---

---

# 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 September 30, 2008 or
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Transition
report pursuant to Section 13 or 15(d) of the Securities                Exchange Act of
1934 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  is  large  accelerated   filer,  an          accelerated  filer, or a
 non-accelerated  filer.  See of  "accelerated  filer and large          accelerated
filer" in Rule 12b-2 of the Exchange Act.

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

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

Yes o No x

As of November 18, 2008 the issuer had 28,991,111 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 September 30, 2008 (Unaudited)                  
|                                |          | and December 31, 2007                                                                        | 2-3 
|                               
|                                |          | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)             
|                                |          | for the Three and Nine Months Ended September 30, 2008 and September 30, 2007               
|                                |          | (Unaudited)                                                                                  | 4   
|                               
|                                |          | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008
|                                |          | and September 30, 2007 (Unaudited)                                                           | 5-6 
|                               
|                                |          | Notes to Condensed Consolidated Financial Statements (Unaudited)                             | 7   
|                               
|                                | Item 2.  | Management's Discussion and Analysis of Financial Condition and Results of Operations        | 14  
|                               
|                                | Item 3.  | Quantitative and Qualitative Disclosures About Market Risk                                   | 23  
|                               
|                                | Item 4T. | Controls and Procedures                                                                      | 23  
|                               
|PART II - OTHER INFORMATION:   
|                               
|                                | Item 1.  | Legal Proceedings                                                                            | 25  
|                               
|                                | Item 1A. | Risk Factors                                                                                 | 25  
|                               
|                                | Item 2.  | Unregistered Sales of Equity Securities and Use of Proceeds                                  | 25  
|                               
|                                | Item 6.  | Exhibits and Reports on Form 8-K                                                             | 25  
|                               
|SIGNATURES                      | 26      

1

---

---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2008 (UNAUDITED) AND DECEMBER 31, 2007

|                                                            | September 30,
2008 | December 31, 2007
|----------------------------------------------------------- | ------------------ | -----------------
|
|
|
|
|ASSETS                                                      |                    |                  
|                                                            |                    |                  
|CURRENT ASSETS                                              |                    |                  
|Cash and cash equivalents                                   |                    |                  
|Bank deposit                                                |                    |                  
|Accounts receivable, net of allowance for doubtful accounts |                    |                  
|of $325,707 and $208,464, respectively                      |                    |                  
|Accounts receivable - related parties                       |                    |                  
|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                                              |                    |                  
|                                                            |                    |                  
|Total Other Assets                                          |                    |                  
|                                                            |                    |                  
|                                                            |                    |                  
|TOTAL ASSETS                                                |                    |                  
|                                                            |                    |                  

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

2

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DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2008 (UNAUDITED) AND DECEMBER 31, 2007

|                                                      | September 30,
2008 | December 31, 2007
|----------------------------------------------------- | ------------------ | -----------------
|
|
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY                  |                    |                  
|                                                      |                    |                  
|CURRENT LIABILITIES                                   |                    |                  
|Accounts payable                                      |                    |                  
|Accounts payable - related parties                    |                    |                  
|Short-term debt                                       |                    |                  
|Common stock to be issued                             |                    |                  
|Deferred income                                       |                    |                  
|Other current liabilities                             |                    |                  
|                                                      |                    |                  
|Total Current Liabilities                             |                    |                  
|                                                      |                    |                  
|                                                      |                    |                  
|LONG-TERM LIABILITIES                                 |                    |                  
|Long-term portion of debt                             |                    |                  
|Liability for employee rights upon retirement         |                    |                  
|Common stock to be issued                             |                    |                  
|                                                      |                    |                  
|                                                      |                    |                  
|Total Long-Term Liabilities                           |                    |                  
|                                                      |                    |                  
|                                                      |                    |                  
|TOTAL LIABILITIES                                     |                    |                  
|                                                      |                    |                  
|                                                      |                    |                  
|Minority interest                                     |                    |                  
|                                                      |                    |                  
|COMMITMENTS AND CONTINGENCIES                         |                    |                  
|                                                      |                    |                  
|SHAREHOLDERS' 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, 28,991,111 and 28,867,272  respectively,  |                    |                  
|issued and outstanding                                |                    |                  
|Additional paid-in capital                            |                    |                  
|Retained earnings                                     |                    |                  
|Accumulated other comprehensive gain                  |                    |                  
|                                                      |                    |                  
|Total Shareholders' Equity                            |                    |                  
|                                                      |                    |                  
|                                                      |                    |                  
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY            |                    |                  
|                                                      |                    |                  

3

---

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DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)

