---

---

# UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549

# FORM 10-Q

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

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

Commission file number:
0-30105

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

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

8 Brisel Street
Industrial Zone Sderot,
Israel, 87711(Address of Principal Executive Offices)

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

N/A(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)

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

Yes x  No o

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

Yes o No o

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

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

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

Yes o No x

As of August 14, 2009 the issuer had 28,150,535 shares of Common Stock, par value $0.0001, outstanding.



---

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DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX

|                                |                                                                                             | Page
|------------------------------- | ------------------------------------------------------------------------------------------- | ----
|
|
|
|
|PART I - FINANCIAL INFORMATION:
|                               
|Item 1.                         | Condensed Consolidated Balance Sheets as of June 30, 2009 (Unaudited) and December 31, 2008 | 3   
|                               
|                                | Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30,
|                                | 2009 and 2008 (Unaudited)                                                                   | 5   
|                               
|                                | Condensed Consolidated Statement of Changes in Equity for the Three and Six Months Ended   
|                                | June 30, 2009 and 2008 (Unaudited)                                                          | 6   
|                               
|                                | Condensed Consolidated Statements of Cash Flows for the Six Months Ended                   
|                                | June 30, 2009 and 2008 (Unaudited)                                                          | 8   
|                               
|                                | Notes to Condensed Consolidated Financial Statements (Unaudited)                            | 9   
|                               
|Item 2.                         | Management's Discussion and Analysis of Financial Condition and Results of Operations       | 18  
|                               
|Item 3.                         | Quantitative and Qualitative Disclosures About Market Risk                                  | 28  
|                               
|Item 4T.                        | Controls and Procedures                                                                     | 28  
|                               
|PART II - OTHER INFORMATION:   
|                               
|Item 1.                         | Legal Proceedings                                                                           | 28  
|                               
|Item 1A.                        | Risk Factors                                                                                | 29  
|                               
|Item 6.                         | Exhibits                                                                                    | 29  
|                               
|SIGNATURES                      | 30                                                                                         

2

---

---

PART I  FINANCIAL INFORMATION:

Item 1.

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2009 (UNAUDITED) AND DECEMBER 31, 2008

ASSETS

|                                                            | June 30,
2009 | December 31,
2008
|----------------------------------------------------------- | ------------- | -----------------
|
|
|
|
|CURRENT ASSETS                                              |               |                  
|Cash and cash equivalents                                   |               |                  
|Restricted bank deposits                                    |               |                  
|Accounts receivable, net of allowance for doubtful accounts |               |                  
|of $288,332 and $298,354, respectively                      |               |                  
|Inventories                                                 |               |                  
|Trading securities                                          |               |                  
|Deferred taxes                                              |               |                  
|Other current assets                                        |               |                  
|                                                            |               |                  
|Total Current Assets                                        |               |                  
|                                                            |               |                  
|                                                            |               |                  
|PROPERTY, PLANT AND EQUIPMENT, NET                          |               |                  
|                                                            |               |                  
|                                                            |               |                  
|OTHER ASSETS                                                |               |                  
|Funds in respect of employee rights upon retirement         |               |                  
|Deferred taxes                                              |               |                  
|Refundable deposits for the purchase of a business (Note 2) |               |                  
|                                                            |               |                  
|Total Other Assets                                          |               |                  
|                                                            |               |                  
|                                                            |               |                  
|TOTAL ASSETS                                                |               |                  
|                                                            |               |                  
|                                                            |               |                  

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

3

---

---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2009 (UNAUDITED) AND DECEMBER 31, 2008

