---

---

# U.S. SECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549

# FORM 10-QSB

|x | Quarterly
 report  under  Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 for the
 quarterly period ended June 30, 2007
|- | -------------------------------------------------------------------------------------------------------------------------------------

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

Commission file number:
000-30105

|                                                                 
|-----------------------------------------------------------------
|Defense Industries
International, Inc.                           
|                                                                 
|(Exact Name of Small
Business Issuer as Specified in Its Charter)

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

|                                        
|----------------------------------------
|8 Brussels St. 
Sderot, 80100, Israel   
|                                        
|(Address of Principal
Executive Offices)

|                                                
|------------------------------------------------
|(011) 972-8-689-1611                            
|                                                
|(Issuer's Telephone Number, Including Area Code)

Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No x

As of August 2, 2007, the Issuer had
28,867,272 shares of Common Stock, $.0001 par value per share, outstanding.

Transitional
Small Business Disclosure Format (check one):

Yes o    No x



---

---



# DEFENSE INDUSTRIES
INTERNATIONAL, INC. AND SUBSIDIARIES

# INDEX

|                                |                                                                  | Page
|------------------------------- | ---------------------------------------------------------------- | ----
|
|Part I  Financial Information: |                                                                 
|                               
|Item 1.                         | Condensed Consolidated Balance Sheets as of June 30, 2007        |     
|                                | (Unaudited) and December 31, 2006                                | 1   
|                               
|                                | Condensed Consolidated Statements of Operations and              |     
|                                | Comprehensive Income (Loss) for the Three and Six Months         |     
|                                | Ended June 30, 2007 and 2006 (Unaudited)                         | 3   
|                               
|                                | Condensed Consolidated Statements of Cash Flows                  |     
|                                | for the Six Months Ended June 30, 2007 and 2006 (Unaudited)      | 5   
|                               
|                                | Notes to Condensed Consolidated Financial Statements (Unaudited) | 6   
|                               
|Item 2.                         | Management's Discussion and Analysis or Plan of Operation        | 10  
|                               
|Item 3A.                        | Controls and Procedures                                          | 21  
|                               
|Part II  Other Information:    |                                                                 
|                               
|Item 1.                         | Legal Proceedings                                                | 22  
|                               
|Item 2.                         | Unregistered Sales of Equity Securities and Use of Proceeds      | 22  
|                               
|Item 3.                         | Default Upon Senior Securities                                   | 22  
|                               
|Item 4.                         | Submission of Matters to a Vote of Security Holders              | 22  
|                               
|Item 5.                         | Other Information                                                | 22  
|                               
|Item 6.                         | Exhibits and Reports on Form 8-K                                 | 22  

i

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC. AND SUBSIDIARY COMPANIES

# CONDENSED CONSOLIDATED
BALANCE SHEETSAS OF JUNE 30, 2007 (UNAUDITED) AND DECEMBER 31, 2006

ASSETS

|                                                                                 | June 30, 2007 | December 31, 2006
|-------------------------------------------------------------------------------- | ------------- | -----------------
|
|
|
|
|CURRENT ASSETS                                                                   |               |                  
|Cash and cash equivalents                                                        |               |                  
|Accounts receivable, net of allowance for doubtful accounts of $194,608 and      |               |                  
|$223,532, respectively                                                           |               |                  
|Accounts receivable - related parties, net of allowance for doubtful accounts of |               |                  
|$105,788 and $106,389, 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                                                                   |               |                  
|Intangible assets, net                                                           |               |                  
|                                                                                 |               |                  
|Total Other Assets                                                               |               |                  
|                                                                                 |               |                  
|                                                                                 |               |                  
|TOTAL ASSETS                                                                     |               |                  
|                                                                                 |               |                  

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

1

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC. 
AND SUBSIDIARY
COMPANIES

# CONDENSED CONSOLIDATED
BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS' EQUITY

|                                                                          | June 30, 2007 | December 31, 2006
|------------------------------------------------------------------------- | ------------- | -----------------
|
|
|
|
|CURRENT LIABILITIES                                                       |               |                  
|Accounts payable                                                          |               |                  
|Short-term debt and current maturities of long-term debt                  |               |                  
|Common stock to be issued                                                 |               |                  
|Embedded derivatives at fair value                                        |               |                  
|Other current liabilities                                                 |               |                  
|                                                                          |               |                  
|Total Current Liabilities                                                 |               |                  
|                                                                          |               |                  
|                                                                          |               |                  
|LONG-TERM LIABILITIES                                                     |               |                  
|Long-term portion of debt                                                 |               |                  
|Liability for employee rights upon retirement                             |               |                  
|Deferred taxes                                                            |               |                  
|Common stock to be issued                                                 |               |                  
|Embedded derivatives at fair value                                        |               |                  
|Total Long-Term Liabilities                                               |               |                  
|                                                                          |               |                  
|TOTAL LIABILITIES                                                         |               |                  
|                                                                          |               |                  
|                                                                          |               |                  
|Minority interest                                                         |               |                  
|                                                                          |               |                  
|COMMITMENTS AND CONTINGENCIES                                             |               |                  
|                                                                          |               |                  
|SHAREHOLDERS' EQUITY                                                      |               |                  
|Preferred stock, $.0001 par value, 50,000,000 shares                      |               |                  
|authorized, none issued and outstanding                                   |               |                  
|Common stock, $.0001 par value, 250,000,000 shares authorized, 28,867,272 |               |                  
|and 28,793,198, respectively, issued and outstanding                      |               |                  
|Additional paid-in capital                                                |               |                  
|Retained earnings                                                         |               |                  
|Accumulated other comprehensive loss                                      |               |                  
|                                                                          |               |                  
|Total Shareholders' Equity                                                |               |                  
|                                                                          |               |                  
|                                                                          |               |                  
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                |               |                  
|                                                                          |               |                  