|                                                 | For the Three MonthsEnded September 30, | For the Nine MonthsEnded September 30,
|------------------------------------------------ | --------------------------------------- | --------------------------------------
|
|
|
|
|NET REVENUES                                     |                                         |                                       
|                                                 |                                         |                                       
|COST OF SALES                                    |                                         |                                       
|                                                 |                                         |                                       
|                                                 |                                         |                                       
|GROSS PROFIT                                     |                                         |                                       
|                                                 |                                         |                                       
|                                                 |                                         |                                       
|OPERATING EXPENSES                               |                                         |                                       
|Selling                                          |                                         |                                       
|General and administrative                       |                                         |                                       
|                                                 |                                         |                                       
|Total Operating Expenses                         |                                         |                                       
|                                                 |                                         |                                       
|                                                 |                                         |                                       
|INCOME FROM OPERATIONS                           |                                         |                                       
|                                                 |                                         |                                       
|                                                 |                                         |                                       
|OTHER INCOME (EXPENSE)                           |                                         |                                       
|Financial income (expense), net                  |                                         |                                       
|Other income (expense), net                      |                                         |                                       
|                                                 |                                         |                                       
|Total Other Income (Expense)                     |                                         |                                       
|                                                 |                                         |                                       
|                                                 |                                         |                                       
|INCOME BEFORE INCOME TAXES                       |                                         |                                       
|                                                 |                                         |                                       
|Income tax expense                               |                                         |                                       
|                                                 |                                         |                                       
|                                                 |                                         |                                       
|NET INCOME (LOSS) BEFORE EXTRAORDINARY INCOME    |                                         |                                       
|                                                 |                                         |                                       
|Extraordinary income, net of tax (Note 6)        |                                         |                                       
|                                                 |                                         |                                       
|                                                 |                                         |                                       
|Income before minority interest                  |                                         |                                       
|                                                 |                                         |                                       
|Minority interest income                         |                                         |                                       
|                                                 |                                         |                                       
|                                                 |                                         |                                       
|NET INCOME                                       |                                         |                                       
|                                                 |                                         |                                       
|Net income (loss) per share before extraordinary |                                         |                                       
|income - basic and diluted                       |                                         |                                       
|                                                 |                                         |                                       
|Net extraordinary income per share - basic and   |                                         |                                       
|diluted                                          |                                         |                                       
|                                                 |                                         |                                       
|                                                 |                                         |                                       
|Net income per share - basic and diluted         |                                         |                                       
|                                                 |                                         |                                       
|                                                 |                                         |                                       
|Weighted average number of shares outstanding -  |                                         |                                       
|basic and diluted                                |                                         |                                       
|                                                 |                                         |                                       

4

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DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)

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

5

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DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)

|                                                | For the Nine Months
Ended September 30,
|----------------------------------------------- | ---------------------------------------
|
|
|
|
|CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD |                                        
|                                                |                                        
|                                                |                                        
|CASH AND CASH EQUIVALENTS - END OF PERIOD       |                                        
|                                                |                                        
|                                                |                                        
|INTEREST PAID                                   |                                        
|                                                |                                        
|                                                |                                        
|TAXES PAID                                      |                                        
|                                                |                                        

# SUPPLEMENTAL SCHEDULE OF
NON-CASH FINANCING ACTIVITIES:

Pursuant to the agreement signed on
February 28, 2005 to acquire the business of Rizzo Inc. (doing business as Owen Mills
Company), the Company issued 123,839 shares of common stock having a fair value of $40,000
on March 18, 2008 to the former shareholders of Rizzo Inc.

6

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DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)

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

| | A. | The
accompanying unaudited interim consolidated financial statements as of
          September 30, 2008 and for the three and nine month periods then ended (the
          Interim Financial Statements) were prepared in a condensed form in
          accordance with the instructions for Form 10-Q and, therefore, do not include
          all disclosures necessary for a complete presentation of financial condition,
          results of operations, 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, 2007.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | The
preparation of the Interim Financial Statements requires management to           make
estimates and assumptions that affect the reported amounts of assets and
          liabilities, the disclosure of contingent assets and liabilities at the date of
          the financial statements, and the reported amounts of revenues and expenses
          during the reported period. Actual results could differ from those estimates.
In           the opinion of management, all adjustments considered necessary for fair
          presentation of the Interim Financial Statements have been included. The
results           of operations for the three and nine months periods ended September 30,
2008,           are not necessarily indicative of the results that may be expected for
the year           ending December 31, 2008. The Interim Financial Statements should be
read in           conjunction with the Companys annual financial statements as of
December           31, 2007 and for the year then ended and the accompanying notes
thereto.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Interim Financial Statements include the accounts of Defense Industries International,
Inc. and its wholly owned subsidiaries, Export Erez, USA, Inc., Export Erez, Ltd.,
Mayotex, Ltd., Dragonwear Trading Ltd, Rizzo, Inc. (Owen Mills) and its 76% owned
subsidiary Achidatex Nazareth Elite (1997) Ltd. for all periods presented (collectively,
the Company). All significant intercompany accounts and transactions have
been eliminated in consolidation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

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DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)

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

| | Basic
net income per share of common stock is computed based on the weighted average number of
shares of common stock outstanding during the period. Diluted net income per share of
common stock is computed based on the weighted average number of shares of common stock
and common stock equivalents outstanding during the period. For the three and nine month
periods ended September 30, 2008 and 2007 common stock equivalents to purchase 202,500
shares of common stock were not included in diluted 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 funds in respect to employees rights upon retirement are measured at fair
value based upon unobservable inputs (Level 3).
| | --------------------------------------------------------------------------------------------------------------------------------------

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

| | The
effect of the first-time adoption of this statement had no material impact on the Companys
financial position and results of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities(SFAS 159).
SFAS 159 permits entities to choose to measure many financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings. This statement became effective for the
Company as of the year beginning January 1, 2008, and in accordance with SFAS 159, the
Company decided not to apply SFAS 159 to its financial assets and liabilities. Therefore
the adoption of SFAS 159 has had no impact on the Companys financial position and
results of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

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DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)

