UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 S
            Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the quarterly period ended September 30,
  2010
 
 *
            Transition
      report pursuant to Section 13 or 15(d) of the Exchange Act for the
      transition period from
 ______________
      to _________________
 
 Commission
file number: 0-30105
 
 DEFENSE INDUSTRIES INTERNATIONAL,
INC.
 (Exact
Name of Registrant as Specified in Its Charter)
 
 Nevada
            
            84-1421483(State
      or Other Jurisdiction of
            
            (I.R.S.
      EmployerIncorporation
      or Organization)
            
            Identification
      No.)
 
 12 Hamefalsim Street, Petach Tikva
49514,
Israel
  (Address
of Principal Executive Offices)
 (011)
972-3-7168383
 (Registrant’s
Telephone Number, Including Area Code)
 N/A
 (Former
Name, Former Address and Former Fiscal Year,
 if
Changed Since Last Report)
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
 Yes T    No
*
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).
 Yes *     No
*
 
 Indicate
by check mark whether the
registrant is large accelerated filer, an accelerated filer, or a
non-accelerated filer. See of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer *
            Accelerated
      filer *Non-accelerated
      filer *
              (Do
      not check if smaller reporting company)
            Smaller
      reporting company T
 
 Indicate
by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes *No T
 
 As of
November 11, 2010 the issuer had 28,150,535 shares of Common
Stock, par value $0.0001, outstanding.
  
  DEFENSE
INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
 
 INDEX
 
 PagePART
      I - FINANCIAL INFORMATION:Item
      1.
            Condensed
      Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and
      December 31, 2009
            3Condensed
      Consolidated Statements of Operations for the Three and Nine Months Ended
      September 30, 2010 and 2009 (Unaudited)
            5Condensed
      Consolidated Statement of Changes in Equity for the Three and Nine Months
      Ended September 30, 2010 and 2009 (Unaudited)
            6Condensed
      Consolidated Statements of Cash Flows for the Nine Months
      Ended
              September
      30, 2010 and 2009 (Unaudited)
            8Notes
      to Condensed Consolidated Financial Statements (Unaudited)
            9Item
      2.
            Management’s
      Discussion and Analysis of Financial Conditionand
      Results of Operations
            17Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            26Item
      4.
            Controls
      and Procedures
            26PART
      II - OTHER INFORMATION:Item
      1.
            Legal
      Proceedings
            27Item
      1A.
            Risk
      Factors
            27Item
      6.
            Exhibits
            27SIGNATURES
            28
 
 
    2
 DEFENSE
INDUSTRIES INTERNATIONAL, INC.
 AND
SUBSIDIARY COMPANIES
 
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 AS OF SEPTEMBER 30, 2010
(UNAUDITED) AND DECEMBER 31, 2009
  ASSETSSeptember
      30,
                2010
              
              December
      31,
                2009(Unaudited)CURRENT
      ASSETSCash
      and cash equivalents
              $
              3,101,257
              $
              3,783,631Accounts
      receivable, net of allowance for doubtful accounts   of $337,759
      and $343,629, respectively
              
              4,402,970
              
              3,352,751Inventories
              
              4,434,970
              
              4,124,141Trading
      securities
              
              2,005,294
              
              2,312,048Deferred
      taxes
              
              141,574
              
              148,710Other
      current assets
              
              514,731
              
              225,112Total Current
      Assets
              
              14,600,796
              
              13,946,393PROPERTY, PLANT AND EQUIPMENT,
      NET
              
              1,521,124
              
              1,741,594OTHER
      ASSETSFunds
      in respect of employee rights upon retirement
              
              869,519
              
              780,960Deferred
      taxes
              
              28,803
              
              25,659Refundable
      deposits for the purchase of a business (Note 2)
              
              2,063,059
              
              1,993,696Total
      Other Assets
              
              2,961,381
              
              2,800,315TOTAL
      ASSETS
              $
              19,083,301
              $
              18,488,302
 
 
  The
accompanying notes are an integral part of the condensed consolidated financial
statements.
 3
 DEFENSE
INDUSTRIES INTERNATIONAL, INC.
 AND
SUBSIDIARY COMPANIES
 
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 AS OF SEPTEMBER 30, 2010
(UNAUDITED) AND DECEMBER 31, 2009
  LIABILITIES
      AND EQUITYSeptember
      30,
                2010
              
              December
      31, 2009(Unaudited)CURRENT
      LIABILITIESAccounts
      payable
              
              $2,411,716
              
              $     1,408,741Accounts
      payable – related parties
              
              38,458
              
              462,968Short-term
      debt
              
              1,063,816
              
              876,554Other
      current liabilities
              
              795,263
              
              1,047,771Total
      Current Liabilities
              
              4,309,253
              
              3,796,034LONG-TERM
      LIABILITIESLong-term
      portion of debt
              
              234,128
              
              268,250Deferred
      tax liability
              
              229,476
              
              229,191Liability
      for employee rights upon retirement
              
              1,027,
      561
              
              911,440Total
      Long-Term Liabilities
              
              1,491,165
              
              1,408,881TOTAL
      LIABILITIES
              
              5,800,418
              
              5,204,915COMMITMENTS
      AND CONTINGENCIESEQUITYPreferred
      stock, $0.0001 par value, 50,000,000 shares authorized, none issued
      and outstanding
              
              -
              
              ---Common
      stock, $0.0001 par value, 250,000,000 shares
                authorized,
      29,200,535 shares issued and 28,150,535 shares outstanding at September
      30, 2010 and December 31, 2009
              
              2,920
              
              2,920Additional
      paid-in capital
              
              2,997,370
              
              2,997,370Treasury
      stock (1,050,000 shares at cost)
              
              (252,000)
              
              (252,000)Retained
      earnings
              
              9,774,271
              
              10,176,352Accumulated
      other comprehensive income
              
              760,322
              
              358,745Total
      Equity
              
              13,282,883
              
              13,283,387TOTAL
      LIABILITIES AND EQUITY
              
              $     19,083,301
              
              $     18,488,302
 
 
 
 
 
 
 The
accompanying notes are an integral part of the condensed consolidated financial
statements
 
  4
 DEFENSE
INDUSTRIES INTERNATIONAL, INC.
 AND
SUBSIDIARY COMPANIES
 
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 FOR THE THREE AND
NINE  MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
  
 For
      the Three Months Ended September 30,
              For
      the Nine Months
                  Ended
      September 30,2010
              2009
              2010
              2009NET
      REVENUES
              $6,581,429
              $  3,554,137
              $12,462,974
              $  12,943,562COST
      OF SALES
              4,865,555
              2,837,920
              9,974,941
              9,982,992GROSS
      PROFIT
              1,715,874
              716,217
              2,488,033
              2,960,570OPERATING
      EXPENSESSelling
              460,788
              153,485
              793,295
              485,540General
      and administrative
              631,357
              551,053
              2,031,652
              1,537,421Compensation
      from government (Note 5)
              ---
              (4,452)
              ---
              (228,365)Total Operating
      Expenses
              1,092,145
              700,086
              2,824,947
              1,794,596INCOME
      (LOSS)  FROM OPERATIONS
              623,729
              16,131
              (336,914)
              1,165,974OTHER
      (EXPENSES) INCOMEFinancial
      expenses
              (330,727)
              (330,934)
              (216,905)
              (808,516)Financial
      income
              17,857
              75,542
              55,715
              770,093Other
      income, net
              10,483
              71,999
              100,694
              293,204Total Other (Expenses)
      Income
              (302,387)
              (183,393)
              (60,496)
              254,781INCOME
      (LOSS) BEFORE INCOME TAXES
              321,342
              (167,262)
              (397,410)
              1,420,755Income
      tax (expense) benefit
              3,313
              16,878
              (4,671)
              (341,348)NET
      INCOME (LOSS)
              $324,655
              $(150,384)
              $(402,081)
              $1,079,407Net
      income (loss) per share - basic and diluted
              $
      0.012
              $(
      0.005)
              $
      (0.014)
              $
      0.039Weighted
      average number of shares outstanding - basic and diluted
              28,150,535
              28,150,535
              28,150,535
              28,028,563
 
 
 
 The
accompanying notes are an integral part of the condensed consolidated financial
statements
 
  5
 DEFENSE
INDUSTRIES INTERNATIONAL, INC.
 AND
SUBSIDIARY COMPANIES
 
 CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
  
 Common
      Stock
              
              Treasury
      Stock
              
              Additional
      Paid-In
              
              Retained
              
              Accumulated
      Other Comprehensive
              
              Total
      Comprehensive
              
              TotalShares
              
              Dollars
              
              Shares
              
              Dollars
              
              Capital
              
              Earnings
              
              Income
      (Loss)
              
              Loss
              
              EquityBalance
      as of January 1, 2010
              29,200,535
              $
              2,920
              