2

---

---

# DEFENSE INDUSTRIES INTERNATIONAL,
INC. 
AND SUBSIDIARY
COMPANIES

# CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS 
AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (UNAUDITED)

|                                                                      | For the Three Months
Ended June 30, | For the Six Months
Ended June 30,
|--------------------------------------------------------------------- | ----------------------------------- | ---------------------------------
|
|
|
|
|NET REVENUES                                                          |                                     |                                  
|                                                                      |                                     |                                  
|COST OF SALES                                                         |                                     |                                  
|                                                                      |                                     |                                  
|                                                                      |                                     |                                  
|GROSS PROFIT                                                          |                                     |                                  
|                                                                      |                                     |                                  
|                                                                      |                                     |                                  
|OPERATING EXPENSES                                                    |                                     |                                  
|Selling                                                               |                                     |                                  
|General and administrative                                            |                                     |                                  
|                                                                      |                                     |                                  
|Total Operating Expenses                                              |                                     |                                  
|                                                                      |                                     |                                  
|                                                                      |                                     |                                  
|INCOME (LOSS) FROM OPERATIONS                                         |                                     |                                  
|                                                                      |                                     |                                  
|                                                                      |                                     |                                  
|OTHER  INCOME (EXPENSES)                                              |                                     |                                  
|Financial income (expenses), net                                      |                                     |                                  
|Gain on fair value adjustment to embedded derivatives                 |                                     |                                  
|Other income (expenses), net                                          |                                     |                                  
|                                                                      |                                     |                                  
|Total Other Income                                                    |                                     |                                  
|                                                                      |                                     |                                  
|                                                                      |                                     |                                  
|INCOME (LOSS) BEFORE INCOME TAXES                                     |                                     |                                  
|                                                                      |                                     |                                  
|Less: income tax (expenses) benefit                                   |                                     |                                  
|                                                                      |                                     |                                  
|                                                                      |                                     |                                  
|Income (loss) before minority interest in income in subsidiary        |                                     |                                  
|                                                                      |                                     |                                  
|Minority interest income (loss)                                       |                                     |                                  
|                                                                      |                                     |                                  
|                                                                      |                                     |                                  
|NET INCOME (LOSS)                                                     |                                     |                                  
|                                                                      |                                     |                                  
|OTHER COMPREHENSIVE INCOME (LOSS)                                     |                                     |                                  
|Foreign currency translation income (loss), net of minority interest  |                                     |                                  
|portion                                                               |                                     |                                  
|                                                                      |                                     |                                  
|Other comprehensive income (loss) before tax                          |                                     |                                  
|Income tax benefit (expenses) related to items of other comprehensive |                                     |                                  
|income                                                                |                                     |                                  
|                                                                      |                                     |                                  
|                                                                      |                                     |                                  
|TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX                   |                                     |                                  
|                                                                      |                                     |                                  

3

---

---

# DEFENSE INDUSTRIES INTERNATIONAL,
INC. 
AND SUBSIDIARY
COMPANIES

# CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME (LOSS) (UNAUDITED)

|                                                                  | For the Three Months | For the Six Months
|----------------------------------------------------------------- | -------------------- | ------------------
|
|
|
|
|COMPREHENSIVE INCOME (LOSS)                                       |                      |                   
|                                                                  |                      |                   
|                                                                  |                      |                   
|Net income (loss) per share - basic and diluted                   |                      |                   
|                                                                  |                      |                   
|                                                                  |                      |                   
|Weighted average number of shares outstanding - basic and diluted |                      |                   
|                                                                  |                      |                   

4

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC. 
AND SUBSIDIARY
COMPANIES

# CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWSFOR THE SIX MONTHS
ENDED JUNE 30, 2007 AND 2006 (UNAUDITED)

|                                                                           | For the Six Months
Ended June 30,
|-------------------------------------------------------------------------- | ---------------------------------
|
|
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                      |                                  
|Net income (loss)                                                          |                                  
|Adjustments to reconcile net income to net cash provided                   |                                  
|by (used in) operating activities:                                         |                                  
|Items not effecting cash:                                                  |                                  
|Depreciation and amortization                                              |                                  
|Gain from sale of property, plant and equipment                            |                                  
|Provision for doubtful accounts                                            |                                  
|Gain on fair value adjustment to embedded derivatives                      |                                  
|Net realized and unrealized gain on marketable securities                  |                                  
|Minority interest in income (loss) of subsidiary                           |                                  
|Gain from erosion of long-term loans                                       |                                  
|(Increase) decrease in deferred taxes                                      |                                  
|Changes in assets and liabilities:                                         |                                  
|(Increase) decrease in funds in respect of employee rights upon retirement |                                  
|Increase in accounts receivable                                            |                                  
|Decrease in other assets                                                   |                                  
|(Increase) in inventories                                                  |                                  
|(Increase) decrease in trading securities                                  |                                  
|Increase in accounts payable                                               |                                  
|Increase (decrease) in other liabilities                                   |                                  
|Increase (decrease) in liability for employee rights upon retirement       |                                  
|                                                                           |                                  
|Net cash provided by (used in) operating activities                        |                                  
|                                                                           |                                  
|                                                                           |                                  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                      |                                  
|Purchases of property, plant and equipment                                 |                                  
|Proceeds from sale of property, plant and equipment                        |                                  
|                                                                           |                                  
|Net cash used in investing activities                                      |                                  
|                                                                           |                                  
|                                                                           |                                  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                      |                                  
|Reduction in short-term debt, net                                          |                                  
|Payments on long-term debt                                                 |                                  
|Proceeds from long term loans                                              |                                  
|                                                                           |                                  
|Net cash (used in) provided by financing activities                        |                                  
|                                                                           |                                  
|                                                                           |                                  
|EFFECT OF CHANGES IN EXCHANGE RATES ON CASH                                |                                  
|                                                                           |                                  
|                                                                           |                                  
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                  |                                  
|                                                                           |                                  
|CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                            |                                  
|                                                                           |                                  
|                                                                           |                                  
|CASH AND CASH EQUIVALENTS - END OF PERIOD                                  |                                  
|                                                                           |                                  
|                                                                           |                                  
|INTEREST PAID                                                              |                                  
|                                                                           |                                  
|                                                                           |                                  
|TAXES PAID                                                                 |                                  
|                                                                           |                                  

# SUPPLEMENTAL SCHEDULE OF
NON-CASH FINANCING ACTIVITIES:

On May 1, 2007, the Company issued
74,074 shares of common stock, having a fair value of $40,000 at date of issuance, to the
former owner of Owen Mills. The shares were issued pursuant to the agreement signed on
February 28, 2005 to acquire the business of Owen Mills.