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

| | In
September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans  an amendment of FASB Statement No.
87, 88, 106 and 132(R), (FAS 158). This Standard requires recognition of the
funded status of a benefit plan in the statement of financial position. The Standard also
requires recognition in other comprehensive income certain gains and losses that arise
during the period but are deferred under pension accounting rules, as well as modifies
the timing of reporting and adds certain disclosures. FAS 158 provides recognition and
disclosure elements to be effective as of the end of the fiscal year after December 15,
2006 and measurement elements to be effective for fiscal years ending after December 15,
2008. The Company does not expect the remaining elements of this Statement to have a
material impact on the companys financial condition, results of operations, cash
flows when adopted.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued SFAS No. 141 (Revised 2007) Business Combinations, a
revision of the original SFAS No. 141". This statement requires an acquirer to
recognize the assets acquired, the liabilities assumed, and any noncontrolling interest
in the acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in the Statement. That replaces the original Statement
141, cost-allocation process, which required the cost of an acquisition to be allocated
to the individual assets acquired and liabilities assumed based on their estimated fair
values. The Company is required to adopt the revised SFAS No. 141 on January 1, 2009. The
Company is currently evaluating the potential impact of the revised SFAS No. 141 on the
Companys consolidated financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51. This statement
establishes accounting and reporting standards for noncontrolling interests in
subsidiaries and for the deconsolidation of subsidiaries and clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the consolidated
entity that should be reported as equity in the consolidated financial statements. SFAS
No. 160 also required expanded disclosures that clearly identify and distinguish between
the interests of the parent owners and the interests of the noncontrolling owners of a
subsidiary. The Company is required to adopt SFAS No. 160 on January 1, 2009. The Company
is currently evaluating the potential impact of this Statement on the Companys
consolidated financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2008, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 161 (SFAS 161), Disclosures about Derivative
Instruments and Hedging Activities. SFAS 161 requires companies with
derivative instruments to disclose information that should enable financial-statement
users to understand how and why a company uses derivative instruments, how derivative
instruments and related hedged items are accounted for under FASB Statement No. 133
Accounting for Derivative Instruments and Hedging Activities and how
derivative instruments and related hedged items affect a companys financial
position, financial performance and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15,
2008. The Company is currently evaluating the potential impact that SFAS 161 will
have on the Companys consolidated financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)

| | H. | Comprehensive
Income
| | -- | --------------------

| |                                                 | Three months ended
September 30
| | ----------------------------------------------- | -------------------------------
|
|
|
|
| | Net Income                                      |                                
| | Net change in cumulative translation adjustment |                                
| |                                                 |                                
| |                                                 |                                
| | Net Comprehensive (Loss) Income                 |                                
| |                                                 |                                

| |                                                 | Three months ended
September 30
| | ----------------------------------------------- | -------------------------------
|
|
|
|
|
| | Net Income                                      |                                
| | Net change in cumulative translation adjustment |                                
| |                                                 |                                
| |                                                 |                                
| | Net Comprehensive Income                        |                                
| |                                                 |                                

|NOTE 2 |  | BANK DEPOSIT
|------ |  | ------------

| | The
Companys bank deposit is a highly liquid investment with the maturity date of March
31, 2009.
| | --------------------------------------------------------------------------------------------------

10

---

---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)

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

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

| |                  | September 30, 2008 | December 31, 2007
| | ---------------- | ------------------ | -----------------
|
|
|
|
| | Raw materials    |                    |                  
| | Work in progress |                    |                  
| | Finished goods   |                    |                  
| |                  |                    |                  
| |                  |                    |                  
| |                  |                    |                  

|NOTE 4 |  | SHORT  TERM DEBT
|------ |  | -----------------

| | On
January 17, 2008 the Company obtained a short-term credit facility of $250,000 from Bank
Leumi USA. The interest rate for such credit facility is Libor + 2%. The credit facility
is due November 17, 2008. As of September 30, 2008, the credit facility was utilized in
full.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 2, 2008 the Company obtained a short-term credit facility of $250,000 from Bank
Leumi USA. The interest rate for such credit facility is Libor + 2%. The credit facility
is due December 31, 2008. As of September 30, 2008 the credit facility had not been
utilized.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 5 |  | 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)

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

| |                            | Civilian | Military |  
| | -------------------------- | -------- | -------- | -
|
|
|
|
| | For the nine months        |          |          |  
| | ended September 30, 2008:  |          |         
| |                            |          |         
| | Revenue from sales         |          |          | $
| | Income from operations     |          |          |  
| |                            |          |         
| | For the nine months        |          |         
| | ended September 30, 2007:  |          |         
| |                            |          |         
| | Revenue from sales         |          |          | $
| | Income from operations     |          |          |  
| |                            |          |         
| | For the three months ended |          |         
| | September 30, 2008:        |          |         
| |                            |          |         
| | Revenue from sales         |          |          | $
| | Income from operations     |          |          |  
| |                            |          |         
| | For the three months ended |          |         
| | September 30, 2007:        |          |         
| |                            |          |         
| | Revenue from sales         |          |          | $
| | Income from operations     |          |          |  

| | B. | Net
Revenues From Sales By Geographic Areas :
| | -- | ---------------------------------------------

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

12

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DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)