              1,050,000
              $
              (252,000)
              $
              2,997,370
              $
              10,176,352
              $
              358,745
              
              
              $
              13,283,387Comprehensive
      loss:Net
      loss
              -
              
              -
              
              -
              
              -
              
              -
              
              (402,081)
              
              -
              $
              (402,081)
              
              (402,081)Foreign
      currency translation gain
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              401,577
              
              401,577
              
              401,577Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (504)Balance
      as of September 30, 2010
              29,200,535
              $
              2,920
              
              1,050,000
              $
              (252,000)
              $
              2,997,370
              $
              9,774,271
              $
              760,322
              
              
              $
              13,282,883Balance
      as of January 1, 2009
              28,991,111
              $
              2,899
              
              1,050,000
              $
              (252,000)
              $
              2,957,391
              $
              9,654,086
              $
              236,503
              
              
              $
              12,598,879Common
      stock issued to acquire Rizzo Inc
              209,424
              
              21
              
              
              
              
              
              39,979
              
              
              
              
              
              
              
              40,000Comprehensive
      loss:Net
      income
              -
              
              -
              
              -
              
              -
              
              -
              
              1,079,407
              
              -
              $
              1,079,407
              
              1,079,407Foreign
      currency translation loss
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              224,125
              
              224,125
              
              224,125Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              1,303,532Balance
      as of September 30 2009
              29,200,535
              $
              2,920
              
              1,050,000
              $
              (252,000)
              $
              2,997,370
              $
              10,733,493
              $
              460,628
              
              
              $
              13,942,411
 
 The
accompanying notes are an integral part of the condensed consolidated financial
statements.
   6
 
 
 Common
      Stock
              
              Treasury
      Stock
              
              Additional
      Paid-In
              
              Retained
              
              Accumulated
      Other Comprehensive
              
              Total
      Comprehensive
              
              Total
      Shareholders'Shares
              
              Dollars
              
              Shares
              
              Dollars
              
              Capital
              
              Earnings
              
              Income
      (Loss)
              
              Income
              
              EquityBalance
      as of July 1, 2010
              29,200,535
              $
              2,920
              
              1,050,000
              $
              (252,000)
              $
              2,997,370
              $
              9,449,616
              $
              26,907
              
              
              $
              12,224,813
              $Common
      stock issued to acquire Rizzo Inc.
              
              
              
              
              -
              
              -
              
              
              
              -
              
              -Comprehensive
      income:Net
      income
              -
              
              -
              
              -
              
              -
              
              -
              
              324,655
              
              -
              $
              324,655
              
              324,655Foreign
      currency translation gain
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              733,415
              
              733,415
              
              733,415Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              1,058,070Balance
      as of September 30, 2010
              29,200,535
              $
              2,920
              
              1,050,000
              $
              (252,000)
              $
              2,997,370
              $
              9,774,271
              $
              760,322
              
              
              $
              13,282,883
              $Balance
      as of July 1, 2009
              29,200,535
              $
              2,920
              
              1,050,000
              $
              (252,000)
              $
              2,997,370
              $
              10,883,877
              $
              (85,251)
              
              
              $
              13,546,916
              $Common
      stock issued to acquire Rizzo Inc.
              
              
              
              
              -
              
              -
              
              
              
              -
              
              -Comprehensive
      income:Net
      income
              -
              
              -
              
              -
              
              -
              
              -
              
              (150,384)
              
              -
              $
              (150,384)
              
              (150,384)Foreign
      currency translation gain
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              545,879
              
              545,879
              
              545,879Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              395,495Balance
      as of September 30, 2009
              29,200,535
              $
              2,920
              
              1,050,000
              $
              (252,000)
              $
              2,997,370
              $
              10,733,493
              $
              460,628
              
              
              $
              13,942,411
              $
 The
accompanying notes are an integral part of the condensed consolidated financial
statements.
 
 
  7
 DEFENSE
INDUSTRIES INTERNATIONAL, INC.
 AND
SUBSIDIARY COMPANIES
 
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2010 AND 2009 (UNAUDITED)
  For
      the Nine Months
                Ended
      September 30,2010
              
              2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
              $
              (402,081)
              $
              1,079,407Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Items
      not effecting cash:Depreciation
      and amortization
              
              425,163
              
              414,058Gain
      from sale of property, plant and equipment
              
              1,829
              
              (29,789)Provision
      for doubtful accounts
              
              (14,642)
              
              (4,734)Deferred
      taxes
              
              2,556
              
              93,833Net
      unrealized (gain) on trading securities
              
              (53,966)
              
              (148,783)Gain
      from the disposal of Dragonwear Trading Ltd.
              
              (14,001)
              
              ---Gain
      from settlement of long term note
              
              (8,968)
              
              ---Accrued
      interest and exchange rate differences of long-term debt
              
              479
              
              (842)Accrued
      interest and exchange rate differences on refundable deposits for the
      purchase of a business
              
              (15,320)
              
              46,800Accrued
      interest and exchange rate differences on deposits
              
              ---
              
              (175,287)Changes
      in assets and liabilities:Decrease
      (increase) in accounts receivable
              
              (912,700)
              
              429,389Decrease
      (increase) in inventories
              
              (189,693)
              
              504,660(Increase)
      decrease in trading securities
              
              419,346
              
              276,488Decrease
      in related parties accounts
              
              (425,233)
              
              13,472(Increase)
      decrease in other current assets
              
              (272,625)
              
              38,971Increase
      in funds in respect of employee rights
      upon  retirement
              
              (63,255)
              
              (111,570)Increase
      in accounts payable
              
              936,561
              
              (227,654)(Decrease)
      increase in other current liabilities
              
              (261,004)
              
              (689,791)Increase
      in liability for employee rights upon retirement
              
              86,225
              
              79,145Net
      cash provided by Operating Activities
              
              (761,329)
              
              1,587,773CASH
      FLOWS FROM INVESTING ACTIVITIES:Redemption
      of restricted bank deposits
              
              ---
              
              3,000,000Purchases
      of property, plant and equipment
              
              (174,239)
              
              (91,118)Proceeds
      from sale of property, plant and equipment
              
              6,891
              
              52,189Refundable
      deposits for purchase of a business
              
              (13,782)
              
              (918,861)Net
      cash (used in)  provided by Investing Activities
              
              (181,130)
              
              2,042,210CASH
      FLOWS FROM FINANCING ACTIVITIES:Short-term
      debt, net
              
              232,736
              
              (231,278)Proceeds
      from long-term debt
              
              124,794
              
              -Repayment
      of long-term debt
              
              (224,877)
              
              (264,388)Redemption
      of related party creditors
              
              -
              
              (1,200,000)Net
      cash used in Financing Activities
              
              132,653
              
              (1,695,666)EFFECT
      OF CHANGES IN EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
              
              127,433
              
              221,092NET
      INCREASE (DECREASE)  IN CASH AND CASH
EQUIVALENTS
              
              (682,373)
              
              2,155,409CASH
      AND CASH EQUIVALENTS – BEGINNING OF PERIOD
              
              3,783,631
              
              1,719,921CASH
      AND CASH EQUIVALENTS – END OF PERIOD
              $
              3,101,258
              $
              3,875,330INTEREST
      PAID
              $
              36,567
              $
              46,400TAXES
      PAID
              $
              134,414
              $
              748,964
 
 The
accompanying notes are an integral part of the condensed consolidated
financial
 statements.
 
  8
 DEFENSE
INDUSTRIES INTERNATIONAL, INC.
 AND
SUBSIDIARY COMPANIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT
 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2010 AND 2009 (UNAUDITED)
  NOTE
1                   BASIS
OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
 A.
              The
      accompanying unaudited interim consolidated financial statements as of
      September 30, 2010 and for the nine month period then ended (the “interim
      financial statements”) were prepared in a condensed form in accordance
      with the instructions for Form 10-Q and, therefore, do not include all
      disclosures necessary for a complete presentation of financial condition,
      results of operations, changes in shareholders’ equity, cash flows and all
      the data and notes which are required when preparing annual financial
      statements, in conformity with generally accepted accounting principles
      accepted in the United States.
 
 B.
              The
      accounting principles used in the presentation of the interim financial
      statements are consistent with those principles used in the presentation
      of the latest annual financial statements. All significant accounting
      policies have been applied consistently with the year ended December 31,
      2009.
 
 C.
              The
      preparation of the interim financial statements requires management to
      make estimates and assumptions that affect the reported amounts of assets
      and liabilities, the disclosure of contingent assets and liabilities at
      the date of the financial statements, and the reported amounts of revenues
      and expenses during the reported period. Actual results could differ from
      those estimates. In the opinion of management, all adjustments considered
      necessary for fair presentation of the interim financial statements have
      been included. The results of operations for the nine months period ended
      September 30, 2010, are not necessarily indicative of the results that may
      be expected for the year ending December 31, 2010. The interim financial
      statements should be read in conjunction with the Company’s annual
      financial statements as of December 31, 2009 and for the year then ended
      and the accompanying notes thereto.
 