5

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC. 
AND SUBSIDIARY
COMPANIES 
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007

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

| | A. | The
accompanying unaudited interim consolidated financial statements as of June
               30, 2007 and for the three and six 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, 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 year ended December 31, 2006.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 (consisting
of normal recurring                accruals) considered necessary for fair presentation
of the Interim Financial                Statements have been included. The results of
operations for the three and six months                period ended June 30, 2007, are not
necessarily indicative of the results that                may be expected for the year
ending December 31, 2007. The Interim Financial                Statements should be read
in conjunction with the Companys annual                financial statements as of
December 31, 2006 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. and its wholly owned subsidiaries, Export Erez, USA, Inc., Export Erez, Ltd.,
Mayotex, Ltd., Dragonwear Trading Ltd, its 76% owned subsidiary, Achidatex Nazareth Elite
(1997) Ltd., for all periods presented and Owen Mills(collectively, the Company).
The minority interest represents the minority shareholdersproportionate share of
Achidatex Nazareth Elite (1997) Ltd. All intercompany accounts and transactions have been
eliminated in consolidation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Earnings
per common share
| | -- | -------------------------

| | Basic
and diluted earning per common share is presented in conformity with SFAS No.128, Earnings
Per Share for all periods presented. Basic earnings per common share is computed by
dividing net income, by the weighted average number of shares of outstanding common
shares. Diluted earnings per common share is computed by dividing net income, by the
weighted average number of shares of outstanding common shares adjusted to include
incremental common shares that would have been outstanding if potentially dilutive common
shares had been issued.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC. 
AND SUBSIDIARY
COMPANIES 
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007

| | F. | Recent
accounting pronouncements
| | -- | --------------------------------

| | In
March 2007, the Financial Accounting Standards Board (FASB) ratified Emerging
Issues Task Force (EITF) Issue No. 06-10, Accounting for Collateral
Assignment Split-Dollar Life Insurance Arrangements (EITF No. 06-10).
EITF No. 06-10 requires an employer to recognize a liability for the postretirement
benefit related to a collateral assignment split-dollar life insurance arrangement in
accordance with either Statement of Financial Accounting Standards (SFAS) No.
106 or Accounting Principles Board (APB) Opinion No. 12 if the employer has
agreed to maintain a life insurance policy during the employees retirement or
provide the employee with a death benefit. EITF No. 06-10 also requires an employer to
recognize and measure an asset based on the nature and substance of the collateral
assignment split-dollar life insurance arrangement. EITF No. 06-10 is effective for
fiscal years beginning after December 15, 2007 with early adoption permitted. The Company
is evaluating the impact that the adoption of EITF No. 06-10 will have on its financial
statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 2 |  | INVENTORIES
|------ |  | -----------

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

| |                  | June 30, 2007 | December 31, 2006
| | ---------------- | ------------- | -----------------
|
|
|
|
| | Raw materials    |               |                  
| | Work in progress |               |                  
| | Finished goods   |               |                  
| |                  |               |                  
| |                  |               |                  
| |                  |               |                  

|NOTE 3 |  | SEGMENT INFORMATION AND CONCENTRATIONS
|------ |  | --------------------------------------

| | The
Company has two strategic business units: the civilian market and the military market.
The military market is further broken down between local and export sales in order to
better analyze trends in sales and profit margins. The Company does not allocate assets
between segments because several assets are used in more than one segment and any
allocation would be impractical.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC. 
AND SUBSIDIARY
COMPANIES 
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007

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

|                           | Civilian | Military |  
|-------------------------- | -------- | -------- | -
|
|
|
|
|For the six months ended   |          |          |  
|June 30, 2007:             |          |         
|                           |          |         
|Net revenues               |          |          | $
|Income from operations     |          |          |  
|                           |          |         
|For the three months ended |          |         
|June 30, 2007:             |          |         
|                           |          |         
|Net revenues               |          |          | $
|Income from operations     |          |          |  
|                           |          |         
|For the six months ended   |          |         
|June 30, 2006:             |          |         
|                           |          |         
|Net revenues               |          |          | $
|Loss from operations       |          |          |  
|                           |          |         
|For the three months ended |          |         
|June 30, 2006:             |          |         
|                           |          |         
|Net revenues               |          |          | $
|Loss from operations       |          |          |  

| | B. | Revenues
from Sales to Single Customer Exceeding 10% of Sales:
| | -- | --------------------------------------------------------------

|                            | For the Three
Months Ended
June 30, | For the Six
Months Ended
June 30,
|--------------------------- | ----------------------------------- | ---------------------------------
|
|
|
|
|Customer A (Military Local) |                                     |                                  

|NOTE 4 |  | Income taxes
|------ |  | ------------

| | In
July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 48,
Accounting for Uncertainty in Income Taxes  an Interpretation of FASB
Statement No. 109,(FIN 48), which clarifies the accounting for uncertain income tax
positions. This interpretation prescribes a financial statement recognition threshold and
measurement attribute for any tax position taken or expected to be taken in a tax return.
The interpretation also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC. 
AND SUBSIDIARY
COMPANIES 
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007

| | Effective
January 1, 2007, the Company adopted FIN 48. Upon adoption, there was not any
unrecognized income tax benefits and the adoption of FIN 48 had no effect on shareholders equity.
The Company recognizes accrued interest and penalties related to uncertain tax positions
in income tax expense. At January 1, 2007, the Company had no accrued for interest or
penalties and there was no tax interest or penalties recognized in the statements of
operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys foreign subsidiaries in Israel filed income tax returns with the Israeli
Tax authorities, that as of 2002 are no longer subject to examination by the Israeli tax
authorities. During 2006, the Israeli tax authorities commenced an examination of such
subsidiaries income tax returns for the years 2003 through 2005, which is anticipated to
be completed by the end of 2007. The Israeli tax authorities proposed certain adjustments
to one subsidiaries, Mayotex Ltd., tax positions related to the allocation of costs
within the group and management fees charges by the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company did not anticipate that such proposed adjustments would have a material effect on
its financial position when the exam commenced in 2006 or during the first quarter of
2007.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Subsequent
to June 30, 2007, Mayotex Ltd. signed a settlement with the Israeli tax authorities,
regarding its tax position, for 2002 through 2005. According to settlement, the Company
recognized additional tax expense for previous years, and a current tax liability of
approximately $10,620, including interest.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of Mayotex Ltd.s tax settlement and based upon the enforcement of
statutory tax regulations, the Company recognized a tax expense and a current tax
liability of approximately $152,000 during the three months ended June 30, 2007 in
respect of the Companys other subsidiaries in Israel, since it is more likely than
not that the proposed settlement will be sustained by the Israeli tax authorities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the three months ended June 30, 2007, the Company recognized approximately $45,000 of
interest expense, related to the above unrecognized tax expense.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 5 |  | Significant related party transactions
|------ |  | --------------------------------------

| | Pursuant
to an employment agreement with the President of the Company, he is entitled to
additional compensation of 1.5% of the growth in the Companys total sales since
2002, by cash payment or at his discretion, by receiving options to purchase shares of
common stock in lieu of cash, according to the terms detailed in the employment agreement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the six months ended June 30, 2007, the President was entitled to bonus compensation in
the amount of $ 88,517, or 88,517 options, each exercisable for 2 ordinary shares of the
Companys common stock, in lieu of such compensation (having a fair value of
$106,220). The Interim Financial Statements include a reserve of $88,517 for such bonus.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