LIABILITIES AND EQUITY

|                                                      | June 30,
2009 | December 31, 2008
|----------------------------------------------------- | ------------- | -----------------
|
|
|
|
|CURRENT LIABILITIES                                   |               |                  
|Accounts payable                                      |               |                  
|Accounts payable - related parties                    |               |                  
|Short-term debt                                       |               |                  
|Common stock to be issued                             |               |                  
|Other current liabilities                             |               |                  
|                                                      |               |                  
|Total Current Liabilities                             |               |                  
|                                                      |               |                  
|                                                      |               |                  
|LONG-TERM LIABILITIES                                 |               |                  
|Long-term portion of debt                             |               |                  
|Liability for employee rights upon retirement         |               |                  
|                                                      |               |                  
|                                                      |               |                  
|Total Long-Term Liabilities                           |               |                  
|                                                      |               |                  
|                                                      |               |                  
|TOTAL LIABILITIES                                     |               |                  
|                                                      |               |                  
|                                                      |               |                  
|COMMITMENTS AND CONTINGENCIES                         |               |                  
|                                                      |               |                  
|EQUITY                                                |               |                  
|Preferred stock, $0.0001 par value, 50,000,000 shares |               |                  
|authorized, none issued and outstanding               |               |                  
|Common stock, $0.0001 par value, 250,000,000 shares   |               |                  
|authorized, 29,200,535 shares issued and 28,150,535   |               |                  
|shares outstanding at June 30, 2009 and 28,991,111    |               |                  
|shares issued and 27,941,111 shares outstanding at    |               |                  
|December 31, 2008                                     |               |                  
|Additional paid-in capital                            |               |                  
|Treasury stock (1,050,000 shares at cost)             |               |                  
|Retained earnings                                     |               |                  
|Accumulated other comprehensive (loss) income         |               |                  
|                                                      |               |                  
|Total Equity                                          |               |                  
|                                                      |               |                  
|                                                      |               |                  
|TOTAL LIABILITIES AND EQUITY                          |               |                  
|                                                      |               |                  
|                                                      |               |                  

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

4

---

---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)

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

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

5

---

---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)

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

6

---

---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)

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

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

7

---

---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED

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

# SUPPLEMENTAL SCHEDULE OF
NON-CASH ACTIVITIES:

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

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

8

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

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

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

| | A. | The
accompanying unaudited interim consolidated financial statements as of June
                    30, 2009 and for the three and six month periods then ended (the
interim                     financial statements) were prepared in a
condensed form in accordance with                     the instructions for Form 10-Q and,
therefore, do not include all disclosures                     necessary for a complete
presentation of financial condition, results of                     operations, changes
in shareholders equity, cash flows and all the data                     and notes
which are required when preparing annual financial statements, in
                    conformity with generally accepted accounting principles accepted in
the United                     States.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | The
accounting principles used in the presentation of the interim financial
                    statements are consistent with those principles used in the
presentation of the                     latest annual financial statements. All
significant accounting policies have                     been applied consistently with
the year ended December 31, 2008, except as                     otherwise stated below.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | The
preparation of the interim financial statements requires management to
                    make estimates and assumptions that affect the reported amounts of
assets and                     liabilities, the disclosure of contingent assets and
liabilities at the date of                     the financial statements, and the reported
amounts of revenues and expenses                     during the reported period. Actual
results could differ from those estimates. In                     the opinion of
management, all adjustments considered necessary for fair
                    presentation of the interim financial statements have been included.
The results                     of operations for the three and six months periods ended
June 30, 2009, are not                     necessarily indicative of the results that may
be expected for the year ending                     December 31, 2009. The interim
financial statements should be read in                     conjunction with the Companys
annual financial statements as of December                     31, 2008 and for the year
then ended and the accompanying notes thereto.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | 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 SIX MONTHS ENDED
JUNE 30, 2009 AND 2008 (UNAUDITED)

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

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

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

| | Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standard No. 157,
Fair Value Measurements (SFAS 157), which establishes a framework
for measuring fair value and requires enhanced disclosures about fair value measurements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

| | G. | Recent
accounting pronouncements adopted in the reported period
| | -- | ---------------------------------------------------------------

| | In
April 2009, the Financial Accounting Standard Based (FASB) issued FSP
FAS 157-4, Determining Fair Value When Volume and Level of Activity for the Asset
or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly (FSP 157-4). FSP 157-4 provides guidance on how to determine the fair value
of assets and liabilities when the volume and level of activity for the asset/liability
has significantly decreased. FSP 157-4 also provides guidance on identifying
circumstances that indicate a transaction is not orderly. In addition, FSP 157-4 requires
disclosure in interim and annual periods of the inputs and valuation techniques used to
measure fair value and a discussion of changes in valuation techniques. FSP 157-4 is
effective for the Company beginning in the second quarter of fiscal year 2009. The
adoption of FSP 157-4 did not have a significant impact on the Companys interim
consolidated financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

