---

---

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

# FORM 10-QSB /A

Amendment No. 1

|x | Quarterly
 report under Section 13 or 15(d) of the  Securities  Exchange Act of 1934 for the
quarterly period ended September 30, 2005
|- | --------------------------------------------------------------------------------------------------------------------------------------

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

Commission file number:
1-9009

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

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

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

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

|                                                                                   
|-----------------------------------------------------------------------------------
|(Former Name, Former Address and Former Fiscal Year, 
if Changed Since Last Report)

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

Yes  x  No o

# APPLICABLE ONLY TO
CORPORATE ISSUERS

As
of November 14, 2005 the Issuer had 25,386,463 shares of Common Stock, $.0001 par value
per share, outstanding.

Transitional
Small Business Disclosure Format (check one):

Yes o No  x



---

---

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-QSB/A hereby amends Item 2.  Managements Discussion and Analysis of
Financial Condition and Results of Operations of Defense Industry International Inc.s Quarterly Report on
Form 10-QSB for the quarterly period ended September 30, 2005, which was filed on November 15,  2005. This
Amendment No. 1 is being filed for the purpose of providing additional details to our disclosures in the
original report pursuant to comments we received from the Staff of the U.S. Securities and Exchange
Commission in connection with its review of our Form 10-QSB for the quarterly period ended September 30,
2005. This Amendment No. 1 is not intended to revise other information presented in our Quarterly Report on
Form 10-QSB for the quarterly period ended September e 30, 2005 as originally filed and all such other
information in the original filing, which remains unchanged.

This Amendment No. 1 on Form 10-QSB/A does not reflect events occurring after the filing of the original Form
10-QSB and does not modify or update the disclosure therein in any way other than as required to reflect the
amendments discussed above, except with respect to disclosure relating to our evacuation of the Erez
Industrial Zone. As a result, this Amendment No. 1 to the Quarterly Report on Form 10-QSB continues to speak
as of November 15, 2005.

For the convenience of the reader the entire document is being refiled.



---

---



# DEFENSE INDUSTRIES
INTERNATIONAL, INC. AND SUBSIDIARIES

# INDEX

|                                |                                                                   | Page 
|------------------------------- | ----------------------------------------------------------------- | -----
|
|
|
|
|Part I - Financial Information: |                                                                  
|                               
|Item 1.                         | Condensed Consolidated Balance Sheets as of September 30, 2005   
|                                | (Unaudited) and December 31, 2004                                 | 2-3  
|                               
|                                | Condensed Consolidated Statements of Operations and              
|                                | Comprehensive Income (Loss) for the Three and Nine Months        
|                                | Ended September 30, 2005 and 2004 (Unaudited)                     | 4    
|                               
|                                | Condensed Consolidated Statements of Cash Flows                  
|                                | for the Nine Months Ended September 30, 2005 and 2004 (Unaudited) | 5-6  
|                               
|                                | Notes to Condensed Consolidated Financial Statements             
|                                | (Unaudited)                                                       | 7-14 
|                               
|Item 2.                         | Management's Discussion and Analysis of Financial Condition      
|                                | and Results of Operations                                         | 15-27
|                               
|Item 3.                         | Controls and Procedures                                           | 28   
|                               
|Part II- Other Information:    
|                               
|Item 1.                         | Legal Proceedings                                                 | 29   
|                               
|Item 2.                         | Unregistered Sales of Equity Securities and Use of Proceeds       | 29   
|                               
|Item 3.                         | Default Upon Senior Securities                                    | 30   
|                               
|Item 4.                         | Submission of Matters to a Vote of Shareholders                   | 30   
|                               
|Item 5.                         | Other Information                                                 | 30   
|                               
|Item 6.                         | Exhibits and Reports on Form 8-K                                  | 30   
|                               
|Signatures                      | 31                                                               