---

# Item 2.
Managements Discussion and Analysis or Plan of Operation

This
information should be read in conjunction with the condensed consolidated financial
statements and notes included elsewhere in this Quarterly Report on Form 10-QSB and the
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,
2006 contained in our 2006 Annual Report on Form 10-KSB. 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.

# Critical Accounting
Policies

We
have identified the following policies as critical to the understanding of our financial
statements. The preparation of our financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of sales and expenses during the reporting periods. Our financial
statements have been prepared in accordance with accounting principles generally accepted
in the United States.

Revenue
Recognition. Revenues from sales of products are recognized upon shipment to
customers. We provide a warranty on goods ranging from three to four years. Our policy is
to consider the establishment of a reserve for warranty expenses, based upon our
historical experience. We did not establish a reserve as at June 30, 2007 and December 31,
2006. If we change any of our assumptions with regard to our recognition of revenues or if
there is a change with respect to warranties expenses, our financial position and results
of operations may change materially.

Foreign
Currency Translation and Transactions. The functional currency of Export Erez, Ltd.,
Mayotex Ltd., and Achidatex Nazareth Elite is the New Israeli Shekel, or NIS. The
functional currency of Dragonwear Trading Ltd. is the Cyprus Pound, or CYP. The financial
statements of Dragonwear are translated into NIS. The financial statements for all of
these entities are then translated into U.S. dollars from NIS at period-end exchange rates
as to assets and liabilities and at average exchange rates as to revenues and expenses.
Capital accounts are translated at their historical exchange rates when the capital
transactions occurred. Foreign currency transaction gains or losses from transactions
denominated in currencies other than NIS are recognized in net income in the period the
gain or loss occurs. Any change in exchange rates may have a material impact on our
financial position and results of operations.

10

---

---

Accounts
Receivable. Accounts receivable consist primarily of receivables from customers and
institutions. We record a provision for doubtful accounts, when appropriate, to allow for
any amounts which may be unrecoverable based upon an analysis of our prior collection
experience, customer creditworthiness and current economic trends.

Most
of our large purchase orders are supported by letters of credit. As a result, we believe
that we have limited exposure to doubtful accounts receivables. We have historically
achieved net profits on an annual basis, but our quarterly profits are not consistent on a
quarter to quarter basis. Nevertheless, we have striven to balance our accounts payable
and accounts receivable.

Inventories. Inventories are valued at the lower of cost or market value using the
          first-in first-out method. The cost includes expenses of freight-in
          transportation. The specific identification method is used for finished goods
          since all orders are custom orders for customers. Inventories write-offs and
          write-down provisions are provided to cover risks arising from slow-moving items
          or technological obsolescence. Any change in our assumptions with respect to the
          need to write-off or write-down the value of our inventories may have a material
          affect on our financial position or results of operations.

Property
Plant and Equipment.Fixed assets are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated useful lives of
three to twenty-five years. These long-lived assets are generally evaluated on an
individual basis in making a determination as to whether such assets are impaired.
Periodically, we review our long-lived assets for impairment based on estimated future
non-discounted cash flows attributed to the assets. In the event such cash flows are not
expected to be sufficient to recover the recorded value of the assets, the assets are
written down to their estimated fair values. The use of different assumptions with respect
to the expected cash flows from our assets and other economic variables, primarily the
discount rate, may lead to different conclusions regarding the recoverability of our
assets carrying values and to the potential need to record an impairment loss for
our long-lived assets.

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, 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.

We
believe that current international tensions, the events of September 11, 2001 as well as
terror attacks in Europe, Asia and Africa in recent years, the continuing 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.

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We
expect to address this growth 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 and we believe that these acquisitions will also assist us to
broaden our portfolio of products.

# Material Trends

Local
Military Market. The Israeli Military defense budget has been subject to reductions
since the second half of the 2003. As a result, the demand for our products declined in
the second half of 2003 and stabilized at a lower level during the three years ended
December 31, 2006.

In
the second half of 2005, the Israeli Government evacuated the Gaza strip. As a result of
the Israeli Governments decisions and the evacuation, the Israeli Defense Forces, or
IDF, indicated that it will slightly reduce its manpower and that its battlefield
equipment will be stored for long periods in environments that will promote battlefield
readiness and the capability of quick deployment. In addition, as a result of the war
between Israel and the Hezbollah in Lebanon, which started in July 2006, many Israeli
reserve forces were activated, and a large amount of stored equipment was removed from
dry-storage compartments and mobilized. In light of this event, we believe that our
military business will grow as a result of an increase in the demand for our dry storage
systems products, bulletproof vests and other military gear. Such increase was reflected
in the fourth quarter of 2006, continued in the first quarter of 2007 and we expect the
trend to continue into the rest of 2007. In the first six months of 2006 and 2007, sales
to the Israeli Ministry of Defense were $860,682 and $4,841,192 accounting for 23.5% and
50.6% of our sales. As of August 10, 2007, we had a backlog of firm orders from the
Israeli Ministry of Defense of approximately $4,250,000, including orders of approximately
$1.5 million that we received subsequent to June 30, 2007. We anticipate that we will ship
approximately $3.0 million of this backlog in 2007.

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

Since
2003, we have increased our export efforts as a consequence of the worldwide environment
resulting from the events of September 11, 2001, the subsequent war on terrorism and the
continuing conflict in Iraq. We are continuing our efforts to strengthen our position in
our existing export markets in the U.S., South America, Asia and Europe, and to extend our
presence to new export markets in South America and Europe and Australia. We believe that
those markets are growing and that any future success in such markets is mainly dependent
on our ability to be competitive in our pricing and the quality of our products.