 D.
              Principles
      of Consolidation
 
 The
interim financial statements include the accounts of Defense Industries
International, Inc., its wholly owned subsidiaries, Export Erez USA, Inc., Rizzo
Inc.(doing business as Owen Mills Company), Export Erez, Ltd. (“Export Erez”),
Mayotex, Ltd. (“Mayotex”), Dragonwear Trading Ltd. (“Dragonwear”), and Achidatex
Nazareth Elite (1977) Ltd. (“Achidatex”).
 
 During
2009, Dragonwear ceased its operations and was dissolved and deleted from the
Register of Companies on March, 14, 2010. Dragonwear had no operational
activities, therefore, its discontinuance had no impact for measurement and
disclosure purposes in all reported periods.
 
 All
significant inter-company accounts and transactions have been eliminated in
consolidation.
  9
 DEFENSE
INDUSTRIES INTERNATIONAL, INC.
 AND
SUBSIDIARY COMPANIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT
 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2010 AND 2009 (UNAUDITED)
  
 NOTE
1                   BASIS
OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 E.
              Per
      share data
 
 Basic
net income per share of common stock is computed based on the weighted average
number of shares of common stock outstanding during the period. Diluted net
income per share of common stock is computed based on the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period. For the three and nine months ended September 30, 2010 and 2009
common stock equivalents to purchase 202,500 shares of common stock were not
included in diluted income (loss) per share because their effect was
anti-dilutive.
  F.
              Fair
      value
 
 The
Company categorizes the fair value of its financial assets and liabilities
according to the hierarchy of Financial Accounting Standard Board (“FASB”)
Accounting Standards Codification (“ASC”) No. 820 "Fair Value Measurements and
Disclosures", which establishes a framework for measuring fair value and
requires enhanced disclosures about fair value measurements.
 
 FASB
ASC 820 clarifies that fair value is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. FASB ASC 820 also requires disclosure
about how fair value is determined for assets and liabilities and establishes a
hierarchy for which these assets and liabilities must be grouped, based on
significant levels of inputs, as follows:
 
 Level
1                  Quoted
prices in active markets for identical assets or liabilities;
 Level
      2
              Quoted prices in active markets for similar assets and liabilities and
      inputs that are observable for the asset or liability;
  or
 Level
3                  Unobservable
inputs, such as discounted cash flow models or valuations.
 
 The
Company’s trading securities and bank deposits are measured at fair value based
on quoted market prices in active markets for identical assets (Level
1).
 
 The
Company funds in respect to employees’ rights upon retirement are measured at
fair value based upon unobservable inputs (Level 3).
 
 In
addition to the assets and liabilities described above, our financial
instruments also include cash, accounts receivable, other receivables, accounts
payable, accounts payable to related parties, accrued expenses and other
payables. The fair value of these financial instruments was not materially
different from their carrying value at September 30, 2010 and December 31, 2009
due to the short-term maturity of these instruments.
  10
 DEFENSE
INDUSTRIES INTERNATIONAL, INC.
 AND
SUBSIDIARY COMPANIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT
 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2010 AND 2009 (UNAUDITED)
  NOTE
1                   BASIS
OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES  (CONTINUE)
  H.
              Recent
      accounting pronouncements issued and adopted in the reported
      period
 
 With
the exception of those stated below, there have been no recent accounting
pronouncements or changes in accounting pronouncements during the nine months
ended September 30, 2010 that are of material significance, or have potential
material significance, to the Company.
 
 Effective
January 1, 2010, the Company adopted the FASB’s ASU No. 2010-06 "Improving
Disclosures about Fair Value Measurements". The updated guidance relates to fair
value measurements and disclosures, which requires a reporting entity to
disclose separately the amounts of significant transfers in and out of Level 1
and Level 2 fair value measurements and to describe the reasons for the
transfers. In addition, in the reconciliation for fair value measurements using
significant unobservable inputs, or Level 3, a reporting entity should disclose
separately information about purchases, sales, issuances and settlements (that
is, on a gross basis rather than one net number). The updated guidance also
requires that an entity should provide fair value measurement disclosures for
each class of assets and liabilities and disclosures about the valuation
techniques and inputs used to measure fair value for both recurring and
non-recurring fair value measurements for Level 2 and Level 3 fair value
measurements. The guidance is effective for interim or annual financial
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances and settlements in the roll forward activity
in Level 3 fair value measurements, which are effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal
years. The Company has updated its disclosures to comply with the updated
guidance; however, adoption of the updated guidance did not have an impact on
the Company’s consolidated results of operations or financial
condition.
 
  11
 DEFENSE
INDUSTRIES INTERNATIONAL, INC.
 AND
SUBSIDIARY COMPANIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT
 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2010 AND 2009 (UNAUDITED)
  
 NOTE
2                   PENDING
ACQUISITION
  On
December 17, 2008, Mayotex entered into an agreement with Sarino Crystal
Technologies Ltd. and Sarino Optronics Ltd. (“Sarino”) to cooperate in the
manufacture of optical grade Germanium crystals and sales of lenses to be used
in optical and infra-red night vision products utilizing the Germanium crystals
(the "Sarino Agreement”).
 
 On
December 21, 2008, Mayosar Ltd. (incorporated by Mayotex and Sarino)
(“Mayosar”), through its wholly owned subsidiary Isorad IR Optics Ltd.,
(“Optics”), entered into an agreement to purchase the Germanium Crystals
Business of Isorad Ltd., an Israeli governmental company (“Isorad”). The Isorad
Agreement provided for the purchase of certain know-how, equipment, inventories
and production activities of Germanium Crystals for lenses used in infra-red
night vision system applications (“Isorad Agreement”).
 
 After
a period of uncertainty, in August 2010, Mayosar, Optics and Isorad Ltd.
executed an addendum to the 2008 agreement, according to which the parties
confirmed the validity of the Isorad Agreement under certain
conditions.
 
 Pursuant
to the Sarino Agreement:
 
 (1) Mayotex and Sarino agreed to
incorporate Mayosar, with Mayotex being the majority shareholder owning 50.1%
and Sarino owning 49.9%. As majority shareholder, Mayotex will have operational
control of Mayosar.
 
 (2)
In consideration of the above, Mayotex paid Sarino $1 million, out of which,
$300,000 is non-refundable to Mayotex upon 24 months following the execution of
the Isorad Agreement, and the remaining $700,000 will be earned by Sarino based
on 10% of sales over $3 million and up to $10 million during the first 36 months
of operations. Amounts not earned are to be refunded to Mayotex, including
interest of Libor + 2% per annum. The refundable consideration is secured by
Sarino’s interest in Mayosar and personal guarantees provided by Sarino Crystal
Technologies Ltd.'s controlling shareholders.
 
 (3) Mayotex agreed to provide Mayosar
with a loan in the aggregate amount of $2 million under a timetable to be determined by
Mayosar’s board of directors. Such loan will bear interest at the rate of Libor
+ 2%, and is payable from profits generated by Mayosar.
 
 As
of September 30, 2010, Mayotex has provided loans of $1.0 million to Sarino and
$1.0 million to Mayosar. Such payments are recognized as refundable deposits
pending resolution of the Isorad Agreement.
 
 Pursuant
to the Isorad Agreement, Optics is to pay annual royalties of 3% out of sales
for a period of 15 years commencing the effective date of the Isorad Agreement
(the “Effective Date”), with a minimum amount of approximately $133,000 payable
per year during the first 18 months or until the date of completion of the
transfer of the site of the Germanium Crystals.
 
 
 
 12
 
 
 DEFENSE
INDUSTRIES INTERNATIONAL, INC.
 AND
SUBSIDIARY COMPANIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT
 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2010 AND 2009 (UNAUDITED)
 NOTE
2                   PENDING
ACQUISITION (CONTINUED)
 
 Business,
whichever is earlier (this payment includes a reimbursement of costs for the
usage of the site and equipment in this initial period), and approximately
$53,000 per year during the following years of the royalties payment
period.
 
 Pursuant
to the Isorad Agreement, Isorad has the right to acquire 5% of the share capital
of Optics on a fully diluted basis for their nominal value during the 24 month
period beginning on the Effective Date. Such right was recently extended for an
additional 12-month period ending January
1,               2012.
If the Israeli Government does not approve the 5% purchase of the Optics shares
by Isorad within the above period, the right to acquire the shares will expire
and Isorad will be entitled to a payment of $75,000.
 
 In
the event of an allotment of shares to Isorad, representing 5% of Optics’ share
capital, Mayosar will issue to Mayotex additional shares of Mayosar on a pro
rata basis, in order for Mayotex to retain a 50.01% indirect interest in Optics’
share capital.
 