1

---

---

# Item 1.

# PART I 
FINANCIAL INFORMATION

# DEFENSE INDUSTRIES
INTERNATIONAL, INC. 
AND SUBSIDIARIES CONDENSED CONSOLIDATED
BALANCE SHEETS

ASSETS

|                                                            | September 30,
2005 | December 31,
2004
|----------------------------------------------------------- | ------------------ | -----------------
|
|
|
|
|CURRENT ASSETS                                              |                    |                  
|Cash and cash equivalents                                   |                    |                  
|Accounts receivable, net of allowance for doubtful accounts |                    |                  
|of $132,200 and $105,927, respectively                      |                    |                  
|Accounts receivable - related parties, net                  |                    |                  
|Inventories                                                 |                    |                  
|Investments in marketable securities - held for trading     |                    |                  
|Deferred taxes                                              |                    |                  
|Other current assets                                        |                    |                  
|                                                            |                    |                  
|Total Current Assets                                        |                    |                  
|                                                            |                    |                  
|                                                            |                    |                  
|PROPERTY, PLANT AND EQUIPMENT, NET                          |                    |                  
|                                                            |                    |                  
|                                                            |                    |                  
|OTHER ASSETS                                                |                    |                  
|Deposits for the severance of employer-employee relations   |                    |                  
|Deferred taxes, long-term                                   |                    |                  
|Intangible assets, net                                      |                    |                  
|Goodwill                                                    |                    |                  
|                                                            |                    |                  
|Total Other Assets                                          |                    |                  
|                                                            |                    |                  
|                                                            |                    |                  
|TOTAL ASSETS                                                |                    |                  
|                                                            |                    |                  

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

2

---

---

# DEFENSE INDUSTRIES INTERNATIONAL,
INC. 
AND SUBSIDIARIES CONDENSED CONSOLIDATED
BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS' EQUITY

|                                                                          | September 30,
2005 | December 31,
2004
|------------------------------------------------------------------------- | ------------------ | -----------------
|
|
|
|
|CURRENT LIABILITIES                                                       |                    |                  
|Accounts payable                                                          |                    |                  
|Accrued expenses                                                          |                    |                  
|Short-term debt                                                           |                    |                  
|Current portion of long-term debt                                         |                    |                  
|Common stock to be issued                                                 |                    |                  
|Other current liabilities                                                 |                    |                  
|                                                                          |                    |                  
|Total Current Liabilities                                                 |                    |                  
|                                                                          |                    |                  
|                                                                          |                    |                  
|LONG-TERM LIABILITIES                                                     |                    |                  
|Long-term portion of debt                                                 |                    |                  
|Provision for the severance of employer-employee relations                |                    |                  
|Common stock to be issued                                                 |                    |                  
|Minority interest                                                         |                    |                  
|                                                                          |                    |                  
|Total long-term Liabilities                                               |                    |                  
|                                                                          |                    |                  
|                                                                          |                    |                  
|TOTAL LIABILITIES                                                         |                    |                  
|                                                                          |                    |                  
|                                                                          |                    |                  
|COMMITMENTS AND CONTINGENCIES                                             |                    |                  
|                                                                          |                    |                  
|SHAREHOLDERS' EQUITY                                                      |                    |                  
|Preferred stock, $.0001 par value, 50,000,000 shares authorized, none     |                    |                  
|issued and outstanding                                                    |                    |                  
|Common stock, $.0001 par value, 250,000,000 shares authorized, 25,386,463 |                    |                  
|and 25,350,000 issued and outstanding, respectively                       |                    |                  
|Additional paid-in capital                                                |                    |                  
|Deferred private placement costs                                          |                    |                  
|Retained earnings                                                         |                    |                  
|Accumulated other comprehensive loss                                      |                    |                  
|                                                                          |                    |                  
|Total Shareholders' Equity                                                |                    |                  
|                                                                          |                    |                  
|                                                                          |                    |                  
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                |                    |                  
|                                                                          |                    |                  