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As
a result of the above, we expect that our export military business will grow in the next
two to three years.

The
following table presents details of our export military sales:

|                            | Three Months Ended
June 30, | Six Months Ended
June 30,
|--------------------------- | --------------------------- | -------------------------
|
|
|
|
|Sales to South America      |                             |                          
|Sales to North America      |                             |                          
|Sales to Europe and Asia    |                             |                          
|Sales to Australia          |                             |                          
|                            |                             |                          
|Total Export Military Sales |                             |                          
|                            |                             |                          

Local Civilian
Market. Our product range to the civilian market is diversified. In 2006 and 2005, our
local market business grew as a result of the improvement of the economic situation in
Israel. We expect an increase in this market in 2007 and in the future.

Export
Civilian Market. Our product range to the export civilian market consists of a range
of several similar products to the agriculture sector to a single US based customer. The
products we manufacture are distributed by us directly to the end users located worldwide.

Industry
Consolidation. Prior to 2005, we encountered additional competition as a result of a trend
toward consolidation among our competitors. This trend abated in 2006 and is not as
relevant at present. However, there can be no assurance that additional consolidation
among our competitors will not take place in the future.

Gross
Profit Margins. Our pricing policy, although slightly different from one product to
the other, is based on our existing overall gross margin. We do not expect a material
change in our gross profit margins in the foreseeable in future.

Backlog.          We
had approximately $7.0 million of unfilled customer orders at June 30, 2007,
          out of which approximately $4.3 million was attributable to the Israeli
Ministry           of Defense, approximately $500,000 was attributable to the Israeli
civilian           market, approximately $600,000 was attributable to the U.S. market,
          approximately $200,000 was attributable to orders from military customers in
          South America, and approximately $1.4 million was attributable to orders from
          Europe, Asia and Africa.

# Prior operations in the
Erez Industrial Zone

During
2004, the Israeli Government decided to evacuate persons and companies from the Erez
Industrial Zone in the Gaza Strip where part of our operations was located. During the
second half of 2004, we prepared for the eventual evacuation of facilities we owned and
leased within this area by merging existing production facilities. We moved one of our
light cut and sewoperations to Sderot and some of our webbing equipment to
Nazareth. We evacuated our remaining operations from the Erez Industrial Zone in August
2005. The Israeli Governments decision to evacuate the Gaza Strip was supported by
certain resolutions as well as the Israeli Evacuation Compensation Law (2005) 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. On
November 30, 2006, we were notified that the Israeli Government determined that Export
Erez Ltd. and Mayotex Ltd. are entitled to advanced payments in the amounts of
approximately $452,000 and $71,000, respectively, which amount exceed the amount of the
receivables on our financial statements. During January 2007 we received those sums.
Further negotiations are currently taking place with respect to the final amount of
compensation to be paid to our subsidiaries under their claims. However, we cannot
provide any assurance that the claims, will be approved in full, or to what extent, or
when the compensation will be paid.

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# Results of Operations

Key Indicators

Our
management team 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. Our management team
believes that the upward trend in our revenues is reflective of an industry-wide increase
in demand for our types of products, and we currently expect that this trend will
continue for the remainder of 2007. While our management team 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 and government budgeting.

Three Months Ended June
30, 2007 Compared with Three Months Ended June 30, 2006

Net
Revenues and Gross Profit Margin. Net revenues for the three months ended June 30,
2007 increased to $5,650,978 from $1,831,027 in the same period in 2006, an increase of
209%. The increase is primarily attributable to an increase in our major market segments
which are the local military market and export military sales. In the three months ended
June 30, 2007, Achidatex, Export Erez and Owen Mills accounted for $1,845,721 or 32.7%,
$3,575,207 or 63.3%, and $230,050 or 4% of our revenues, respectively. In the three months
ended June 30, 2006, Achidatex, Export Erez, and Owen Mills accounted for $646,805 or
35.3%, $980,245 or 53.5%, and $203,977 or 11.2% of our revenues, respectively.

The
following table sets forth the breakdown of sales by segment for the three months ended
June 30, 2007 and 2006.

| |                                     | Three Months Ended
June 30,
| | ----------------------------------- | ---------------------------
|
|
|
|
| | Sales to the local civilian market  |                            
| | Sales to the export civilian market |                            
| | Sales to the local military market  |                            
| | Export military sales               |                            
| |                                     |                            
| | Total                               |                            
| |                                     |                            

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Gross
profit for the three months ended June 30, 2007 was $2,369,488 compared to $217,644 for
the same period in 2006. This increase in gross profit is principally attributable to the
increase in sales, the increase in production resulting in the increased absorption of
fixed manufacturing expenses and sales of higher margin product during the three months
ended June 30, 2007 compared to the same period in 2006. In the three months ended June
30, 2007 Achidatex, Export Erez, and Owen Mills accounted for 33.9%, 61.6% and 4.5%, of
our gross profit, respectively. In the three months ended June 30, 2006, Achidatex, Export
Erez and Owen Mills accounted for 0%, 97.4%, and 2.6%, of our gross profit, respectively.

Selling
Expenses. Selling expenses for the three months ended June 30, 2007 increased to
$314,796from $82,386 for the same period in 2006. The increase in our selling
expenses was attributable to the increase in the export sales.Achidatexs
selling expenses for the three months ended June 30, 2007 were $32,271 compared to $18,438
for the three months ended June 30, 2006. Export Erezs selling expenses for the
three months ended June 30, 2007 were $280,999 compared to $60,318 for the three months
ended June 30, 2006. Owen Mills selling expenses for the three months ended June 30,
2007 were $1,526 compared to $3,630 for the three months ended June 30, 2006.

General
and Administrative Expenses. General and administrative expenses for the three months
ended June 30, 2007 increased to $658,508 from $612,397 for the same period in 2006,
mainly as a result of the increased scope of our operations.

Financial
Expenses. We had financial income, net of $36,203 for the three months ended June 30,
2007 as compared to financial expenses, net of $150,708 for the same period in 2006. The
income is primarily due to the change in the exchange rate of U.S. Dollar versus the NIS,
which resulted in a gain of $82,743 for the three months ended June 30, 2007 and a loss of
$78,903 for the same period in 2006.

