.S. dollar at a rate of 1.16%. If future inflation in Israel exceeds the
devaluation of the NIS against the U.S. dollar or if the timing of such devaluation lags
behind increases in inflation in Israel, our results of operations may be materially
adversely affected.

We
did not enter into any foreign exchange contracts or hedging transactions in the nine
months ended September 30, 2009.

# Inflation and Seasonality

We
do not believe that our operating results have been materially affected by inflation
during the preceding two years. There can be no assurance, however, that our operating
results will not be affected by inflation in the future. Our business is subject to
minimal seasonal variations with slightly increased sales historically in the second and
third quarters of fiscal year.

# Off-balance Sheet
Arrangements

None.

# Contractual Obligations

The
following table summarizes our contractual obligations and commercial commitments as of
September 30, 2009.

|Contractual Obligations     |  | Payments due by Period
|--------------------------- |  | ----------------------
|
|
|
|
|Long-term debt obligations  |  |                       
|Estimated interest          |  |                       
|payments on long-term debt  |  |                       
|obligations                 |  |                       
|Operating lease obligations |  |                       
|                            |  |                       
|Total                       |  |                       
|                            |  |                       

# Critical Accounting
Policies

A
discussion of our critical accounting policies was provided in Item 7 of our Annual Report
on Form 10-K for the year ended December 31, 2008. There were no significant changes to
these policies in the nine months ended September 30, 2009.

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# Recent Accounting
Pronouncements

See
Note 1G. to the unaudited condensed consolidated financial statements included in Part I,
Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

Item 3. Quantitative
and Qualitative Disclosures About Market Risk

# Interest Rate Risk

We
do not believe that we have any material exposure to interest rate risk other than
sensitivity to prevailing interest rates that may affect income from our cash deposits
and marketable securities.

# Foreign Exchange Risk

Most
of our sales are currently denominated in dollars, while the majority of our operating
expenses are incurred in foreign currencies, principally the NIS. As a result, the
decrease in the value of the U.S. dollar against these currencies has resulted in
increased expenses for our company. In 2006, 2007 and 2008, the U.S dollar depreciated
against the NIS by approximately 8%, 9%, 1%, respectively. In the first nine months of
2009, the U.S dollar depreciated by approximately 1.2% in relation to the NIS.

# Item
4T. Controls and Procedures

We
maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Securities Exchange Act of 1934, or the Exchange Act,
reports is recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms, and that such
information is accumulated and communicated to our chief executive officer and chief
financial officer to allow timely decisions regarding required disclosure. Our
management, including our chief executive officer and chief financial officer, conducted
an evaluation of the effectiveness of our disclosure controls and procedures, as defined
under Exchange Act Rule 13a-15(e), as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based upon that evaluation, our chief executive officer and chief
financial officer have concluded that, as of such date, our disclosure controls and
procedures were effective.

# Changes in Internal
Control over Financial Reporting

There
was no change in our internal control over financial reporting that occurred during the
quarter ended September 30, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.

# PART II  OTHER
INFORMATION:

# Item 1. Legal Proceedings

On
February 11, 2009, a lawsuit was filed in the Jerusalem District Court against our
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 $2.7
million), and claiming all rights in the patent. We believe that the plaintiffs
claim is unfounded and that we have substantial legal arguments to oppose the
allegations. We have denied any liability under the claims, have sought the dismissal of
the claims against Export Erez and Mr. Avraham Hazor because of a lack of privity, have
sought to join a third party and have submitted a counterclaim against the plaintiff for
funds owed to Achidatex. This matter is currently in its early stages, and we intend to
vigorously defend against the claim and to pursue our counterclaim.

29

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# Item 1A. Risk Factors

Our business may be
negatively affected by the current global economic and credit crisis.

The
current economic climate and the uncertainty in the global economic conditions resulting
from the recent disruption in credit markets pose a risk to the overall economy that could
impact customer demand for our products, as well as our ability to manage normal
commercial relationships with our customers, suppliers and creditors. If the current
situation deteriorates significantly, our business could be negatively impacted, including
such areas as reduced demand for our products from a slow-down in the general economy, or
supplier or customer disruptions resulting from tighter credit markets.

# Reliance on a Limited
Number of Key Personnel.

Our
success has been significantly dependent on the services of our former chairman and chief
executive officer, Joseph Postbinder. Mr. Postbinder passed away in June 2009 and we
appointed Mrs. Meira Postbinder to succeed him as the chairman of our board of directors.
Mr. Baruch Tosh, our president, was appointed as Chief Executive Officer. The death of Mr.
Joseph Postbinder could have a material adverse effect on our business.

There
have been no other material changes to our Risk Factors set forth in our
Annual Report on Form 10-K for the year ended December 31, 2008.

# Item 6.  Exhibits

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

|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.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------

30

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# SIGNATURE

In
accordance with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

|Dated: November  12, 2009 |  | DEFENSE INDUSTRIES INTERNATIONAL, INC.By: /s/ Baruch Tosh
Baruch ToshChief Executive Officer and President
|------------------------- |  | ------------------------------------------------------------------------------------------------------------------------

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