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

| |                                                 | For theThree Months EndedSeptember 30, | For theNine Months EndedSeptember 30,
| | ----------------------------------------------- | -------------------------------------- | -------------------------------------
|
|
|
|
| | Revenues from sales Customer A (Military Local) |                                        |                                      

| |                                                        | September 30, 2008 | December 31, 2007
| | ------------------------------------------------------ | ------------------ | -----------------
|
|
|
|
| | Account Receivable Balance Customer A (Military Local) |                    |                  

|NOTE 6 |  | EXTRAORDINARY GAIN
|------ |  | ------------------

| | During
2004, the Israeli Government decided to evacuate the Erez Industrial Zone in the Gaza
Strip where part of the Companys operations were located. The Company had owned
facilities, leased other facilities and maintained equipment and inventory within this
area. In 2005, the Company moved its light cut and sew operation from the
Erez Industrial Zone to Sderot as well as some of its webbing equipment to Nazareth. In
August 2005, the Company evacuated its remaining operations and abandoned the buildings
it owned and leased in the Erez Industrial Zone. In 2005, the Company recorded a
receivable from the Israeli Government of $217,477 related to the direct cost to move and
loss on abandoned properties.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Israeli Governments decision to evacuate the Gaza Strip was supported by certain
resolutions, as well as 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 subsidiaries, Export Erez, Mayotex and Achidatex filed claims for compensation
pursuant to the Evacuation Compensation Law.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2006, the Company was notified that it would receive advance payments aggregating
$523,000. The Company applied these payments against the receivables established in 2005
and recorded the excess payment of $240,658, net of 5% taxes, as an extraordinary gain.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
February 18, 2008 Export Erez Ltd., Mayotex Ltd. and Achidatex Nazareth Elite (1997) Ltd.
signed definitive agreements with SELA, a government agency, established pursuant to the
Evacuation Compensation Law, for compensation of approximately $6 million. The net
compensation payments, in the amount of $4,930,065 was recognized as an extraordinary
gain, net of 5% related taxes, receipt of advance payments of $523,000 and associated
costs during the nine months ended September 30, 2008. The change in the dollar amount
from the amount reported in the first quarter resulted from the appreciation of the NIS
against the U.S. dollar.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

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|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,
2007 contained in our 2007 Annual Report on Form 10-KSB. The discussion and analysis which
follows may contain trend analysis and other forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with
respect to future events and financial results. These include statements regarding our
earnings, projected growth and forecasts, and similar matters that are not historical
facts.

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

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

Overview

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

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

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

The
following elements define our growth strategy:

| |  | Pursue
strategic acquisitions. We intend to selectively pursue strategic acquisitions that
complement our product offerings, provide access to new geographic markets, and provide
additional distribution channels and new customer relations.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Expand
Distribution Networks and Product Offerings. We expect to continue to strengthen our
distribution network by expanding our range of branded law enforcement equipment through
the acquisition of and by investing in development of new and enhanced products which
complement our existing offerings. We believe that a broader product line will strengthen
our relationships with distributors and enhance our brand appeal with military, law
enforcement and other end users.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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 reminder of 2006 and
through 2007. During the first nine months of 2008 the demand for our products decreased
compared to the same period of 2007, but was significantly higher than in 2006. We believe
that the demand for our products from the Israeli Ministry of Defense will continue at the
current levels for the remainder of 2008 and into the beginning of 2009.

14

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As
of November 10, 2008, we had a backlog of firm orders from the Israeli Ministry of Defense
of approximately $3.7million, including orders of approximately $800,000 that we
received subsequent to September 30, 2008. In the nine month periods ended September 30,
2008 and 2007, sales to the Israeli Ministry of Defense were $4.0 millionand
$7.3million, accounting for32.8% and 51.4% of our sales, respectively.

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

Since
2003, we have increased our export efforts as a consequence of the worldwide environment
resulting from the events of September 11, 2001, the subsequent war on terrorism and the
continuing conflict in Iraq. We are continuing our efforts to strengthen our position in
our existing export markets in North America, South America, Asia and Europe, and to
extend our presence to new export markets in Australia and Africa. We believe that
although the demand for our products from these markets 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 armor car business is growing and will
become even more significant for us in the near future. The armor car business is
characterized by higher gross margins than our traditional military products.

The
following table presents details of our export military sales during the three and nine
month period ended September 30, 2008 and 2007:

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

Export
Civilian Market. In this market segment we have been dependent on one major U.S.
customer for flexible agriculture storage products. During 2007, this customer started its
own limited production line for the same products that it previously purchased from us. As
of now we do not expect to receive significant orders from this customer in the
foreseeable future.

Local
Civilian Market. Our product range to the civilian market is diversified. In 2007 and
2006, our local market business grew moderately as a result of the improvement in the
economic situation in Israel. We expect this market to continue to grow in the remaining
of 2008.

Backlog.          We
had approximately $7.5million of unfilled customer orders at           September
30, 2008, compared to $5.0 million of unfilled customer orders at           September 30,
2007. As of September 30, 2008 our backlog included approximately           $2.9 million
of orders that were attributable to the Israeli Ministry of           Defense,
approximately $1.3 million of orders that were attributable to civilian           and
military customers in Africa and Asia, approximately $550,000 of orders that
          were attributable to the local civilian market, and approximately $2.3 million
          of orders that were attributable to civilian and military customers in South
          America.

15

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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 throughout 2008 have slowed-down our sales process and
complicated our ability to conduct transactions. The current economic climate and the
uncertainty in the global economic conditions could impact the ability of our customers 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 a 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.

Our
cost of sales and operating expenses are affected in the same manner.  Most of our
purchases of raw material are in U.S. dollars while most of our labor and other operating
expenses are made 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 period ended September 30, 2008 the U.S. dollar depreciated against the NIS by
approximately 11%, 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.