 Optics
has the right during the four year period following the Effective Date to redeem
its commitment to pay royalties under the Isorad agreement, in consideration of
a fixed payment of $750,000, less all royalties paid to Isorad through that
date.
 
 As of the balance sheet date
management assessed its legal
position and is of the opinion, based on legal advice received, that the amounts
paid under the Sarino and Isorad agreements should be fully refunded to the
Company in the event that the Isorad Agreement is not
consummated.
 
 
 NOTE
3                   INVENTORIES
 
 Consist
of:
 
 September
      30,
                2010
              
              December
      31, 2009Raw
      materials (1)
              $  3,100,885
              
              $  2,597,759Work
      in progress
              608,753
              
              642,132Finished
      goods
              725,332
              
              884,250$  4,434,970
              
              $  4,124,141
 
 (1)
As of September 30, 2010 and December 31, 2009, includes advanced payments to
purchase inventory for $62, 213 and $52,894, respectively.
   13
 DEFENSE
INDUSTRIES INTERNATIONAL, INC.
 AND
SUBSIDIARY COMPANIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT
 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2010 AND 2009 (UNAUDITED)
  
 NOTE
      4
              SEGMENT
      INFORMATION AND CONCENTRATIONS
 
 The
Company has two strategic business segments: sales to the civilian market and
the military market.
  The
military and the civilian markets are further broken down between Israel (local)
and other (export) sales in order to better analyze trends in sales and profit
margins. The Company does not allocate assets between segments because assets
are used in more than one segment and any allocation would be
impractical.
  A.
              Sales
      and Income from Operations:
 
 Civilian
              Military
              ConsolidatedLocal
              Export
              Local
              ExportFor
      the nine months
                ended
      September 30, 2010:Revenue
      from sales
              $2,996,771
              $1,096,859
              $3,805,094
              $4,564,250
              $     12,462,974Gross
      Profits
              531,011
              282,657
              767,714
              906,651
              2,488,033Corporate
      unallocated costs
              
              
              
              
              2,824,947Loss
      from operations
              
              
              
              
              (336,914)For
      the three months
                ended
      September 30, 2010:Revenue
      from sales
              $1,311,624
              $488,141
              $1,129,326
              $3,652,338
              $     6,581,429Gross
      Profits
              301,491
              199,868
              409,906
              804,609
              1,715,874Corporate
      unallocated costs
              
              
              
              
              1,092,145Income
      from operations
              
              
              
              
              623,729
 
 For
      the nine months
                ended
      September 30, 2009:Revenue
      from sales
              $1,640,218
              $763,342
              $6,089,191
              $4,450,811
              $     12,943,562Gross
      Profits
              525,099
              139,881
              1,248,834
              1,046,756
              2,960,570Corporate
      unallocated costs
              
              
              
              
              1,794,596Income
      from operations
              
              
              
              
              1,165,974For
      the three months
                ended
      September 30, 2009:Revenue
      from sales
              $
      484,888
              $340,489
              $1,883,167
              $845,593
              $     3,554,137Gross
      Profits
              136,395
              85,319
              375,523
              118,980
              716,217Corporate
      unallocated costs
              
              
              
              
              700,086Income
      from operations
              
              
              
              
              16,131
  14
 DEFENSE
INDUSTRIES INTERNATIONAL, INC.
 AND
SUBSIDIARY COMPANIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT
 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2010 AND 2009 (UNAUDITED)
  B.
              Geographic
      Areas – revenues:
 Three
      Months Ended
                  September  30,
              Nine  Months
      Ended
                  September  30,2010
              2009
              2010
              2009Israel
              $   2,440,950
              $   2,368,055
              $   6,801,865
              $   7,729,409South
      America
              2,825,282
              335,766
              3,292,725
              1,544,182North
      America
              488,175
              351,703
              1,093,918
              951,210Europe
      and Asia
              190,230
              147,896
              635,413
              980,553Africa
              636,792
              350,717
              639,053
              1,738,208Total
      Sales
              $   6,581,429
              $   3,554,137
              $   12,462,974
              $   12,943,562
 B.
              Single
      Customer Exceeding 10% of Sales:
 
 
 
 For
      the Three
                Months
      Ended
                September
      30,
              For
      the Nine
                Months
      Ended
                September
      30,2010
              2009
              2010
              2009Customer
      A (Military Local)
              $1,059,509
              $1,795,385
              $3,515,281
              $5,936,523Customer
      B (Military Export)
              ---*
              346,099
              ---*
              1,501,304Customer
      C (Military Export)
              1,777,869
              ---*
              1,777,869
              ---*
 
 
 *
      did not exceed 10% of sales for the respective
  period
  15
 DEFENSE
INDUSTRIES INTERNATIONAL, INC.
 AND
SUBSIDIARY COMPANIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT
 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2010 AND 2009 (UNAUDITED)
  NOTE
5                                COMMITMENTS
AND CONTINGENCIES [ fix indent]
 
 A.
              On
      February 11, 2009, a lawsuit was filed in the Jerusalem District Court
      (the "Court") against the Company's subsidiaries, Export Erez USA Inc. and
      Achidatex, and the then chief executive officer of Achidatex, Mr. Avraham
      Hatzor. Export Erez was subsequently added as a defendant in the
      action.  The suit alleges that Achidatex materially breached its
      agreement with the plaintiff, dated February 22, 2000, relating to the
      development of inflatable mine-field crossing enabling sandals, by
      failingto
      register patents for the technology underlying the sandals worldwide and
      only registered patents in the United States. The plaintiff further claims
      that the defendants, jointly and severally, committed a breach of
      trust.  The plaintiff is seeking damages in the amount of NIS 10
      million (approximately $2.8 million). The Company’s subsidiaries filed a
      statement of defense rejecting the plaintiff's claims and asserted a claim
      against the plaintiff and others for a declaratory judgment that the
      plaintiff breached his contractual undertakings towards Achidatex. The
      petition to consolidate the counter-claim with the plaintiff's claim was
      ordered by the Court and the claims are now being heard together.
      Achidatex also filed a petition to strike the claim against Mr. Hatzor and
      Export Erez USA Inc. based on the assertion that there is no contractual
      or any other kind of privity between the plaintiff and Mr. Hatzor and
      Export Erez USA Inc. and, therefore, no cause of action against them
      exists. This petition is pending.  The Company intends to vigorously
      defend against the lawsuit. Due to the preliminary stage of the lawsuit,
      management and its legal advisors cannot currently assess the outcome or
      possible adverse effect of the lawsuit on the Company’s financial position
      or results of operations.
 
 B.
              On
      12 July 2010, a lawsuit was filed in the Tel-Aviv Regional Labor Court
      (the "Labor Court") against the Company, its subsidiaries Mayotex and
      Export Erez (the "Group") and against an officer of the Group, by a former
      employee. The plaintiff alleges that the Group breached her employment
      agreement and violated certain Israeli labor related legislation, by not
      paying her severance payment, payment in lieu of vacation, recuperation
      payments, contribution to Study Fund, due to her claiming to being subject
      to sexual harassment and consequently violation of certain applicable
      Israeli legislation, not making the payments due to the employee during
      the prior notice period and compensation for overtime. The amount claimed
      under the above claim is NIS 1,472,035 ($379,880). The Labor Court
      has imposed a gag order on the parties to the lawsuit. The Company
      believes that the amounts sought are exaggerated and that the exposure, if
      any, to the lawsuit is not material to the business of the Company. The
      Company intends to vigorously defend its
  position.
 
 NOTE
6                      SUBSEQUENT
EVENTS
  On October 27
2010, the Company’s subsidiary Mayotex Ltd., or Mayotex, entered into an
agreement to purchase shares of Mayo-Ben Investments and Development Ltd., or
Mayo-Ben. Pursuant to the agreement, Mayotex agreed to invest up to $1.5 million
in Mayo-Ben, a real estate company holding industrial properties in Israel which
are partially occupied by the Company's subsidiaries, in consideration for the
purchase of approximately 20 per cent of the share capital of Mayo-Ben on a
fully diluted basis. The subscription price is subject to adjustment based on an
appraisal of the properties to be conducted by a major accounting firm in
Israel.
  Mayotex also
agreed to lend Mayo-Ben $1 million, which funds will be utilized by Mayo-Ben to
improve and renovate its industrial properties, subject to and upon the terms of
the agreement. Within the framework of a recent amendment to the Evacuation
Compensation Law, under which several of our subsidiaries received compensation
for their forced evacuation from the Gaza Strip area, such subsidiaries are
eligible to apply for additional compensation under such law, subject to certain
requirements, including investment in the factories and properties to which they
moved their activities and businesses, such as the properties held by Mayo-Ben.
The Company expects that a portion of the grants, if any, to be received from
the Israeli government within the above framework, will be used (subject to the
amount granted), with the funds to be invested by Mayo-Ben, for renovations and
improvements to the properties occupied by the Company’s subsidiaries and will
entitle the Company’s subsidiaries to apply for additional grants and tax
benefits.
 