Gain
on Fair Value Adjustment to Embedded Derivatives. Pursuant to a securities purchase
agreement we executed with a group of investors on June 15, 2005, we issued to such
investors warrants to purchase 627,500 shares of our common stock. Our accounting for the
warrants was based on guidance from SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities and EITF No. 00-19, Accounting for
Derivative Financial Instruments Indexed to and Potentially Settled in a Companys
Own Stock. Accordingly, the warrants were treated as derivatives and classified as a
liability. The warrants are recorded at fair value, based on the Black-Scholes pricing
model, and are revalued each reporting period with the change in fair value recorded as
other income (expenses). For the three months ended June 30, 2007, the fair value
adjustment resulted in a gain of $12,449.

Other
Income (Expenses), Net. We had other income, net for the three months ended June 30,
2007 of $35,580 as compared to other expense, net of $16,199 for the same period in 2006.
Our other income in 2007 is attributable to profit from sales of tradable securities.

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Income
Tax Expense (Benefit). Our income tax expense for the three months ended June 30, 2007
was $720,494 as compared to an income tax benefit of $18,686 for the comparable period in
2006. Approximately $10,620 of our income tax expense of $720,494 resulted from Mayotex
Ltd.s tax settlement with the Israeli tax authorities regarding its tax position
from 2002 through 2005. As a result of Mayotex Ltd.s tax settlement and based upon
the enforcement of statutory tax regulations, we recognized a tax expense and a current
tax liability of approximately $152,000 during the three months ended June 30, 2007, and
additional $45,000 for interest expense related to the above unrecognized tax expenses
in respect of our other subsidiaries in Israel, since it is more likely
than not that the proposed settlement will be sustained by the Israeli tax authorities.

As
an Israeli taxpayer, we are unable to include the losses of Owen Mills in our consolidated
income tax filings in Israel. Achidatexs income tax expense for the three months
ended June 30, 2007 was $183,929 compared to income tax benefit of $22,168 for the three
months ended June 30, 2006. Export Erezs income tax expense for the three months
ended June 30, 2007 was $536,565 compared to income tax expense of $3,482 for the three
months ended June 30, 2006. The increase in income tax expense was due to our improved
operating results in the period. In 2007, the corporate statutory tax rate in Israel was
reduced to 29%. Defense Industries did not have any tax expense for the three months ended
June 30, 2007 and 2006. Owen Mills did not have any tax expense for the three months ended
June 30, 2007 and 2006.

Minority
Interest. Minority interest in the profits and losses of one of our consolidated
subsidiaries represents the minority shareholders share of the profits or losses in
such majority owned subsidiary. For the three months ended June 30, 2007, we recognized
and recorded minority share in our profit of $99,157 compared to minority share in our
loss of $67,082 for the three months ended June 30, 2006.

Net
Income (Loss). In the three months ended June 30, 2007, we had consolidated net income
of $660,765 compared to a net loss of $549,136 for the three months ended June 30, 2006.
Achidatexs net income for the three months ended June 30, 2007 was $313,997 compared
to a net loss of $248,452 for the three months ended June 30, 2006. Export Erezs net
income for the three months ended June 30, 2007 was $407,067 compared to a net loss of
$126,706 for the three months ended June 30, 2006. Owen Mills net loss for the three
months ended June 30, 2007 was $971 compared to a net loss of $76,292 for the three months
ended June 30, 2006. Defense Industries net loss for the three months ended June 30,
2007 was $59,328 compared to a net loss of $97,686 for the three months ended June 30,
2006.

Other
Comprehensive Income (Loss). We had other comprehensive loss, for the three months
ended June 30, 2007 of $96,556 compared to other comprehensive income of $179,516 for the
three months ended June 30, 2006. This comprehensive loss is principally attributable to
change in US Dollar exchange rate versus the NIS.

Six Months Ended June 30,
2007 Compared with Six Months Ended June 30, 2006

Net
Revenues and Gross Profit Margin. Net revenues for the six months ended June 30, 2007
increased to $9,565,550 from $3,664,398 in the same period in 2006, an increase of 161%.
The increase is primarily attributable to a general increase in all of our market
segments. In the six months ended June 30, 2007, Achidatex, Export Erez and Owen Mills
accounted for $2,954,051 or 30.9%, $6,103,472 or 63.8%, and $508,027 or 5.3% of our
revenues, respectively. In the six months ended June 30, 2006, Achidatex, Export Erez, and
Owen Mills accounted for $1,329,302 or 36.3%, $1,876,763 or 51.2%, and $458,333 or 12.5%
of our revenues, respectively.

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The
following table sets forth the breakdown of sales by segment for the six months ended June
30, 2007 and 2006.

| |                                     | Six Months Ended
June 30,
| | ----------------------------------- | -------------------------
|
|
|
|
| | Sales to the local civilian market  |                          
| | Sales to the export civilian market |                          
| | Sales to the local military market  |                          
| | Export military sales               |                          
| |                                     |                          
| | Total                               |                          
| |                                     |                          

Gross
profit for the six months ended June 30, 2007 was $3,657,655 compared to $526,542 for the
same period in 2006. This increase in gross profit is principally attributable to the
increase in sales, the increase in production resulting in the increased absorption of
fixed manufacturing expenses and sales of higher margin product during the six months
ended June 30, 2007 compared to the same period in 2006. In the six months ended June 30,
2007 Achidatex, Export Erez, and Owen Mills accounted for 33.3%, 62.6% and 4.1%, of our
gross profit, respectively. In the three months ended June 30, 2006, Achidatex, Export
Erez and Owen Mills accounted for 13.6%, 76.1 and 10.3%, of our gross profit,
respectively.

Selling
Expenses. Selling expenses for the six months ended June 30, 2007 increased to
$554,561from $218,075 for the same period in 2006. The increase in our selling
expenses was attributable to the increase in the export sales.Achidatexs
selling expenses for the six months ended June 30, 2007 were $108,634 compared to $106,585
for the six months ended June 30, 2006. Export Erezs selling expenses for the six
months ended June 30, 2007 were $437,458 compared to $105,818 for the six months ended
June 30, 2006. Owen Mills selling expenses for the six months ended June 30, 2007
were $8,469 compared to $5,672 for the six months ended June 30, 2006.