# 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 2005, we recorded a receivable from the
Israeli Government of $217,477 related to our direct moving costs and loss on abandoned
properties.

In
2006, we were notified that we would receive advance payments 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. The Company received and recorded
gain in the amount of $4.9 million during the nine months ended September 30, 2008. The
change in the dollar amount from the amount reported in the first quarter, resulted from
the appreciation of the NIS against the U.S. dollar.

16

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# Results of Operations

Key Indicators

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

Three Months Ended
September 30, 2008 Compared with Three Months Ended September 30, 2007

Net
Revenues. Net revenues for the three months ended September 30, 2008 remained stable
at $4.65 million the same as in the comparable period in 2007. In 2008, revenues from our
civilian local market segment increased by approximately $284,000 and our military export
market segment grew by approximately $1.1 million, which was offset by a decrease of
approximately $1.4 million in our local military market. The increased revenues in our
export military market segment is attributable to an increase in demand for our armored
vehicles. Our local market sales were also positively effected by the devaluation of the U.S. dollar.

In
the three months ended September 30, 2008, Achidatex, Export Erez and Owen Mills accounted
for $750,000 or 16.2%, $3.7 million or 78.8%, and $232,000 or 5% of our revenues,
respectively. In the three months ended September 30, 2007, Achidatex, Export Erez and
Owen Mills accounted for $1.3 million or 27.0%, $3.0 million or 64.5%, and $394,000 or
8.5% of our revenues, respectively.

The
following table sets forth the breakdown of sales by segment for the three months ended
September 30, 2008 and 2007.

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

Gross
profit. Gross profit for the three months ended September 30, 2008 was approximately
$973,000 compared to $1.2 million for the same period in 2007. This decrease in gross
profit is primarily attributable to higher overhead expenses, higher labor costs as a
result of currency fluctuation, and a significant sale that had a low profit margin. In
the three months ended September 30, 2008, Achidatex, Export Erez, and Owen Mills
accounted for 24.6%, 75.8% and (0.4)%, of our gross profit, respectively. In the three
months ended September 30, 2007, Achidatex, Export Erez, and Owen Mills accounted for
29.7%, 71.0% and (0.7)%, of our gross profit, respectively.

Our
gross profit margin for the three months ended September 30, 2008 declined to 20.9%
compared to 25.0% for the three months ended September 30, 2007 primarily due to higher
overhead expenses, higher labor costs due to currency fluctuation and a significant sale
that had a low profit margin. Achidatexs gross margin for the three months ended
September 30, 2008 was 10.6% compared to 18.4% for the three months ended September 30,
2007 primarily due to higher overhead expenses, higher labor costs due to currency
fluctuation and a significant sale that had a low profit margin. Export Erezs gross
margin for the three months ended September 30, 2008 was 19.4% compared to 25.4% for the
three months ended September 30, 2007 primarily due to higher overhead expenses, higher
labor costs due to currency fluctuation and a significant sale that had a low profit
margin. Owen Mills gross margin for the three months ended September 30, 2008 was
(0.1)% compared to 16.8% for the three months ended September 30, 2007 primarily due to a
decrease in orders, resulting in higher overhead expenses.

17

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---

Selling
Expenses. Selling expenses for the three months ended September30, 2008 remain stable
at $222,000, the sameas in the comparable period in 2007. Achidatexs
selling expenses for the three months ended September 30, 2008 were $45,000 compared to
$121,000 for the three months ended September 30, 2007, a result of lower percentage of
sales made to the export military market. Export Erezs selling expenses for the
three months ended September 30, 2008 were $173,000 compared to $95,000 for the three
months ended September 30, 2007 a result of a higher percentage of sales made to the
export military market. Owen Mills selling expenses for the three months ended
September 30, 2008 were $4,000 compared to $2,600 for the three months ended September 30,
2007.

General
and Administrative Expenses. General and administrative expenses for the three months
ended September 30, 2008 increased slightly to $558,000 from $529,000 for the same period
in 2007, mainly as a result of an increase in professional fees.

Financial
Income (Expense). We had financial income, net of $108,000 or the three months ended
September 30, 2008 as compared to financial expense, net of $128,000 for the same period
in 2007. The income is primarily due to the change in the exchange rate of U.S. Dollar
versus the NIS, which resulted in a gain of $85,000 for the three months ended September
30, 2008 and a loss of $89,000 for the same period in 2007.

Other
Expense, Net. We had other expense, net for the three months ended September 30, 2008
of $30,000 as compared to other expense, net of $24,000 for the same period in 2007. Our
other expense in 2008 is primarily attributable to losses from sales of highly liquid
tradable securities managed by professional brokerage firms.

Income
Tax Expense. Our income tax expense for the three months ended September 30, 2008 was
$122,000 as compared to an income tax expense of $72,117 for the comparable period in
2007. We did not record a tax benefit related to the loss incurred by our U.S. operation
due to our deferred tax valuation allowance.

Extraordinary
Income.For the three months ended September 30, 2008, we recognized extraordinary
income of $20,000 net of tax as a result of a reduction in professional expenses
associated with the compensation received from the Israeli Government pursuant to the
Evacuation Compensation Law. We did not recognized any extraordinary income in the
comparable 2007 period.

Minority
Interest. Minority interest in the profits and losses of one of our consolidated
subsidiaries represents the minority shareholders share of the profits or losses in
such majority owned subsidiary. For the three months ended September 30, 2008, we recorded
minority share in our subsidiary profit of $(23,000) compared to minority share in our
subsidiary profit of $6,400 for the three months ended September 30, 2007.