 The Company
has agreed to forgive the loan in the event that Mayo-Ben invests at least $1
million in the renovation and improvement of the properties in accordance with a
renovation plan agreed to by both parties and to the complete satisfaction of
the Company within a three (3) year period commencing on the first closing date
of the transaction, of which at least $200,000 must be spent for such
renovations prior to August 30, 2011.
 
  16
  
 
 Item 2.Management’s Discussion and Analysis
of Financial Condition and Results of Operations
  This discussion should be read in
conjunction with the condensed consolidated financial statements and notes
included in Item 1 of Part I of this Quarterly Report and the audited
consolidated financial statements and notes thereto, and Management's Discussion
and Analysis of Financial Condition and Results of Operations for the Year Ended
December 31, 2009 contained in our 2009 Annual Report on Form 10-K. The
discussion and analysis which follows may contain trend analysis and other
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 which reflect our current views with respect to future
events and financial results. These include statements regarding our earnings,
projected growth and forecasts, and similar matters that are not historical
facts.
 
 We
remind shareholders that forward-looking statements are merely predictions and
therefore are inherently subject to uncertainties and other factors that could
cause the future results to differ materially from those described in the
forward-looking statements.
 
 The
following is management's discussion and analysis of certain significant factors
which have affected our financial position and operating results during the
periods included in the accompanying consolidated financial statements, as well
as information relating to the plans of our current management.
 
 Overview
 
 We are a manufacturer and global provider of personal military and civilian
protective equipment and supplies. Our products are used by military, law
enforcement, border patrol enforcement, and other special security forces,
corporations, non-governmental organizations and individuals throughout the
world.
 
 Our
main products include body armor, bomb disposal suits, bullet proof vests and
jackets, ballistic wall coverings, bullet proof ceramic and polyethylene panels,
V.I.P. car armoring and lightweight armor kits for vehicles, personal military
equipment, dry storage systems, liquid logistic products, tents and other
camping and travel gear.
 
 As
a supplier of products to the civilian and military markets, our business is
affected by economic conditions. The volatile economic conditions of 2009 have
continued into 2010 and slowed down our sales process and complicated our
ability to conduct transactions. The current economic climate and the
uncertainty in the global economic conditions could impact the ability of our
customers, including governmental entities, to make capital expenditures,
thereby affecting their ability to purchase our products. Our business and
financial performance, including collection of our accounts receivable,
realization of inventory and recoverability of assets including investments, may
be adversely affected if economic conditions deteriorate or continue to be
volatile. Our profitability may also be adversely affected by our fixed costs
and the possibility that we would be unable to scale back other costs within a
time frame sufficient to match any decreases in revenue relating to changes in
market and economic conditions.
 
 We
develop our products in Israel and sell them in Israel, North and South America,
Asia, Africa and several European countries. Our sales in Israel are denominated
in NIS, while most of our export sales are denominated in U.S. dollars. Under
U.S. GAAP we report all of our sales in U.S. dollars. Accordingly, appreciation
of the U.S. dollar against the NIS reduces our reported sales while the
devaluation of the U.S. dollar against the NIS increases our reported
sales.
 
 Our cost
of sales and operating expenses are affected in the same manner.  Most of
our purchases of raw material are made in U.S. dollars while most of our labor
and other operating expenses are in NIS, however, under U.S. GAAP we report our
cost of sales and operating expenses in U.S. dollars. Accordingly, appreciation
of the U.S. dollar against the NIS reduces our reported cost of sales and
operating expenses while the devaluation of the U.S. dollar against the NIS
increases our reported cost of sales and operating expenses.
   17
 
 
 Exchange
rate fluctuations also affect our financial results in other ways. Most of our
deposits and a portion of our tradable securities are linked to the rate of
exchange between the U.S. dollar and the NIS. Accordingly, a devaluation of the
U.S. dollar against the NIS is reflected as comprehensive income in our
consolidated statement. In the period ended September 30, 2010, the NIS
appreciated in relation to the U.S. dollar at a rate of 2.9% and our accumulated
comprehensive income as of September 30, 2010 was $760,000
 In
addition, we develop products in Israel and sell them in Israel, North and South
America, Asia, Africa and several European countries. Our sales in Israel are
denominated in NIS, while most of our export sales are denominated in U.S.
dollars. Under U.S. GAAP we report all of our sales in U.S. dollars.
Accordingly, appreciation of the U.S. dollar against the NIS reduces our
reported sales while the devaluation of the U.S. dollar against the NIS
increases our reported sales.
 
 Our cost
of sales and operating expenses are affected in the same manner.  Most of
our purchases of raw material are made in U.S. dollars while most of our labor
and other operating expenses are in NIS, however, under U.S. GAAP we report our
cost of sales and operating expenses in U.S. dollars. Accordingly, appreciation
of the U.S. dollar against the NIS reduces our reported cost of sales and
operating expenses while the devaluation of the U.S. dollar against the NIS
increases our reported cost of sales and operating expenses.
 
 In the
quarter ended September 30, 2010, the NIS depreciated against the U.S. dollar by
approximately 5.42% and our financial results were negatively impacted. Exchange
rates between the U.S. dollar and the NIS fluctuate continuously. As a result,
exchange rate fluctuations and especially larger periodic devaluations will have
an impact on our profitability and period-to-period comparisons of our results.
We cannot assure you that in the future our results of operations will not be
materially adversely affected by currency fluctuations.
 
 Material
Trends
  Local Military Market.
The demand for our products increased significantly in the first quarter of
2009, mainly due to the effect of the hostilities between Israel and the Hamas
in Gaza, which took place in December 2008 and January 2009. During the end of
2009 and the first nine months of 2010, the demand for our products
decreased due to a break in the hostilities in Gaza. We believe that the demand
for our products from the Israeli Ministry of Defense will continue at the
current levels during the remainder of 2010.
 
 As
of November 9, 2010, we had a backlog of firm orders from the Israeli Ministry
of Defense of approximately $1.3 million, including orders of approximately
$500,000 that we received subsequent to September 30, 2010.  In the
nine month periods ended September 30, 2010 and 2009, sales to the Israeli
Ministry of Defense were $3.5 million and $5.9 million, accounting for 28.2% and
45.9% of our sales, respectively.
 
 Export Military Market. Our
customers in this market are military and law enforcement organizations mostly
in South America, North America, Africa 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 and 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, Africa, Europe and Australia. Any future success in such markets
is mainly dependant on our marketing efforts, our ability to be competitive in
our pricing and the quality of our products.
  The following table presents details of
our export military sales during the three and nine month periods ended
September 30, 2010 and 2009:
   18
  Three
      Months Ended
              September
      30,
            Nine
      Months Ended
              September
      30,2010
            2009
            2010
            2009Sales
      to South America
            $2,825,282
            $
      335,766
            $3,292,725
            $
      1,544,182Sales
      to North America
            ---
            11,214
            7,356
            187,868Sales
      to Europe and Asia
            190,264
            147,896
            625,116
            980,553Sales
      to Africa
            636,792
            350,717
            639,053
            1,738,208Total
      Export Military Sales
            $3,652,338
            $
      845,593
            $4,564,250
            $
      4,450,811
 
 Local Civilian Market. Our
product range for the civilian market is diversified. In the three and nine
month periods ended September 30, 2010, our local market business increased to
$1,311,624_ and $2,996,771 respectively, compared to $485,000 and $1,6 million
for the three and nine month periods ended September 30, 2009, mainly due to
sales of armored vehicles for civilian use. We expect to maintain the same level
of revenues in the fourth quarter, due to marketing efforts and increased demand
for armored vehicles in the civilian market.
 
 The
following table sets forth the breakdown of sales by segment for the three and
nine month periods ended September 30, 2010 and 2009.
  Three
      Months Ended
              September
      30,
            Nine
      Months Ended
              September
      30,2010
            2009
            2010
            2009Local
      civilian market
            $1,311,624
            $  484,888
            $2,996,771
            $  1,640,218Export
      civilian market
            488,141
            340,489
            1,096,859
            763,342Local
      military market
            1,129,326
            1,883,167
            3,805,094
            6,089,191Export
      military market
            3,652,338
            845,593
            4,564,250
            4,450,811Total
            $6,581,429
            $  3,554,137
            $12,462,974
            $  12,943,562
 
 Backlog. We had approximately
$3.3 million of unfilled customer orders at September 30, 2010, compared to $3.5
million of unfilled customer orders at September 30, 2009. Of the $3.3 million
of unfilled customer orders at September 30, 2010, approximately $270,000 was
attributable to orders from military customers in South America, approximately
$140,000 was attributable to orders from military customers in Europe and Asia,
approximately $600,000 was attributable to orders from military customers in
Africa, approximately $400,000 was attributable to the local civilian market ,
approximately $400,000 was attributable to the U.S. civilian market and
approximately $1.5 million was attributable to the Israeli Ministry of
Defense.
 