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

| | In
April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairment (FSP 115-2/124-2). FSP 115-2/124-2
amends the requirements for the recognition and measurement of other-than-temporary
impairments for debt securities by modifying the pre-existing intent and ability indicator.
Under FSP 115-2/124-2, an other-than-temporary impairment is triggered when there is
intent to sell the security, it is more likely than not that the security will be
required to be sold before recovery, or the security is not expected to recover the
entire amortized cost basis of the security. Additionally, FSP 115-2/124-2 changes the
presentation of an other-than-temporary impairment in the income statement for those
impairments involving credit losses. The credit loss component will be recognized in
earnings and the remainder of the impairment will be recorded in other comprehensive
income. FSP 115-2/124-2 is effective for the Company beginning in the second quarter of
fiscal year 2009. FSP 115-2/124-2 did not have a significant impact on the Companys
interim consolidated financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosure
about Fair Value of Financial Instruments (FSP 107-1/APB 28-1). FSP 107-1/APB 28-1
requires interim disclosures regarding the fair values of financial instruments that are
within the scope of FAS 107, Disclosures about the Fair Value of Financial
Instruments. Additionally, FSP 107-1/APB 28-1 requires disclosure of the methods
and significant assumptions used to estimate the fair value of financial instruments on
an interim basis as well as changes of the methods and significant assumptions from prior
periods. FSP 107-1/APB 28-1 does not change the accounting treatment for these financial
instruments and is effective for the Company beginning in the second quarter of fiscal
year 2009.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

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

| | In
May 2009, SFAS No. 165, Subsequent Events, was issued by the FASB, which
establishes general standards of accounting for and disclosure of events that occur after
the balance sheet date but before the financial statements are issued or are available to
be issued. SFAS No. 165 provides guidance on the period after the balance sheet date
during which management of a reporting entity should evaluate events or transactions that
may occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions occurring
after the balance sheet date in its financial statements and the disclosures that an
entity should make about events or transactions that occurred after the balance sheet
date. SFAS No. 165 is effective for interim or annual financial periods ending after June
15, 2009. Accordingly, the Company has adopted SFAS No. 165 for the period ended
June 30, 2009, and its application had no impact on the Companys condensed
financial statements. Events subsequent to the balance sheet date have been evaluated for
inclusion in the accompanying financial statements through the issuance date, August 14,
2009.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principlesa
replacement of FASB Statement No. 162 (SFAS 168). The statement confirmed that the
FASB Accounting Standards Codification (the Codification) will become the single official
source of authoritative U.S. GAAP (other than guidance issued by the SEC), superseding
existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task
Force (EITF), and related literature. After that date, only one level of authoritative
U.S. GAAP will exist. All other literature will be considered non-authoritative. The
Codification does not change U.S. GAAP; instead, it introduces a new structure that is
organized in an easily accessible, user-friendly online research system. The
Codification, which changes the referencing of financial standards, becomes effective for
interim and annual periods ending on or after September 15, 2009. The Company will
apply the Codification beginning in the third quarter of 2009. The Company does not
expect the adoption of SFAS 168 to have any substantive impact on its Condensed
Consolidated Financial Statements or related footnotes.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

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

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

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

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

| | (1)
                     Mayotex and Sarino agreed to incorporate Mayosar, with Mayotex being
the                     majority shareholder owning 50.1% and Sarino owning 49.9%. As
majority                     shareholder, Mayotex will have operational control of
Mayosar.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2)
                     In consideration of the above, Mayotex will pay Sarino $1 million,
out of                     which, $300,000 will be non-refundable to Mayotex upon 24
months following the                     execution of the Isorad agreement, as detailed
below 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. The $1
million                     payment is currently being held in escrow pending completion
of the Isorad                     Transaction.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | As
of June 30, 2009, Mayotex provided loans of $1 million to Sarino and $900,000 to Mayosar.
Such payments are recognized as refundable deposits for the above transaction.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 21, 2008, Mayosar, through its wholly owned subsidiary Isorad IR Optics Ltd., (Optics),
entered into an agreement to purchase the Germanium Crystals Business of Isorad,
consisting of certain know-how, equipment, inventories and production activities of
Germanium Crystals for lenses used in infra-red night vision system applications (Isorad
Agreement).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

13

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

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

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

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

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

| | Management
is of the opinion, based on legal advice received, that the amounts paid under the Sarino
and Isorad agreements will be fully refundable to the Company in the event that the
Isorad  transaction
is not consummated.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