Net
Income (Loss). In the three months ended September 30, 2008, we recorded consolidated
net income of $192,000 compared to consolidated net income of $184,000 for the three
months ended September 30, 2007. Achidatexs net income for the three months ended
September 30, 2008 was $31,000 compared to net income of $20,000 for the three months
ended September 30, 2007. Export Erezs net income for the three months ended
September 30, 2008 was $251,000 compared to net income of $252,000 for the three months
ended September 30, 2007. Owen Mills net loss for the three months ended September
30, 2008 was $137,000 compared to a net loss of $14,000 for the three months ended
September 30, 2007. Defense Industries net income for the three months ended
September 30, 2008 was $48,000 compared to a net income of $15,000 for the three months
ended September 30, 2007.

18

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Nine Months Ended
September 30, 2008 Compared with Nine Months Ended September 30, 2007

Net
Revenues. Net revenues for the nine months
ended September 30, 2008 decreased to $12.2 million from $14.2 million in the same period
in 2007, a decrease of 13.8%. The decrease is primarily attributable to a decrease of
approximately $3.6 million in our local military market segment and the loss of our
U.S.-based customer in the export civilian market, which was offset in part by the
devaluation of the U.S. dollar, an increase of approximately $1.4 million in our local
civilian market, and an increase of $800,000 in the export military market segment. The
decreased revenues in our local military market segment is attributable to a general
decrease in orders from the Israeli Ministry of Defense.

In
the nine months ended September 30, 2008, Achidatex, Export Erez and Owen Mills accounted
for $2.5 million or 20.6%, $8.9 million or 72.7%, and $800,000 or 6.7% of our revenues,
respectively. In the nine months ended September 30, 2007, Achidatex, Export Erez and Owen
Mills accounted for $4.2 or 29.6%, $9.1 or 64.0%, and $900,000 or 6.4% of our revenues,
respectively.

The
following table sets forth the breakdown of sales by segment for the nine months ended
September 30, 2008 and 2007.

| |                        | Nine Months Ended
September30,
| | ---------------------- | ------------------------------
|
|
|
|
| | Local civilian market  |                               
| | Export civilian market |                               
| | Local military market  |                               
| | Export military market |                               
| |                        |                               
| | Total                  |                               
| |                        |                               

Gross
profit for the nine months ended September 30, 2008 was $2.9 million compared to $4.8
million for the same period in 2008. This decrease in gross profit is principally
attributable to the decrease in revenues, higher overhead expenses, higher labor costs due
to currency fluctuation, and a large lower margin sale. In the nine months ended September
30, 2008, Achidatex, Export Erez, and Owen Mills accounted for 31.8%, 63.9% and 4.3%, of
our gross profit, respectively. In the nine months ended September 30, 2007, Achidatex,
Export Erez, and Owen Mills accounted for 32.4%, 64.7% and 2.9%, of our gross profit,
respectively.

Our
gross profit margin for the nine months ended September 30, 2008 declined to 23.6%
compared to 33.9% for the nine months ended September 30, 2007 primarily due to a decrease
in revenues, higher overhead expenses, higher labor costs due to currency fluctuations and
a significant sale that had a low profit margin. Achidatexs gross margin for the
nine months ended September 30, 2008 was 36.4% compared to 37.1% for the nine months ended
September 30, 2007primarily due to a decrease in revenues, higher overhead
expenses, higher labor costs due to currency fluctuations and a significant sale that had
a low profit margin. Export Erezs gross margin for the nine months ended September
30, 2008 was 20.8% compared to 34.2% for the nine months ended September 30, 2007
primarily due to a decrease in revenues, higher overhead expenses, higher labor costs due
to currency fluctuations and a significant sale that had a low profit margin. Owen
Mills gross margin for the nine months ended September 30, 2008 was 15.2% compared
to 15.6% for the nine months ended September 30, 2007primarily due to decrease in
orders, resulting in higher overhead expenses.

Selling
Expenses. Selling expenses for the nine months ended September 30, 2008 decreased to
$752,000 from $773,000 for the same period in 2007. The decrease in our selling expenses
was attributable to lower sales and lower commissions paid on the export sales. Achidatexs selling expenses for the nine months ended September 30, 2008 were
$204,000 compared to $229,000 for the nine months ended September 30, 2007. Export
Erezs selling expenses for the nine month periods ended September 30, 2007 and 2008
were $535,000. Owen Mills selling expenses for the nine months ended September30,
2008 were $13,000 compared to $3,500 for the nine months ended September 30, 2007 as a
result of a decrease in sales.

19

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---

General
and Administrative Expenses. General and administrative expenses for the nine months
ended September 30, 2008 increased to $1.7million from $1.6 million for the same period in
2007, primarily due to an increase in our provisions to doubtful accounts receivables and
costs associated with our compliance with the requirements of the Sarbanes-Oxley Act of
2002.

Financial
Expenses. We had financial expenses, net of $158,000 for the nine months ended
September 30, 2008 as compared to financial expenses, net of $176,000 for the same period
in 2007. The decrease is primarily due to the change in income from deposits, which
resulted in an increased income of $117,000, offset by the change in the U.S. Dollar
exchange rate versus the NIS, which resulted in an increased expense of $101,000 for the
nine months ended September 30, 2008 comparable to the nine months ended September 30,
2007.