 Sarino
Agreement
 
 On
December 17, 2008, our subsidiary, Mayotex Ltd., or Mayotex, entered into an
agreement with Sarino Crystal Technologies Ltd. and Sarino Optronics Ltd., or
Sarino, to cooperate in the manufacture of optical grade Germanium crystals and
sales of lenses to be used in optical and infra-red night vision products
utilizing the Germanium crystals, or the Sarino Agreement.
 
 On
December 21, 2008, Mayosar Ltd., or Mayosar, which was incorporated by Mayotex
and Sarino, through its wholly owned subsidiary Isorad IR Optics Ltd., or
Optics, entered into an agreement, or the Isorad Agreement, to purchase the
Germanium Crystals Business of  Isorad Ltd., an Israeli governmental
company, or Isorad. The Isorad Agreement provided for the purchase of certain
know-how, equipment, inventories and production activities of Germanium Crystals
for lenses used in infra-red night vision system applications.
 
 After a
period of uncertainty, in August 2010, Mayosar, Optics and Isorad Ltd.
executed an addendum to the 2008 agreement, according to which the parties
confirmed the validity of the Isorad Agreement under certain
conditions. Pursuant to the Sarino Agreement:
    19
 
 ●
            Mayotex
      and Sarino agreed to incorporate Mayosar, with Mayotex being the majority
      shareholder owning 50.1% and Sarino owning 49.9%. As majority shareholder,
      Mayotex will have operational control of
  Mayosar.
 
 ●
            In
      consideration of the above, Mayotex paid Sarino $1 million, out of which
      $300,000 is non-refundable to Mayotex upon 24 months following the
      execution of the Isorad Agreement, and the remaining $700,000 will be
      earned by Sarino based on 10% of sales over $3 million and up to $10
      million during the first 36 months of operations. Amounts not earned are
      to be refunded to Mayotex, including interest of Libor + 2% per annum. The
      refundable consideration is secured by Sarino’s interest in Mayosar and
      personal guarantees provided by Sarino Crystal Technologies Ltd.'s
      controlling shareholders.
 
 ●
            Mayotex
      agreed to provide Mayosar with a loan in the aggregate amount of $2
      million under a timetable to be determined by Mayosar’s board of
      directors. Such loan will bear interest at the rate of Libor + 2%, and is
      payable from profits generated by
Mayosar.
 
 As of
September 30, 2010, Mayotex has provided loans of $1.0 million to Sarino and
$1.0 million to Mayosar. Such payments are recognized as refundable deposits
pending resolution of the Isorad Agreement.
 
 Pursuant
to the Isorad Agreement, Optics is to pay annual royalties of 3% out of sales
for a period of 15 years commencing the effective date of the Isorad Agreement ,
or the Effective Date, with a minimum amount of approximately $133,000 payable
per year during the first 18 months or until the date of completion of the
transfer of the site of the Germanium Crystals Business, whichever is earlier
(this payment includes a reimbursement of costs for the usage of the site and
equipment in this initial period), and approximately $53,000 per year during the
following years of the royalties payment period.
 
 Pursuant
to the Isorad Agreement, Isorad has the right to acquire 5% of the share capital
of Optics on a fully diluted basis for their nominal value during the 24 month
period beginning on the Effective Date. Such right was recently extended for an
additional 12-month period 1 January 2012. If the Israeli
Government does not approve the 5% purchase of the Optics shares by Isorad
within the above period, the right to acquire the shares will expire and Isorad
will be entitled to a payment of $75,000.
 
 In the
event of an allotment of shares to Isorad, representing 5% of Optics’ share
capital, Mayosar will issue to Mayotex additional shares of Mayosar on a pro
rata basis, in order for Mayotex to retain a 50.01% indirect interest in Optics’
share capital.
 
 Optics
has the right during the four year period following the Effective Date to redeem
its commitment to pay royalties under the Isorad Agreement in consideration of a
fixed payment of $750,000, less all royalties paid to Isorad through that
date.
 
 As of the
balance sheet date Management assessed its legal position and is of the opinion,
based on legal advice received, that the amounts paid under the Sarino and
Isorad agreements should be fully refunded to the Company in the event that the
Isorad Agreement is not consummated.
 
 Results
of Operations
  Key
Indicators
 Our
management views revenues, the sources of our revenues, gross profit margin and
the level of inventory compared to revenues as the key performance indicators in
assessing our company’s financial condition and results of
operations.  While our management believes that demand for our
products will continue to grow, our business is subject to a high degree of
volatility because of the impact of geopolitical events, government budgeting,
and competition.
    20
 
 Three
Months Ended September 30, 2010 Compared with Three Months Ended September 30,
2009
  Net Revenues. Net revenues
for the three months ended September 30, 2010 increased to $6.6 million from
$3.6 million in the three months ended September 30, 2009, a increase of
85.2_%.  The increase is mainly attributable to a increase of
approximately $827,000 in our local civilian market segment, a increase of
approximately $2.8 million in our export military market segment, and a increase
of approximately $150,000 in our export civilian market segment which was offset
by an decrease of approximately $750,000  in our local military market
segment.  The decreased revenues in our local military market segment
are attributable to an decrease in demand for our products from the Israeli
Ministry of Defense. The increased revenues in our export military market and
local civilian market segments are attributable to a general increase in demand
for our products in those markets, especially in South America.
  Gross Profit. Gross
profit for the three months ended September 30, 2010 was $1.7 million compared
to $716,000 for the three months ended September 30, 2009.  Our
gross profit margin for the three months ended September 30, 2010 increased to
26.1% compared to 20.2% for the three months ended September 30,
2009.  The increase in gross profit margin is primarily attributable
to the 85.2% increase in revenues while our cost of sales increased by only
71.4%, which is primarily due to our fixed costs that are not revenue
dependent.
  Selling Expenses. Selling
expenses for the three months ended September 30, 2010 increased by 200.2% to
$461,000 from $153,000 for the three months ended September 30, 2009. The
increase in our selling expenses was attributable primarily to the increase in
export sales commissions.
  General and Administrative
Expenses. General and administrative expenses for the three months ended
September 30, 2010 increased by 14.6% to $631,000 from $551,000 for the three
months ended September 30, 2009. This increase is primarily attributable to an
increase in professional services expenses.
  Compensation from Israeli
Government. In the second quarter of 2009, our subsidiaries Export Erez
and Mayotex received a total of $224,000, as compensation from the Israeli
Government under the "Property tax and compensation payments for war damages"
regulations, for the loss of employment days and potential revenues during the
last two years due to the security and military situation in the area in which
Export Erez and Mayotex are located. We recorded approximately $4,500 of income
due to exchange rate differences in the third quarter of 2009  with
respect to the compensation received from the Israeli Government. .
  Financial Income (Expenses),
Net. We had financial expenses, net of $313,000 for the three months
ended September 30, 2010 compared to financial expenses, net of $255,000 for the
three months ended September 30, 2009. Our financial expenses are primarily due
to the change in the U.S. dollar exchange rate versus the NIS, which resulted in
a loss of $304,000 for the three months ended September 30, 2010 compared to a
loss of $255,000 for the three months ended September 30, 2009.
  Other Income, Net. We had
other income, net for the three months ended September 30, 2010 of $10,000 as
compared to other income, net of $72,000 for the three months ended September
30, 2009. Our other income in the three months ended September 30, 2010 is
attributable to a $11,000 gain derived from the revaluation of funds in respect
of employee rights upon retirement, which was offset by a small loss derived
from the sale of tradable securities  and a small unrealized gain on
tradable securities.  Our other income in the three months ended
September 30, 2009 is attributable to a $30,000 gain derived from the
revaluation of funds in respect of employee rights upon retirement, a $9,000
gain derived from sales of tradable securities and a $33,000 unrealized gain on
tradable securities.
  Income Tax Benefit. We
recorded an income tax benefit of $3,000 for the three months ended September
30, 2010 compared to an  income tax benefit of $17,000 for the three
months ended September 30, 2009. The decrease in the income tax benefit was
mainly due to increased  income before income taxes in the three
months ended September 30, 2010 compared to the loss before income taxes in the
three months ended September 30, 2009
  Net Income (Loss).For the
three months ended September 30, 2010, our consolidated net income was $325,000
compared to a net loss of  $150,000 for the three months ended
September 30, 2009.
   21
   Nine
Months Ended September 30, 2010 Compared with Nine Months Ended September 30,
2009
  Net Revenues. Net revenues
for the nine months ended September 30, 2010 decreased to $12.5 million from
$12.9 million in the nine months ended September 30, 2009, an decrease of 3.7%.
The decrease is mainly attributable to an decrease in revenues from our local
military market segment. In the period ended September 30, 2010, revenues from
our local military market segment decreased by approximately $2.3 million due to
a  decrease in demand for our products. This decrease was offset by a
increase of approximately $1.4 million in our local civilian market segment
and  an increase of approximately $300,000  in our export
civilian market segment.
  Gross Profit. Gross
profit for the nine months ended September 30, 2010 was $2.5 million compared to
$3.0 million for the nine months ended September 30, 2009. This decrease in
gross profit is primarily attributable to the decrease in sales. Our gross
profit margin for the nine months ended September 30, 2010 decreased to 20%
compared to 22.9% for the nine months ended September 30, 2009 due to the change
in the mix of products sold and the impact of our fixed costs that are not
revenue dependent.
  Selling Expenses.Selling
expenses for the nine months ended September 30, 2010 increased by 63.4% to
$793,000 from $486,000 for the nine months ended September 30, 2009. The
increase in our selling expenses was primarily attributable to increased
commissions due to a different mix of products sold and an increase in sales
through agents.
  General and Administrative Expenses.General and administrative expenses for the nine months ended September
30, 2010 increased by 32.1% to $2 million  from $1.5 million for the
nine months ended September 30, 2009. This increase is primarily attributable to
an increase in professional services expenses.
  Compensation from Israeli
Government.In the second quarter of 2009, Export Erez and Mayotex
received a total of $224,000 as compensation from the Israeli Government under
the "Property tax and compensation payments for war damages" regulations, for
the loss of employment days and potential revenues during the last two years due
to the security and military situation in the area in which Export Erez and
Mayotex are located. We recorded $4,000 of income due to exchange rate
differences in the third quarter of 2009 with respect to the compensation
received from the Israeli Government.
  Financial (Expenses), Net.We
had financial expenses, net of $161,000 for the nine months ended September 30,
2010 compared to financial expenses, net of $38,000 for the nine months ended
September 30, 2009. Our financial expense  is primarily due to the
change in the U.S. dollar exchange rate versus the NIS, which resulted in a loss
of $170,000  for the nine months ended September 30, 2010 compared to
a loss of $98,000 for the nine months ended September 30, 2009.
  Other Income, Net.We had
other income, net for the nine months ended September 30, 2010 of $101,000 as
compared to other income, net of $293,000 for the nine months ended September
30, 2009. Our other income in the nine months ended September 30, 2010 is mainly
attributable to the revaluation
 of funds
in respect of employee rights upon retirement of $20,000, an unrealized gain of
$59,000 on tradable securities and a gain of $23,000 from the dissolution
of  Dragonwear. Our other income in the nine months ended September
30, 2009 was mainly attributable to revaluation of funds in respect of employee
rights upon retirement of $112,000 a gain derived from sales of tradable
securities of $34,000 and an unrealized gain of $148,000 on tradable
securities.
 