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

3

---

---

# DEFENSE INDUSTRIES INTERNATIONAL,
INC. 
AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) 
(UNAUDITED)

|                                                    | For the
Three Months
Ended
September
30, 2005 | For the Three
Months Ended
September 
30, 2004 | For the
Nine
Months
Ended
September
30, 2005 | For the Nine
Months Ended
September 
30, 2004
|--------------------------------------------------- | --------------------------------------------- | ---------------------------------------------- | -------------------------------------------- | ---------------------------------------------
|
|
|
|
|NET REVENUES                                        |                                               |                                                | $                                            | 1,992,642                                    
|COST OF SALES                                       |                                               |                                                |                                              | 1,461,237                                    
|                                                    |                                               |                                                |                                              |                                              
|GROSS PROFIT                                        |                                               |                                                |                                              | 531,405                                      
|                                                    |                                               |                                                |                                              |                                              
|                                                    |                                               |                                               
|OPERATING EXPENSES                                  |                                               |                                               
|Selling                                             |                                               |                                                |                                              | 224,941                                      
|General and administrative                          |                                               |                                                |                                              | 431,620                                      
|                                                    |                                               |                                                |                                              |                                              
|TOTAL OPERATING EXPENSES                            |                                               |                                                |                                              | 656,561                                      
|                                                    |                                               |                                                |                                              |                                              
|                                                    |                                               |                                               
|INCOME (LOSS) FROM OPERATIONS                       |                                               |                                                |                                              | (125,156                                     
|                                                    |                                               |                                                |                                              |                                              
|                                                    |                                               |                                               
|OTHER INCOME (EXPENSE)                              |                                               |                                               
|Financial income (expense), net                     |                                               |                                                |                                              | (11,286                                      
|Other income (expense), net                         |                                               |                                                |                                              | 39,763                                       
|                                                    |                                               |                                                |                                              |                                              
|Total other income (expense)                        |                                               |                                                |                                              | 28,477                                       
|                                                    |                                               |                                                |                                              |                                              
|                                                    |                                               |                                               
|INCOME (LOSS) BEFORE INCOME TAXES                   |                                               |                                                |                                              | (96,679                                      
|Income tax (expense) benefit                        |                                               |                                                |                                              | 28,569                                       
|                                                    |                                               |                                                |                                              |                                              
|INCOME (LOSS) BEFORE MINORITY INTEREST              |                                               |                                                |                                              | (68,110                                      
|Minority interest (income) loss                     |                                               |                                                |                                              | 12,568                                       
|                                                    |                                               |                                                |                                              |                                              
|NET INCOME (LOSS)                                   |                                               |                                                | $                                            | (55,542                                      
|                                                    |                                               |                                                |                                              |                                              
|                                                    |                                               |                                               
|OTHER COMPREHENSIVE INCOME (LOSS)                   |                                               |                                               
|                                                    |                                               |                                               
|Foreign currency translation gain (loss), net of    |                                               |                                               
|minority interest portion                           |                                               |                                                |                                              | (8,145                                       
|                                                    |                                               |                                                |                                              |                                              
|Other comprehensive income (loss) before tax        |                                               |                                                |                                              | (8,145                                       
|Income tax (expense) benefit related to items of    |                                               |                                               
|other comprehensive income (loss)                   |                                               |                                                |                                              | 2,994                                        
|                                                    |                                               |                                                |                                              |                                              
|                                                    |                                               |                                               
|TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX |                                               |                                                |                                              | (5,151                                       
|                                                    |                                               |                                                |                                              |                                              
|COMPREHENSIVE INCOME (LOSS)                         |                                               |                                                | $                                            | (60,693                                      
|                                                    |                                               |                                                |                                              |                                              
|                                                    |                                               |                                               
|Net income (loss) per share - basic and diluted     |                                               |                                                | $                                            | ---                                          
|                                                    |                                               |                                                |                                              |                                              
|                                                    |                                               |                                               
|Weighted average number of shares outstanding -     |                                               |                                               
|basic and diluted                                   |                                               |                                                |                                              | 25,386,463                                   
|                                                    |                                               |                                                |                                              |                                              