Other
Income (Expense), Net. We had other expense, net for the nine months ended September
30, 2008 of $126,000 as compared to other income, net of $54,000 for the same period in
2007. Our other expense in 2008 is attributable to losses from sales of our tradable
securities.

Income
Tax Expense. Our income tax expense for the nine months ended September 30, 2008 was
$211,000 as compared to an income tax expense of $958,000 for the same period in 2007. We
did not record a tax benefit related to the loss incurred by our U.S. operation due to our
deferred tax valuation allowance.

Extraordinary
Income.For the nine months ended September 30, 2008, we recognized and recorded
extraordinary income of $4,930,000, net of tax. This amount was received by our three
Israeli subsidiaries, Export Erez, Mayotex and Achidatex, as compensation from the Israeli
Government pursuant to the Evacuation Compensation Law.

Minority
Interest. Minority interest in the profits and losses of one of our consolidated
subsidiaries represents the minority shareholders share of the profits or losses in
such majority owned subsidiary. For the nine months ended September 30, 2008, we
recognized and recorded our minority share in our subsidiary profit of $36,000 compared to
minority share in our subsidiary profit of $129,000 for the nine months ended September
30, 2007.

Net
Income. In the nine months ended September 30, 2008, we recorded consolidated net
income of $4.8 million compared to net income of $1.2 million for the nine months ended
September 30, 2007. Achidatexs net income for the nine months ended September 30,
2008 was $428,000 compared to net income of $407,000 for the nine months ended September
30, 2007. Export Erezs net income for the nine months ended September 30, 2008 was
$4,512,000 compared to net income of $1.0 million for the nine months ended September 30,
2007, due to our receipt of compensation from the Israeli Government pursuant to the
Evacuation Compensation Law. Owen Mills net loss for the nine months ended September
30, 2008 was $229,000 compared to a net loss of $167,000 for the nine months ended
September 30, 2007. Defense Industries net income for the nine months ended
September 30, 2008 was $129,000 compared to net loss of $48,000 for the nine months ended
September 30, 2007.

# Liquidity and Capital
Resources

As
of September 30, 2008, we had $2.4 million in cash and cash equivalents, $3.6 million in
trading securities, $3.0 million in bank deposits and working capital of $12.7 million as
compared to $1.1 million in cash and cash equivalents, $2.9 million in trading securities
and working capital of $6.6 million at December 31, 2007. The improvement in our liquidity
and capital resources is primarily attributable to the extraordinary income of $4.9
million, net of tax, that we recorded during the nine months ended September 30, 2008,
when our three Israeli subsidiaries, Export Erez, Mayotex and Achidatex, received
compensation from the Israeli Government with respect to the evacuation of the Gaza
Industrial Zone.

The
current economic climate and the uncertainty in the global financial markets resulting
from the recent 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. As of November 17, 2008 we did not purchase any
shares.

20

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# Cash Flows

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

| |                                                     | Nine months ended
| | --------------------------------------------------- | -----------------
|
|
|
|
| | Net cash (used in) provided by operating activities |                  
| | Cash provided by extraordinary items                |                  
| | Net cash 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 used in operating activities was $642,000 for the nine months ended September 30,
2008 as compared to net cash provided by operating activities of $3.0 million for the same
period in 2007. This was primarily attributable to net loss from operating activities of
$90,000, an $1.7 million increase in inventories in order to support future sales, new
product lines and also reflects the production of a significant amount of finished and
semi finished products that will be delivered during the fourth quarter, increase in
trading securities of $431,000, an increase in other current assets of $335,000, offset by
a decrease in accounts receivable of $788,000, increase in accounts payable of $108,000
depreciation of $438,000, deferred income of $197,000, an increase in other liabilities of
$160,000, and decrease of related parties accounts of $210,000.

Net
cash used in investing activities was $2.2 million for the nine months ended September 30,
2008 as compared to $335,000 in the nine months ended September 30, 2007. During the nine
months ended September 30, 2008, purchases of fixed assets were $274,000 and $2.0 million
comprises bank deposits compared to purchases of fixed assets of $362,000 during the nine
months ended September 30, 2007.

Net
cash used in financing activities was $174,000 for the nine months ended September 30,
2008 as compared to $1.5 million of net cash used in financing activities for the nine
months ended September 30, 2007. During the nine months ended September 30, 2008, we
decreased our short-term debt by $114,000 and we repaid $436,000 of long-term debt.

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, new product
lines and 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.

During
the nine months ended September 30, 2008 we spent approximately $88,000 in research and
development. We anticipate that our research and development expenses for the remainder of
2008 will reach approximately $25,000.

On
January 17, 2008 we obtained a short-term credit facility of $250,000 from Bank Leumi USA.
The interest rate for such credit facility is Libor + 2%. The credit facility is due
November 17, 2008. As of September 30, 2008 the credit facility was utilized in full. On
November 6, 2008 we repaid the credit facility in full. On June 2, 2008 we obtained a
short-term credit facility of $250,000 from Bank Leumi USA. The interest rate for such
credit facility is Libor + 2%. The credit facility is due December 31, 2008. As of
September 30, 2008, $100,000 of this credit facility was utilized.

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

21

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# 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 NIS U.S. dollars
and Euros. As a result, our financial results are affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.

Our
foreign currency exposure is significant due to the depreciation of the U.S. dollar versus
the NIS and the Euro. We expect our exposure will continue to be significant, since a
significant portion of the prices of our material purchases, as well as part of our sales
are denominated in U.S. dollars.