 Income Tax Expense.Our
income tax expense for the nine months ended September 30, 2010 was $5,000
compared to income tax expense of $341,000 for the nine months ended September
30, 2009. The decrease in income tax expense was mainly due to the decrease in
our income before income taxes in the nine months ended September 30,
2010.
  Net Income(Loss) .In the
nine months ended September 30, 2010 our consolidated net loss was $402,081
compared to net income of  $1.1 million for the nine months ended
September 30, 2009.
  
  22
  Liquidity
and Capital Resources
   We assess
liquidity in terms of our ability to generate cash to fund our operating and
investing activities. Of particular importance to management are cash flows
generated by operating activities and cash used for capital and financing
expenditures.
   In the
last few years we have financed our operating needs and capital expenditures
through cash flows from our operations, payments from the Israeli government
relating to the evacuation by our Erez Export and Mayotex subsidiaries from
their manufacturing facilities in the Erez Industrial Zone in the Gaza Strip and
existing cash. We expect to continue to finance current and planned operating
requirements principally through cash from operations, as well as existing cash
resources. We believe that these funds will be sufficient to meet our operating
requirements for the foreseeable future. However, we may, from time to time,
seek additional funding through a combination of equity and debt financings or
from other sources. The current economic climate and the uncertainty in the
global financial markets resulting from the disruption in credit markets may
affect our ability to raise additional funds in the future, if required. There
can be no assurance that such additional financing will be available to us, or
if available, will be on terms favorable to our company.
   Most of our large contracts, which are Israeli Governmental contracts, are
supported by letters of credit. As a result, we believe that we have limited
exposure to doubtful accounts receivables. We have endeavored to balance our
accounts payable and accounts receivable.
   As of
September 30, 2010, we had $3.1 million in cash and cash equivalents, $2.0
million in trading securities and working capital of $10.3 million as compared
to $3.8 million in cash and cash equivalents, $2.3 million in trading securities
and working capital of $10.2 million at December 31, 2009.
   We
believe that we have sufficient working capital and borrowing capability to
sustain our current level of operations for the next twelve months.
   Subsequent
Event
   On
October 27, 2010, our subsidiary Mayotex Ltd., or Mayotex, entered into an
agreement to purchase shares of Mayo-Ben Investments and Development Ltd., or
Mayo-Ben. Pursuant to the agreement, Mayotex agreed to invest up to $1.5 million
in Mayo-Ben, a real estate company holding industrial properties in Israel which
are partially occupied by the Company's subsidiaries, in consideration for the
purchase of approximately 20 per cent of the share capital of Mayo-Ben on a
fully diluted basis. The subscription price is subject to adjustment based on an
appraisal of the properties to be conducted by a major accounting firm in
Israel.
   Mayotex
also agreed to lend Mayo-Ben $1 million, which funds will be utilized by
Mayo-Ben to improve and renovate its industrial properties, subject to and upon
the terms of the agreement. Within the framework of a recent amendment to the
Evacuation Compensation Law, under which several of our subsidiaries received
compensation for their forced evacuation from the Gaza Strip area, such
subsidiaries are eligible to apply for additional compensation under such law,
subject to certain requirements, including investment in the factories and
properties to which they moved their activities and businesses, such as the
properties held by Mayo-Ben. We expect that a portion of the grants, if any, to
be received from the Israeli government within the above framework, will be used
(subject to the amount granted), with the funds to be invested by Mayo-Ben, for
renovations and improvements to the properties occupied by the Company’s
subsidiaries and will entitle the Company’s subsidiaries to apply for additional
grants and tax benefits.
   The
Company has agreed to forgive the loan in the event that Mayo-Ben invests at
least $1 million in the renovation and improvement of the properties in
accordance with a renovation plan agreed to by both parties and  to
the complete satisfaction of the Company within a three (3) year period
commencing on the first closing date of the transaction, of which at least
$200,000 must be spent for such renovations prior to August 30,
2011.
   23
  Cash
Flows
 
 The following table summarizes our cash
flows for the periods presented:
  Nine
      months endedSeptember
      30,
                2010
            September
      30,
                2009Net
      cash provided by (used in) operating activities
            $(761,329)
            $      1,587,773Net
      cash provided by (used in) investing activities
            (181,130)
            2,042,210Net
      cash used in financing activities
            132,653
            (1,695,666)Net
      (decrease) increase in cash and cash equivalents
            (682,373)
            2,155,409Cash
      and cash equivalents at beginning of period
            3,783,631
            1,719,921Cash
      and cash equivalents at end of period
            $3,101,258
            $3,875,330
 
  Operating activities.Net cash
used in operating activities was $761,000 for the nine months ended September
30, 2010 as compared to $1.6 million provided by operating activities in the
nine months ended September 30, 2009. This was primarily due to our net loss of
$402,000, an increase in accounts receivable of $913,000, a decrease in other
current liabilities of $261,000, an increase in other current assets of
$273,000, a decrease in related parties accounts of
425,000  and a  increase in inventories of $190,000,
offset by an increase in accounts payable of $937,000 and a decrease in trading
securities of $419,000. The $1.6 million provided by operating activities in the
2009 period was primarily provided from net income of $1.1 million, a decrease
in accounts receivable of $429,000, a decrease in inventories of $505,000 and a
decrease in trading securities of $276,000, offset by a decrease in accounts
payable of $228,000 and a decrease in other current liabilities of $690,000.
  Investing activities. Net cash used in investing activities was $181,000 for the
nine months ended September 30, 2010 as compared to $2.0 million provided by
investing activities in the nine months ended September 30, 2009. During the
nine months ended September 30, 2010, $174,000 was used to purchase fixed assets
and $14,000 was used for the purchase of a business. During the nine months
ended September 30, 2009, $3.0 million  was provided from the
redemption of bank deposits, $52,000 was provided from the sale of fixed assets,
$91,000 was used to purchase fixed assets and $919,000 was used for the purchase
of a business.
 