14

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

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

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

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

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

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

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

15

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

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

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

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

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

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

16

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC.
AND SUBSIDIARY
COMPANIES

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

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

| | Export
Erez and Mayotex received $53,002 and $170,911, respectively, as compensation from the
Israeli Government, under the Property tax and compensation payments for war damages Regulations,
for the loss of employment days and potential revenues during the last two years due to
the security and military situation in the area in which Export Erez and Mayotex were
located.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | On
February 11, 2009, a lawsuit was filed in the Jerusalem District Court against the Companys
subsidiaries, Export Erez USA Inc. and Achidatex, and its chief executive officer, Mr.
Avraham Hazor. The suit alleges that Achidatex materially breached its agreement with the
plaintiff, dated February 22, 2000, relating to the development of inflatable mine-field
crossing enabling sandals, because Achidatex allegedly failed to register patents for the
technology worldwide and only registered patents in the United States. The plaintiff
further claims that the defendants, jointly and severally, committed a breach of trust.
The plaintiff is seeking damages in the amount of NIS 10 million (approximately $2.6
million), and claiming all rights in the patent. Contemporaneously with the filing of the
claim, the plaintiff also filed a motion seeking an exemption from payment of the
requisite court filing fee, which motion was subsequently granted. The Company believes
that the plaintiffs claim is unfounded and that it has substantial legal arguments
to oppose the allegations. The Company intends to vigorously defend against the claim and
is considering a possible counterclaim.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

---

---

|Item 2. |  | Management's Discussion and Analysis of Financial Condition and Results of Operations
|------- |  | -------------------------------------------------------------------------------------

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

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

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

Overview

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

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

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

Material Trends

Local
Military Market. After the war between Israel and the Hezbollah in Lebanon in July and
August of 2006, increased orders from the Israeli Ministry of Defense increased the
demand for our products in this market. We benefited from this trend for the remainder of
2006 and through 2007. During 2008 the demand for our products decreased compared to the
same period of 2007, but was significantly higher than in 2006. We believe that on an
annual basis the demand for our products from the Israeli Ministry of Defense will
continue at the levels similar to the demand in 2008.

As
of August 5, 2009, we had a backlog of firm orders from the Israeli Ministry of Defense
of approximately $2.2 million, including orders of approximately $0.3 million that we
received subsequent to June 30, 2009.  In the six month periods ended June 30, 2009 and
2008, sales to the Israeli Ministry of Defense were $4.1 million and $2.8 million,
accounting for 44.1% and 36.6% of our sales, respectively.

18

---

---

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.

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

Since
January 2008, we have experienced an increased demand for armored vehicles from central
and South African countries.  We believe that the armored car business is growing and
will become even more significant for us in the near future.  The armored car business is
characterized by higher gross margins than our traditional military products.

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

|                            | Three Months EndedJune 30, | Six Months EndedJune 30,
|--------------------------- | -------------------------- | ------------------------
|
|
|
|
|Sales to South America      |                            |                         
|Sales to North America      |                            |                         
|Sales to Europe and Asia    |                            |                         
|Sales to Africa             |                            |                         
|                            |                            |                         
|Total Export Military Sales |                            |                         
|                            |                            |                         

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

Current
Economic Overview. We generate revenues from sales of our products to the civilian and
military markets. Accordingly, our business is affected by economic conditions. The
volatile economic conditions have slowed down our sales process and complicated our
ability to conduct transactions. The current economic climate and the uncertainty in
global economic conditions could impact the ability of our customers to make capital
expenditures, thereby affecting their ability to purchase our products. In addition, the
turmoil in the financial markets may limit our ability to obtain financing in 2009. Our
business and financial performance, including collection of our accounts receivable,
realization of inventory and recoverability of assets including investments, may be
adversely affected if economic conditions deteriorate or continue to be volatile. Our
profitability may also be adversely affected by our fixed costs and the possibility that
we would be unable to scale back other costs within a time frame sufficient to match any
decreases in revenue relating to changes in market and economic conditions. The turmoil in
the financial markets may limit our ability to obtain financing for our working capital
requirements.

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

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.

19

---

---

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 June 30, 2009, the U.S. dollar depreciated against the NIS by
approximately 6.4%, and our financial results were positively impacted. However, because
exchange rates between the U.S. dollar and the NIS fluctuate continuously, exchange rate
fluctuations and especially larger periodic devaluations will have an impact on our
profitability and period-to-period comparisons of our results. We cannot assure you that
in the future our results of operations may not be materially adversely affected by
currency fluctuations.

# Former Operations in the
Erez Industrial Zone

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

The
Israeli Governments decision to evacuate the Gaza Strip was supported by certain
resolutions, including the Evacuation Compensation Law that was adopted by the
Israeli Parliament to compensate the Israeli Gaza Strip settlers as well as business and
property owners in the Gaza Strip and in the Erez Industrial Zone. In February 2006, three
of our subsidiaries, Export Erez, Mayotex and Achidatex, filed claims for compensation
pursuant to the Evacuation Compensation Law. In 2006, we were notified that we would
receive advance payment in the aggregate amount of $523,000. We applied this payment
against the receivable established in 2005 and recorded the excess payment of $240,658,
net of taxes, as extraordinary gain.