# Contractual Obligations

The
following table summarizes our contractual obligations and commercial commitments as of
September 30, 2008.

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

# Critical Accounting
Policies

A
discussion of our critical accounting policies was provided in Item 6 of our Annual Report
on Form 10-KSB for the year ended December 31, 2007. There were no significant changes to
these policies in the nine months ended September 30, 2008.

22

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# Recent Accounting
Pronouncements

In
September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans  an amendment of FASB Statement No.
87, 88, 106 and 132(R), (FAS 158). This Standard requires recognition of the
funded status of a benefit plan in the statement of financial position. The Standard also
requires recognition in other comprehensive income certain gains and losses that arise
during the period but are deferred under pension accounting rules, as well as modifies the
timing of reporting and adds certain disclosures. FAS 158 provides recognition and
disclosure elements to be effective as of the end of the fiscal year after December 15,
2006 and measurement elements to be effective for fiscal years ending after December 15,
2008. We do not expect the remaining elements of this Statement to have a material impact
on our financial condition, results of operations, cash flows when adopted.

In
December 2007, the FASB issued SFAS No. 141 (Revised 2007) Business
Combinations, a revision of the original SFAS No. 141". This statement
requires an acquirer to recognize the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date, measured at their fair
values as of that date, with limited exceptions specified in the Statement. That replaces
the original Statement 141, cost-allocation process, which required the cost of an
acquisition to be allocated to the individual assets acquired and liabilities assumed
based on their estimated fair values. We are required to adopt the revised SFAS No. 141 on
January 1, 2009. We are currently evaluating the potential impact of the revised SFAS No.
141 on our consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51. This statement establishes
accounting and reporting standards for noncontrolling interests in subsidiaries and for
the deconsolidation of subsidiaries and clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. SFAS No. 160 also required expanded
disclosures that clearly identify and distinguish between the interests of the parent
owners and the interests of the noncontrolling owners of a subsidiary. We are required to
adopt SFAS No. 160 on January 1, 2009. We are currently evaluating the potential impact of
this Statement on our consolidated financial statements.

In
March 2008, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 161 (SFAS 161), Disclosures about Derivative
Instruments and Hedging Activities. SFAS 161 requires companies with derivative
instruments to disclose information that should enable financial-statement users to
understand how and why a company uses derivative instruments, how derivative instruments
and related hedged items are accounted for under FASB Statement No. 133
Accounting for Derivative Instruments and Hedging Activities and how
derivative instruments and related hedged items affect a companys financial
position, financial performance and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15,
2008. We are currently evaluating the potential impact that SFAS 161 will have on
tour consolidated financial statements.

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

Not
applicable.

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

Management
is responsible for establishing and maintaining effective disclosure controls and
procedures. As of September 30, 2008, our chief executive officer and chief financial
officer participated with our management in evaluating the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended). Our disclosure controls and procedures are designed to
ensure that information required to be disclosed in the SEC reports we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time period specified by the SECs rules and forms and that such
information is accumulated and communicated to management, including our chief executive
officer and chief financial officer, to allow timely decisions regarding required
disclosure. Our chief executive officer and chief financial officer have concluded that,
our disclosure controls and procedures were not effective as of September 30, 2008 for the
same reasons indicated in our annual report on Form 10-KSB for the fiscal year ended
December 31, 2007.

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# Plan for Remediation of
Material Weaknesses

In
response to the material weaknesses identified in our Form 10-KSB for the fiscal year
ended December 31, 2007, our management plans to improve our control environment and to
remedy the identified material weaknesses by adding qualified financial personnel and
resources to implement, maintain and monitor the required internal controls over the
financial reporting process. In addition, we believe this will provide for reasonable and
necessary separation of duties to allow for the compilation, review and analysis of
complete financial reporting in a timely manner, and for the management to review key
performance indicators regularly to identify and investigate significant variances by
implementing a reporting package procedure.

In
the fiscal quarter ended September 30, 2008, we relied on the support of outside financial
service providers in connection with the preparation of our financial reports. In
addition, we are currently in the process of hiring a qualified controller. In the fiscal
quarter ended September 30, 2008 we entered into a contract for the upgrade of our ERP
system, beginning on the fourth quarter of 2008. Such upgrade will allow us to
significantly improve our financial reporting process as well as the internal planning and
our control over the financial reporting process.

# Changes in Internal
Control over Financial Reporting

There
was no change in our internal control over financial reporting that occurred during the
period covered by this quarterly report that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial reporting.

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# PART II  OTHER
INFORMATION:

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

We
are not a party to any pending or to the best of our knowledge, any threatened legal
proceedings.

|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.

There
have been no other material changes to our Risk Factors set forth in our
Annual Report on Form 10-KSB for the year ended December 31, 2007.

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

On
March 18, 2008, we issued 123,839 shares of common stock, having a fair value of $40,000
at February 28, 2008, to the former owner of Owen Mills. The shares were issued pursuant
to the agreement we signed on February 28, 2005 to acquire the business of Owen Mills. The
shares were issued pursuant to the exemption afforded by Section 4(2) of the Securities
Act of 1933.

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

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

| | 31.1 | Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------

| | 31.2 | Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the   Securities
Exchange Act, as amended.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------

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

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

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# SIGNATURES

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

|Dated: November 18, 2008 |  | DEFENSE INDUSTRIES INTERNATIONAL, INC.By: /s/ Joseph Postbinder
Joseph PostbinderChairman and Chief Executive Officer
|------------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------

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