 Financing
activities.Net cash provided  in financing
activities was $133,000 for the nine months ended September 30, 2010 as compared
to $1.7 million  used in financing activities for the nine months
ended September 30, 2009. During the nine months ended September 30, 2010, we
incurred additional short-term debt of $233,000 and  long-term
debtof $125,000,
which was offset by the repayment of  $225,000 of long-term debt.
During the nine months ended September 30, 2009, we incurred additional
short-term debt of $231,000, repaid $264,000 of long-term debt and paid $1.2
million to related parties for the purchase of their minority interest in
Achidatex and 1,050,000 of our Company’s shares held by them..
 
 
 Foreign
Currency Exchange Risk
  We
develop products in Israel and sell them in Israel, North and South America,
Asia, Africa and several European countries. Our sales in Israel are denominated
in NIS while most of our export sales are denominated in U.S. dollars. In
addition, our labor expenses are primarily paid in NIS while our expenses for
raw materials are paid primarily in U.S. dollars. 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 is significant due to the depreciation of the U.S.
dollar versus the NIS. We expect our exposure will continue to be significant,
since a significant portion of the prices of our raw material purchases, as well
as part of our sales are denominated in U.S. dollars.
 
 In the year ended December 31, 2009, the inflation rate in Israel was 3.91% and
the NIS appreciated in relation to the U.S. dollar at a rate of 0.71%, from NIS
3.802per $1 on
December 31, 2008 to NIS 3.775 per $1 on December 31, 2009. In the nine months
ended September 30, 2010, inflation in Israel was1.9% while the NIS
appreciated in relation to the U.S. dollar at a rate of 2.9%. If future
inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar
or if the timing of such devaluation lags behind increases in inflation in
Israel, our results of operations may be materially adversely
affected.
  We
did not enter into any foreign exchange contracts or hedging transactions in the
nine months ended September 30, 2010.
     24
  Inflation and
Seasonality
   We do not
believe that our operating results have been materially affected by inflation
during the preceding two years. There can be no assurance, however, that our
operating results will not be affected by inflation in the future. Our business
is subject to minimal seasonal variations with slightly increased sales
historically in the second and third quarters of fiscal year. We expect to
continue to experience slightly higher sales in the third quarter, and slightly
lower sales in the fourth and first quarters, as a result of reduced sales on
nondairy frozen desserts during those periods.
  Off-balance
Sheet Arrangements
   None.
  Contractual
Obligations
  The
following table summarizes our contractual obligations and commercial
commitments as of September 30, 2010.
  Contractual
      Obligations
            
            Payments
      due by PeriodTotal
            Less
      than 1 year
            2
      -3 years
            4
      -5 years
            more
      than 5 yearsLong-term
      debt obligations
            $466,748
            $232,620
            $224,745
            $9,383
            $   --Estimated
      interest payments on long-term debt obligations .........
            29,478
            18,913
            10,401
            164
            --Operating
      lease obligations
            646,986
            486,164
            160,822
            -
            --Total
            $1,143,212
            $737,697
            $395,968
            $9,547
            $   --
 
 
 Critical
      Accounting Policies
 
 A
discussion of our critical accounting policies was provided in Item 7 of our
Annual Report on Form 10-K for the year ended December 31,
2009.  There were no significant changes to these policies in the nine
months ended September 30, 2010.
 
 Recent
      Accounting Pronouncements
 
  See Note 1G. to the unaudited
condensed consolidated financial statements included in Part I, Item 1,
Financial Statements,
of this Quarterly Report on Form 10-Q.
   25
 
  Item
3.      Quantitative and Qualitative Disclosures About
Market Risk
  Interest
Rate Risk
   We do not
believe that we have any material exposure to interest rate risk other than
sensitivity to prevailing interest rates that may affect income from our cash
deposits and marketable securities.
  Foreign
Exchange Risk
   Most of
our sales are currently denominated in dollars, while the majority of our
operating expenses are incurred in foreign currencies, principally the NIS. As a
result, the decrease in the value of the U.S. dollar against these currencies
has resulted in increased expenses for our company. In 2007, 2008 and 2009, the
U.S dollar depreciated against the NIS by approximately 9%, 1% and 1%,
respectively. In the first nine months of 2010, the U.S dollar depreciated by
approximately 2.9% in relation to the NIS.
  Changes
in Market Risk
 
 The
ongoing global recession, driven initially by the crisis in global credit and
financial markets, has severely diminished liquidity and credit availability,
declines in consumer confidence, increases in unemployment rates, and
uncertainty about economic stability. There can be no assurance that there will
not be further deterioration in credit and financial markets and confidence in
economic conditions. These economic uncertainties affect businesses such as ours
in a number of ways, making it difficult to accurately forecast and plan our
future business activities. The current constriction of credit in financial
markets may continue to lead governments and businesses to postpone
spending.
 
  Item
4.     Controls and Procedures
   We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities Exchange Act of 1934, or
the Exchange Act, reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and
forms, and that such information is accumulated and communicated to our chief
executive officer and chief financial officer to allow timely decisions
regarding required disclosure. Our management, including our chief executive
officer and chief financial officer, conducted an evaluation of the
effectiveness of our disclosure controls and procedures, as defined under
Exchange Act Rule 13a-15(e), as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based upon that evaluation, our chief executive
officer and chief financial officer have concluded that, as of such date, our
disclosure controls and procedures were effective.
  Changes
in Internal Control over Financial Reporting
   There was
no change in our internal control over financial reporting that occurred during
the quarter ended September 30, 2010 that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting. . The company has hired the services of an external controller for
the purposes of assisting the Company with preparation of the financial
reports.
   26
  
  PART II - OTHER
INFORMATION:
  Item 1.Legal
      Proceedings
  On
February 11, 2009, a lawsuit was filed in the Jerusalem District Court (the
"Court") against the Company's subsidiaries, Export Erez USA Inc. and,
Achidatex, and the then chief executive officer of Achidatex, Mr. Avraham
Hatzor. Export Erez was subsequently added as a defendant in the action. The
suit alleges that Achidatex materially breached its agreement with the
plaintiff, dated February 22, 2000, relating to the development of inflatable
mine-field crossing enabling sandals, by failing to register patents for the
technology underlying the sandals worldwide and only registered patents in the
United States. The plaintiff further claims that the defendants, jointly and
severally, committed a breach of trust. The plaintiff is seeking damages in the
amount of NIS 10 million (approximately $2.77 million). The Company’s
subsidiaries filed a statement of defense rejecting the plaintiff's claims and
asserted a claim against the plaintiff and others for a declaratory judgment
that the plaintiff breached his contractual undertakings towards
Achidatex.
 
 The
petition to consolidate the counter claim with the plaintiff's claim was ordered
by the Court and the claims are now being heard together. Achidatex also filed a
petition to strike the claim against Mr. Hatzor and Export Erez USA Inc. based
on the assertion that there is no contractual or any other kind of privity
between the plaintiff and Mr. Hatzor and Export Erez USA Inc. and, therefore, no
cause of action against them exists. This petition is pending. The Company
intends to vigorously defend against the lawsuit. Due to the preliminary stage
of the lawsuit, management and its legal advisors cannot currently assess the
outcome or possible adverse effect of the lawsuit  on the Company’s
financial position or results of operations.
 On 12
July 2010, a lawsuit was filed in the Tel-Aviv Regional Labor Court (the "Labor
Court") against the Company, its subsidiaries Mayotex and Export Erez (the
"Group") and against an officer of the Group, by a former employee. The
plaintiff alleges that the Group breached her employment agreement and violated
certain Israeli labor related legislation, by not paying her severance payment,
payment in lieu of vacation, recuperation payments, contribution to Study Fund,
due to her claiming to being subject to sexual harassment and consequently
violation of certain applicable Israeli legislation, not making the payments due
to the employee during the prior notice period and compensation for overtime.
The amount claimed under the above claim is NIS 1,472,035 ($379,880). The
Company believes that the amounts sought are exaggerated and that the exposure,
if any,  to the lawsuit, is not material to the business of the
Company. The Company intends to vigorously defend its position. The Labor
Court has imposed a gag order on the parties to the lawsuit.
 
  Item
      1A.
            Risk
      Factors
  There
have been no material changes to our “Risk Factors” set forth in our Annual
Report on Form 10-K  for the year ended December 31,
2009.
  Item
      6.Exhibits
  Exhibits
 
 31.1
            Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
      Exchange Act, as amended.
 
 31.2
            Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
      Exchange Act, as amended.
 
 32.1
            Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
      Exchange Act, as amended.
 
 32.2
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of
  2002.
  27
   
  
  SIGNATURE
 
 In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 
 
 
 DEFENSE
      INDUSTRIES INTERNATIONAL, INC.Dated:
      November 15, 2010
            /s/Uri
      NissaniUri
      NissaniChief
      Executive Officer and President
 
 
  28