On
February 18, 2008 Export Erez, Mayotex and Achidatex signed definitive agreements with
SELA, a government agency, established pursuant to the Evacuation Compensation Law, for
compensation of approximately $6.0 million, net of 5% related taxes, receipt of the
previous advance payment and the other associated costs.

# Tentative acquisitions

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

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

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

| |  | In
consideration of the above, Mayotex will pay Sarino $1 million, out of which, $300,000
will be non-refundable to Mayotex upon 24 months following the execution of the Isorad
agreement, as detailed below 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. The $1 million payment is currently being held in escrow pending completion of
the Isorad Transaction.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

20

---

---

As
of June 30, 2009, Mayotex provided loans of $1 million to Sarino and $900,000 to Mayosar.
Such payments are recognized as refundable deposits for the above transaction.

On
December 21, 2008, Mayosar, through its wholly owned subsidiary Isorad IR Optics Ltd.,
(Optics), entered into an agreement to purchase the Germanium Crystals
Business of Isorad, consisting of certain know-how, equipment, inventories and production
activities of Germanium Crystals for lenses used in infra-red night vision system
applications (Isorad Agreement).

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

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

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

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

Our
management is of the opinion, based on legal advice received, that the amounts paid under
the Sarino and Isorad agreements will be fully refundable to us in the event that the
Isorad transaction is not consummated.

21

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# Results of Operations

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

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

Net
Revenues. Net revenues for the three months ended June 30, 2009 decreased to
$3,576,137 from $4,477,086 in the three months ended June 30, 2008, a decrease of 20.1%.
The decrease is mainly attributable to a decrease of approximately $0.9 million in our
local civilian market segment, a decrease of approximately $62,000 in our export civilian
market segment, and a decrease of approximately $0.2 million in our export military market
segment, which was offset by an increase of approximately $0.3 million in our local
military market segment. The increased revenues in our local military market segment are
attributable to an increase in demand for our products from the Israeli Ministry of
Defense. The decreased revenues in our export military market and civilian markets
segments are attributable to a general decrease in demand for our products in those
markets.

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

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

Gross
Profit. Gross profit for the three months ended June 30, 2009 was $752,625 compared to
$1,176,762 for the three months ended June 30, 2008. Our gross profit margin for the
three months ended March 31, 2009 decreased to 21.0% compared to 26.3% for the three
months ended June 30, 2008. This decrease in gross profit is primarily attributable to the
decrease in revenues from sales. The decrease in gross profit margin is primarily
attributable to the 20.1% decrease in revenues while our cost of sales decreased by only
14.5%, which is primarily due to our fixed costs that are not revenue-dependent, and due
to the depreciation of the U.S. dollar against the NIS.

22

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Selling
Expenses. Selling expenses for the three months ended June 30, 2009 decreased by
60.2% to $148,279 from $372,690 for the three months ended June 30, 2008. The decrease in
our selling expenses was attributable primarily to the decrease in export sales
commissions.

General
and Administrative Expenses. General and administrative expenses for the three months
ended June 30, 2009 decreased by 24.3% to $456,474 from $602,904 for the three months
ended June 30, 2008. This decrease is primarily attributable to the appreciation of the
U.S. dollar against the NIS.

Compensation
from Israeli Government. Export Erez and Mayotex received $53,002 and $170,911,
respectively, as compensation from the Israeli Government under the Property tax
and compensation payments for war damages regulations, for the loss of employment
days and potential revenues during the last two years due to the security and military
situation in the area in which Export Erez and Mayotex are located.

Financial
(Expenses) Income, Net. We had financial expenses, net of $224,056 for the three
months ended June 30, 2009 compared to financial expenses, net of $151,243 for the three
months ended June 30, 2008. Our financial expenses are primarily due to the change in the
U.S. dollar exchange rate versus the NIS, which resulted in a loss of $233,599 for the
three months ended June 30, 2009 compared to a loss of $134,483 for the three months
ended June 30, 2008.

Other
Income (Expense), Net. We had other income, net for the three months ended June 30,
2009 of $57,001 as compared to other expense, net of $56,189 for the three months ended
June 30, 2008. Our other income in three months ended June 30, 2009 is attributable to a
$42,489 gain derived from revaluation of funds in respect of employee rights upon
retirement, a $4,805 gain derived from sales of tradable securities and a $9,707
unrealized gain on tradable securities. Our other expense for the three months ended June
30, 2008 is mainly attributable to a $12,416 loss from sales of tradable securities and a
$45,777 unrealized loss on tradable securities.