General
and Administrative Expenses. General and administrative expenses for the six months
ended June 30, 2007 increased to $1,072,401 from $1,006,647 for the same period in 2006,
mainly as a result of the increased scope of our operations.

Financial
Expenses. We had financial expenses, net of $48,069 for the six months ended June 30,
2007 as compared to financial expenses, net of $158,091 for the same period in 2006. The
decrease is primarily due to the change in the U.S. Dollar exchange rate versus the NIS,
which resulted in a gain of $32,176 for the six months ended June 30, 2007 and a loss of
$50,066for the same period in 2006.

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Gain
on Fair Value Adjustment to Embedded Derivatives. Pursuant to a securities purchase
agreement we executed with a group of investors on June 15, 2005, we issued to such
investors warrants to purchase 627,500 shares of our common stock. Our accounting for the
warrants was based on guidance from SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities and EITF No. 00-19, Accounting for
Derivative Financial Instruments Indexed to and Potentially Settled in a Companys
Own Stock. Accordingly, the warrants were treated as derivatives and classified as a
liability. The warrants are recorded at fair value, based on the Black-Scholes pricing
model, and are revalued each reporting period with the change in fair value recorded as
other income (expenses). For the six months ended June 30, 2007, the fair value adjustment
resulted in a gain of $73,603.

Other
Income (Expenses), Net. We had other income, net for the six months ended June 30,
2007 of $77,584 as compared to other income, net of $14,089 for the same period in 2006.
Our other income in 2007 is attributable to profit from sales of tradable securities and
from sales of fixed assets.

Income
Tax Expense (Benefit). Our income tax expense for the six months ended June 30, 2007
was $885,715 as compared to an income tax benefit of $3,464 for the comparable period in
2006. Approximately $10,620 of our income tax expense of $885,715 resulted from Mayotex
Ltd.s tax settlement with the Israeli tax authorities regarding its tax position
from 2002 through 2005. As a result of Mayotex Ltd.s tax settlement and based upon
the enforcement of statutory tax regulations, we recognized a tax expense and a current
tax liability of approximately $152,000 during the six months ended June 30, 2007, and
additional $45,000 for interest expense related to the above unrecognized tax expenses
in respect of our other subsidiaries in Israel, since it is more likely
than not that the proposed settlement will be sustained by the Israeli tax authorities.

As
an Israeli taxpayer, we are unable to include the losses of Owen Mills in our consolidated
income tax filings in Israel. Achidatexs income tax expense for the six months ended
June 30, 2007 was $218,258 compared to income tax benefit of $21,247 for the six months
ended June 30, 2006. Export Erezs income tax expense for the six months ended June
30, 2007 was $667,457 compared to income tax expense of $16,983 for the six months ended
June 30, 2006. The increase in income tax expense was due to our improved operating
results in the period. In 2007, the corporate statutory tax rate in Israel was reduced to
29%. Defense Industries did not have any tax expense for the six months ended June 30,
2007 and 2006. Owen Mills did not have any tax expense for the six months ended June 30,
2007 compared to $800for the six months ended June 30, 2006.

Minority
Interest. Minority interest in the profits and losses of one of our consolidated
subsidiaries represents the minority shareholders share of the profits or losses in
such majority owned subsidiary. For the six months ended June 30, 2007, we recognized and
recorded minority share in our profit of $122,267 compared to minority share in our loss
of $95,212 for the six months ended June 30, 2006.

Net
Income (Loss). In the six months ended June 30, 2007, we had consolidated net income
of $1,125,829 compared to net loss of $705,146 for the six months ended June 30, 2006.
Achidatexs net income for the six months ended June 30, 2007 was $387,178 compared
to a net loss of $373,555 for the six months ended June 30, 2006. Export Erezs net
income for the six months ended June 30, 2007 was $791,275 compared to a net loss of
$140,927 for the six months ended June 30, 2006. Owen Mills net loss for the six
months ended June 30, 2007 was $62,742 compared to a net loss of $120,029 for the six
months ended June 30, 2006. Defense Industries net income for the six months ended
June 30, 2007 was $10,118 compared to a net loss of $70,635 for the six months ended June
30, 2006.

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Other
Comprehensive Income (Loss). We had other comprehensive loss, for the six months ended
June 30, 2007 of $83,911 compared to other comprehensive income of $119,705 for the six
months ended June 30, 2006. This comprehensive loss is principally attributable to the
change in the exchange rate of U.S. Dollar versus the NIS.

# Liquidity and Capital
Resources

As
of June 30, 2007, we had cash and cash equivalents of $1,434,160, $1,292,357 of trading
securities, and working capital of $6,006,062 as compared to $1,670,912 in cash and cash
equivalents, $804,963 of trading securities and $4,746,225 of working capital at December
31, 2006.

Net
cash provided by operating activities was $753,997 for the six months ended June 30, 2007
as compared to net cash used in operating activities of $847,910 for the same period in
2006. This was primarily attributable to net income of $1,125,829, an increase in accounts
payable of $1,269,816, a decrease in other assets of $561,551, depreciation of $239,548
and an increase in other liabilities of $456,702 offset by an increase in inventory of
$1,087,646 and an increase in accounts receivable of $1,287,487.

Net
cash used in investing activities was $266,197 for the six months ended June 30, 2007 as
compared to $158,736 in the six months ended June 30, 2006. During the six months ended
June 30, 2007, purchases of fixed assets were $292,762 compared to $158,736 during the six
months ended June 30, 2006.

Net
cash used in financing activities was $734,003 for the six months ended June 30, 2007 as
compared to $575,075 of net cash provided by financing activities for the six months ended
June 30, 2006. During the six months ended June 30, 2007, we decreased our short-term debt
by $502,155 and we repaid $231,848 of long-term debt.

The
following table summarizes our minimum contractual obligations and commercial commitments
as of June 30, 2007 and the effect we expect them to have on our liquidity and cash flow
in future periods:

|Contractual Obligations     | Payments due by Period
|--------------------------- | ----------------------
|
|
|
|
|Long-term debt obligations  |                       
|Operating lease obligations |                       
|                            |                       
|Total                       |                       
|                            |                       

As
of June 30, 2007, our principal commitments consisted of $1,814,331 of long-term debt and
operating lease obligations. Of such amount, we incurred $1,300,865 in long-term debt in
order to support the increased scope of our operations. We currently do not have
significant capital expenditures or purchase commitments. We anticipate that our cash
resources will be used primarily to fund our operating activities. We believe that our
spending for research and development in 2007 will be approximately $80,000.