Income
Tax Expense. Our income tax expense for the three months ended June 30, 2009 was
$73,375 compared to income tax expense of $9,310 for the three months ended June 30,
2008. The increase in income tax expense was mainly due to the increase in our income
before income taxes in the three months ended June 30, 2009.

Extraordinary
Income.We didnt record any extraordinary income for the three months ended
June 30, 2009. For the three months ended June 30, 2008, we recognized and recorded
extraordinary income of $228,703, net of tax, from the payments to our three
subsidiaries, Export Erez, Mayotex and Achidatex, by the Israeli Government with respect
to their evacuation from the Gaza Industrial Zone.

Noncontrolling
Interest.For the three months ended June 30, 2009, we did not recognize or record
any noncontrolling interest, compared with the noncontrolling interest in our profit of
$18,042 for the three months ended June 30, 2008 with respect to a subsidiary that is now
wholly-owned.

Net
Income.For the three months ended June 30, 2009 our consolidated net income of
controlling interest was $131,355, compared to $195,087 for the three months ended June
30, 2008.

Six Months Ended June 30,
2009 Compared with Six Months Ended June 30, 2008

Net
Revenues. Net revenues for the six months ended June 30, 2009 increased to $9,389,425
from $7,602,388 in the six months ended June 30, 2008, an increase of 23.5%. The increase
is mainly attributable to an increase in our local military and export military market
segments. In the period ended June 30, 2009, revenues from our local military market
segment increased by approximately $1.4 million and our military export market segment
grew by approximately $1.6 million. The increased revenues in our local military market
segment are attributable to an increase in demand for our products. The increased revenues
in our export military market segment are attributable to a general increase in demand for
our products during the first quarter, especially armored vehicles, which demand moderated
during the second quarter of 2009. The following table sets forth the breakdown of sales
by segment for the six months ended June 30, 2009 and 2008.

23

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| |                        | Six Months Ended
June 30,
| | ---------------------- | -------------------------
|
|
|
|
| | Local civilian market  |                          
| | Export civilian market |                          
| | Local military market  |                          
| | Export military market |                          
| |                        |                          
| | Total                  |                          
| |                        |                          

Gross
Profit. Gross profit for the six months ended June 30, 2009 was $2,244,353 compared to
$1,919,906 for the six months ended June 30, 2008. This increase in gross profit is
primarily attributable to the increase in revenues from sales. Our gross profit margin for
the six months ended June 30, 2009 decreased to 23.9% compared to 25.3% for the six months
ended June 30, 2008.

Selling
Expenses. Selling expenses for the six months ended June 30, 2009 decreased by 37.3%
to $332,055 from $529,834 for the six months ended June 30, 2008. The decrease in our
selling expenses was attributable primarily to lower commissions due to the decrease in
sales in our export civilian market.

General
and Administrative Expenses. General and administrative expenses for the six months
ended June 30, 2009 decreased by 13.6% to $986,368 from $1,141,229 for the six months
ended June 30, 2008. This decrease is primarily attributable to the appreciation of the
U.S. dollar against the NIS.

Financial
(Expenses) Income, Net. We had financial income, net of $216,969 for the six months
ended June 30, 2009 compared to financial expenses, net of $266,501 for the six months
ended June 30, 2008. Our financial income is primarily due to the change in the U.S.
dollar exchange rate versus the NIS, which resulted in a gain of $157,368 for the six
months ended June 30, 2009 compared to a loss of $261,540 for the six months ended June
30, 2008.

Other
Income (Expense), Net. We had other income, net for the six months ended June 30,
2009 of $221,205 as compared to other expense, net of $96,669 for the six months ended
June 30, 2008. Our other income in six months ended June 30, 2009 is mainly attributable
to revaluation of funds in respect of employee rights upon retirement of $81,240, a gain
derived from sales of tradable securities of $24,680 and an unrealized gain of $115,285
on tradable securities. Our other expense in six months ended June 30, 2008 is mainly
attributable to a $55,046 loss derived from sales of tradable securities and a $53,007
unrealized loss on tradable securities.

Income
Tax Expense. Our income tax expense for the six months ended June 30, 2009 was
$358,226 compared to income tax expense of $89,004 for the six months ended June 30,
2008. The increase in income tax expense was mainly due to the increase in our income
before income taxes in the six months ended June 30, 2009.

Extraordinary
Income. We did not record any extraordinary income for the six months ended June 30,
2009. For the six months ended June 30, 2008, we recognized and recorded extraordinary
income of $4,910,541, net of tax, from the payments to our three subsidiaries, Export
Erez, Mayotex and Achidatex, by the Israeli Government with respect to their evacuation
from the Gaza Industrial Zone.

Noncontrolling
Interest. For the six months ended June 30, 2009, we did not recognize or record any
noncontrolling interest, compared with the noncontrolling interest in our profit of
$59,459 for the six months ended June 30, 2008 with respect to a subsidiary that is now
wholly-owned.

Net
Income. In the six months ended June 30, 2009 our consolidated net income of
controlling interest was $1,229,791, compared to $4,647,751 for the six months ended June
30, 2008.

24

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# Liquidity and Capital
Resources

As
of June 30, 2009, we had $3,411,492 in cash and cash equivalents, $2,154,927 in trading
securities and working capital of $10,148,693 as compared to $1,719,921 in cash and cash
equivalents, $2,384,727 in trading securities and working capital of $10,088,528 at
December 31, 2008.

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.

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

# Cash Flows

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

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

Net
cash provided by operating activities was $983,638 for the six months ended June 30, 2009
as compared to $1,917,075 used in operating activities in the six months ended June 30,
2008. This was primarily provided from net income of $1,229,791, a decrease in trading
securities of $268,088, and a decrease in other current assets of $417,792, offset by a
decrease in accounts payable of $237,215, and a decrease in other current liabilities of
$245,656.

Net
cash provided by investing activities was $2,066,130 for the six months ended June 30,
2009 as compared to $1,995,114 net cash used in the six months ended June 30, 2008.
During the six months ended June 30, 2009, $3,000,000 was provided from the redemption of
bank deposits, $23,658 was provided from the sale of fixed assets, $76,594 was used to
purchase fixed assets and $880,934 was used to purchase of a business.

Net
cash used in financing activities was $1,431,949 for the six months ended June 30, 2009
as compared to $309,460 net cash used in financing activities for the six months ended
June 30, 2008. During the six months ended June 30, 2009, we incurred additional
short-term debt of $46,314, repaid $185,635 of long-term debt and repaid $1,200,000 to
related party creditors for the purchase of the minority interest in Achidatex and
1,050,000 of our shares.

Most
of our large contracts, which are Israeli Governmental contracts, are supported by
letters of credit. As a result, we believe that we have limited exposure to doubtful
accounts receivables. We have strived to balance our accounts payable and accounts
receivable.

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

25

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We
anticipate that our research and development expenses in 2009 will total approximately
$140,000.

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

# Foreign Currency
Exchange Risk

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

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

In
the year ended December 31, 2008, the inflation rate in Israel was 3.8% and the NIS
appreciated in relation to the U.S. dollar at a rate of 1.14%, from NIS 3.846per
$1 on December 31, 2007 to NIS 3.802 per $1 on December 31, 2008. In the six months ended
in June 30, 2009 deflation in Israel was2.2% while the NIS devaluated in relation
to the U.S. dollar at a rate of 3.1%. 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 six
months ended June 30, 2009.

# Inflation and Seasonality

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

# Off-balance Sheet
Arrangements

None.

# Contractual Obligations

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

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

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# Critical Accounting
Policies

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

# Recent Accounting
Pronouncements

In
April 2009, the Financial Accounting Standard Based (FASB) issued FSP FAS
157-4, Determining Fair Value When Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly (FSP 157-4). FSP 157-4 provides guidance on how to determine the fair value
of assets and liabilities when the volume and level of activity for the asset/liability
has significantly decreased. FSP 157-4 also provides guidance on identifying circumstances
that indicate a transaction is not orderly. In addition, FSP 157-4 requires disclosure in
interim and annual periods of the inputs and valuation techniques used to measure fair
value and a discussion of changes in valuation techniques. FSP 157-4 is effective for us
beginning in the second quarter of fiscal year 2009. The adoption of FSP 157-4 did not
have a significant impact on our interim financial statements.

In
April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairment (FSP 115-2/124-2). FSP 115-2/124-2
amends the requirements for the recognition and measurement of other-than-temporary
impairments for debt securities by modifying the pre-existing intent and
ability indicator. Under FSP 115-2/124-2, an other-than-temporary impairment is
triggered when there is an intent to sell the security, it is more likely than not that
the security will be required to be sold before recovery, or the security is not expected
to recover the entire amortized cost basis of the security. Additionally, FSP 115-2/124-2
changes the presentation of an other-than-temporary impairment in the income statement for
those impairments involving credit losses. The credit loss component will be recognized in
earnings and the remainder of the impairment will be recorded in other comprehensive
income. FSP 115-2/124-2 is effective for us beginning in the second quarter of fiscal year
2009. FSP 115-2/124-2 did not have a significant impact on our interim financial
statements.