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We
believe that we have sufficient working capital and borrowing capability to sustain our
current level of operations for the next twelve months.

Recent Accounting
Pronouncements

In
March 2007, the Financial Accounting Standards Board (FASB) ratified Emerging
Issues Task Force (EITF) Issue No. 06-10, Accounting for Collateral
Assignment Split-Dollar Life Insurance Arrangements (EITF No. 06-10).
EITF No. 06-10 requires an employer to recognize a liability for the postretirement
benefit related to a collateral assignment split-dollar life insurance arrangement in
accordance with either Statement of Financial Accounting Standards (SFAS) No.
106 or Accounting Principles Board (APB) Opinion No. 12 if the employer has
agreed to maintain a life insurance policy during the employees retirement or
provide the employee with a death benefit. EITF No. 06-10 also requires an employer to
recognize and measure an asset based on the nature and substance of the collateral
assignment split-dollar life insurance arrangement. EITF No. 06-10 is effective for fiscal
years beginning after December 15, 2007 with early adoption permitted. We are evaluating
the impact that the adoption of EITF No. 06-10 will have on our financial statements.

# Foreign Currency
Exchange Risk

We
develop products in Israel and sell them in North and South America, Asia, Africa and
several European countries. 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.

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.

During
2006, the NIS rose approximately 8.2% against the dollar. In the period ending in June 30,
2007, there was inflation in Israel of 0.98% and the NIS depreciated in relation to the
U.S. dollar at a rate of 0.57%, from NIS 4.225 per $1.00 on December 31, 2006 to NIS 4.249
per $1 on June 30, 2007. 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
will also be adversely affected if the dollar depreciates against the Euro, the currency
used for many of our purchases of raw material.

We
did not enter into any foreign exchange contracts in the year ended December 31, 2006 and
the six months ended June 30, 2007.

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# Item 3A. Controls and
Procedures

Our
management, including our chief executive officer and chief financial officer, evaluated
the effectiveness of our disclosure controls and procedures (as defined in Exchange Act
Rule 13a-15(e)) as of the end of the period covered by this quarterly report on Form
10-QSB. 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 to ensure that information required to be disclosed by our company in reports
that we file under the Securities Exchange Act of 1934, as amended, 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 was made known to
them by others within the company, as appropriate to allow timely decisions regarding
required disclosure.

All
internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective may not prevent or detect
misstatements and can provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

# Changes in Internal
Controls over Financial Reporting

There
were no changes to our internal controls over financial reporting that occurred during the
period covered by this quarterly report on Form 10-QSB that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting.

# Compliance with Section
404 of Sarbanes-Oxley Act

Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 (the Act), beginning with our Annual
Report on Form 10-KSB for our 2007 fiscal year, we will be required to furnish a report by
our management on our internal controls over financial reporting. This report will
contain, among other matters, an assessment of the effectiveness of our internal controls
over financial reporting as of the end of our fiscal year, including a statement as to
whether or not our internal controls over financial reporting is effective. This
assessment must include disclosure of any material weaknesses in our internal controls
over financial reporting identified by management. If we identify one or more material
weaknesses in our internal controls over financial reporting, we will be unable to assert
our internal controls over financial reporting are effective. Currently, our independent
registered public accountants will be required to issue an attestation report on
managements assessment of such internal controls and a conclusion on the operating
effectiveness of those controls for our 2008 fiscal year.

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# PART II  OTHER
INFORMATION

# DEFENSE INDUSTRIES
INTERNATIONAL, INC. AND SUBSIDIARIES

# Item 1. Legal
Proceedings

We
are not a party to any pending or to the best of our knowledge, any threatening legal
proceedings. None of our directors, officers or affiliates, or owner of record of more
than five percent (5%) of our shares, or any affiliate of any such director, officer or
security holder is a party adverse to us or has a material interest adverse to us in
reference to a pending litigation.

# Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds

On
May 1, 2007, we issued 74,074 shares of common stock, having a fair value of $40,000 at
date of issuance, to the former owner of Owen Mills. The shares were issued pursuant to
the agreement we signed on February 28, 2005 to acquire the business of Owen Mills. The
shares were issued pursuant to the exemption afforded by Section 4(2) of the Securities
Act of 1933.

# Item 3. Default Upon
Senior Securities

| | None.
| | -----

Item 4. Submission of Matters to a Vote of Security Holders

| | None.
| | -----

# Item 5. Other Information

| | None.
| | -----

# Item 6. Exhibits and
Reports on Form 8-K

|(a) | Exhibits
|--- | --------

| | 3.1 | Certificate
 of  Incorporation,  incorporated  herein by reference from the filing on Form 10-KSB
                  for the year ended December 31, 2001.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.1.1 | Certificate
of Amendment to the Certificate of  Incorporation,  incorporated  herein by reference
                  from the Filing on Schedule 14C, filed with the Commission on December
30, 2002.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.2 | By-laws,
 incorporated  herein by  reference  from the  Filing on  Schedule  14C,  filed with the
                  Commission on June 14, 2002.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1 | Translation
 of  Employment  Agreement  with Mr. Tosh,  incorporated  herein by  reference  from the
                  filing on Form 10-KSB for the year ended December 31, 2003.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | 31.1 | Certification
 by  Chief  Executive  Officer  Pursuant  to  Section  302 of the
                  Sarbanes-Oxley Act of 2002.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------

| | 31.2 | Certification
 by  Chief  Financial  Officer  Pursuant  to  Section  302 of the
                  Sarbanes-Oxley Act of 2002.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------

| | 32.1 | Certification
by Chief Executive  Officer  Pursuant to 18 U.S.C.  Section 1350,                   As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 32.2 | Certification
by Chief Financial  Officer  Pursuant to 18 U.S.C.  Section 1350,                   As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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# SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.

| |  | DEFENSE INDUSTRIES INTERNATIONAL, INC.(Registrant)By: /s/ Joseph Postbinder
Joseph PostbinderChief Executive Officer
| |  | ----------------------------------------------------------------------------------------------------------------------------------

| |  | By: /s/ Tsippy Moldovan
Tsippy MoldovanChief Accounting and Financial Officer
| |  | -------------------------------------------------------------------------------------------

Date: August 14, 2007

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