In
April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosure
about Fair Value of Financial Instruments (FSP 107-1/APB 28-1). FSP 107-1/APB 28-1
requires interim disclosures regarding the fair values of financial instruments that are
within the scope of FAS 107, Disclosures about the Fair Value of Financial
Instruments. Additionally, FSP 107-1/APB 28-1 requires disclosure of the methods and
significant assumptions used to estimate the fair value of financial instruments on an
interim basis as well as changes of the methods and significant assumptions from prior
periods. FSP 107-1/APB 28-1 does not change the accounting treatment for these financial
instruments and is effective for the us beginning in the second quarter of fiscal year
2009.

In
May 2009, SFAS No. 165, Subsequent Events, was issued by the FASB, which
establishes general standards of accounting for and disclosure of events that occur after
the balance sheet date but before the financial statements are issued or are available to
be issued. SFAS No. 165 provides guidance on the period after the balance sheet date
during which management of a reporting entity should evaluate events or transactions that
may occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions occurring
after the balance sheet date in its financial statements and the disclosures that an
entity should make about events or transactions that occurred after the balance sheet
date. SFAS No. 165 is effective for interim or annual financial periods ending after June
15, 2009. Accordingly, we have adopted SFAS No. 165 for the period ended June 30,
2009, and its application had no impact on our condensed financial statements. Events
subsequent to the balance sheet date have been evaluated for inclusion in the accompanying
financial statements through the issuance date, August 14, 2009.

In
June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principlesa
replacement of FASB Statement No. 162 (SFAS 168). The statement confirmed that the
FASB Accounting Standards Codification (the Codification) will become the single official
source of authoritative U.S. GAAP (other than guidance issued by the SEC), superseding
existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task
Force (EITF), and related literature. After that date, only one level of authoritative
U.S. GAAP will exist. All other literature will be considered non-authoritative. The
Codification does not change U.S. GAAP; instead, it introduces a new structure that is
organized in an easily accessible, user-friendly online research system. The Codification,
which changes the referencing of financial standards, becomes effective for interim and
annual periods ending on or after September 15, 2009. We will apply the Codification
beginning in the third quarter of 2009. We do not expect the adoption of SFAS 168 to have
any substantive impact on our Condensed Consolidated Financial Statements or related
footnotes.

27

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

# Interest Rate Risk

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

# Foreign Exchange Risk

Most
of our sales are currently denominated in dollars, while the majority of our operating
expenses are incurred in foreign currencies, principally the NIS. As a result, the
decrease in the value of the U.S. dollar against these currencies has resulted in
increased expenses for our company. In 2006, 2007 and 2008, the U.S dollar depreciated
against the NIS by approximately 8%, 9%, 1%, respectively. In the first six months of
2009, the U.S dollar appreciated by approximately 3.1% in relation to the NIS.

|Item 4T. |  | Controls
and Procedures
|-------- |  | -----------------------

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

# Changes in Internal
Control over Financial Reporting

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

# PART II  OTHER
INFORMATION:

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

On
February 11, 2009, a lawsuit was filed in the Jerusalem District Court against our
subsidiaries, Export Erez USA Inc. and Achidatex, and its chief executive officer, Mr.
Avraham Hazor. The suit alleges that Achidatex materially breached its agreement with the
plaintiff, dated February 22, 2000, relating to the development of inflatable mine-field
crossing enabling sandals, because Achidatex allegedly failed to register patents for the
technology worldwide and only registered patents in the United States. The plaintiff
further claims that the defendants, jointly and severally, committed a breach of trust.
The plaintiff is seeking damages in the amount of NIS 10 million (approximately $2.6
million), and claiming all rights in the patent. Contemporaneously with the filing of the
claim, the plaintiff also filed a motion seeking an exemption from payment of the
requisite court filing fee, which motion was subsequently granted. We believe that the
plaintiffs claim is unfounded and that we have substantial legal arguments to oppose
the allegations. We intend to vigorously defend against the claim and we are considering a
possible counterclaim.

28

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

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

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

# Reliance on a Limited
Number of Key Personnel.

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

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

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

# Exhibits

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

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

|32.1 |  | Certification
of Chief Financial  Officer  pursuant to Rule 13a-14(a) of the Securities  Exchange
         Act, as amended.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------

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

29

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# SIGNATURE

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

|Dated: August 14, 2009 |  | DEFENSE INDUSTRIES INTERNATIONAL, INC.By: /s/  Baruch Tosh
 Baruch ToshChief Executive Officer and President
|---------------------- |  | --------------------------------------------------------------------------------------------------------------------------

30

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