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

4

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC. 
AND SUBSIDIARIES CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                                                  | For the Nine
Months Ended
September 30,
2005 | For the Nine
Months Ended
September 30,
2004
|--------------------------------------------------------------------------------- | -------------------------------------------- | --------------------------------------------
|
|
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |                                              |                                             
|Net income                                                                        |                                              |                                             
|Adjustments to reconcile net income to net cash provided by operating activities: |                                              |                                             
|Depreciation and amortization                                                     |                                              |                                             
|Gain from sale of property, plant and equipment                                   |                                              |                                             
|Provision for doubtful accounts                                                   |                                              |                                             
|Net realized and unrealized gain on marketable securities                         |                                              |                                             
|Minority interest in income of subsidiary                                         |                                              |                                             
|Change in operating assets and liabilities, net of effects of acquisition:        |                                              |                                             
|Decrease (increase) in accounts receivable                                        |                                              |                                             
|Decrease (increase) in inventories                                                |                                              |                                             
|(Increase) decrease in deferred taxes                                             |                                              |                                             
|Decrease (increase) in other current assets                                       |                                              |                                             
|Decrease in deposits for employee severance                                       |                                              |                                             
|(Decrease)  increase in accounts payable                                          |                                              |                                             
|(Decrease) increase in accrued liabilities                                        |                                              |                                             
|(Decrease) increase in other current liabilities                                  |                                              |                                             
|(Decrease) increase in provision for the severance of employer-employee relations |                                              |                                             
|                                                                                  |                                              |                                             
|Net Cash Provided By Operating Activities                                         |                                              |                                             
|                                                                                  |                                              |                                             
|                                                                                  |                                              |                                             
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |                                              |                                             
|Purchases of property, plant and equipment                                        |                                              |                                             
|Proceeds from sale of property, plant and equipment                               |                                              |                                             
|Cash acquired in acquisition of Owen Mills Company                                |                                              |                                             
|Proceeds from sale of marketable securities                                       |                                              |                                             
|Purchases of marketable securities                                                |                                              |                                             
|                                                                                  |                                              |                                             
|Net Cash Used in Investing Activities                                             |                                              |                                             
|                                                                                  |                                              |                                             
|                                                                                  |                                              |                                             
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |                                              |                                             
|Short-term debt, net                                                              |                                              |                                             
|Deferred private placement costs                                                  |                                              |                                             
|Payments on long-term debt                                                        |                                              |                                             
|Proceeds from long-term debt                                                      |                                              |                                             
|                                                                                  |                                              |                                             
|Net Cash Provided By (Used In) Financing Activities                               |                                              |                                             
|                                                                                  |                                              |                                             
|EFFECT OF CHANGES IN EXCHANGE RATES ON CASH                                       |                                              |                                             
|                                                                                  |                                              |                                             
|                                                                                  |                                              |                                             
|NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS                               |                                              |                                             
|CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                                   |                                              |                                             
|                                                                                  |                                              |                                             
|CASH AND CASH EQUIVALENTS - END OF PERIOD                                         |                                              |                                             
|                                                                                  |                                              |                                             
|                                                                                  |                                              |                                             
|                                                                                  |                                              |                                             
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                 |                                              |                                             
|INTEREST PAID                                                                     |                                              |                                             
|                                                                                  |                                              |                                             
|TAXES PAID                                                                        |                                              |                                             
|                                                                                  |                                              |                                             

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

5

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC. 
AND SUBSIDIARIES CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)

SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

|On
February 28, 2005, the Company acquired all the outstanding shares of Rizzo Inc. (doing
business as Owen Mills Company) for an aggregate of $372,401, consisting of a note payable
of $172,401 and $200,000 in common stock of the Company, both of which are to be paid over
five years. Also, see Note 2. On
April 27, 2005 the Company issued 36,463 common shares having a fair value of $40,000.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|At the end of August 2005, the Company
evacuated and abandoned the building owned in the Erez Industrial Zone (see Note 6 (A) for
details). The net book value of the building in the amount of $127,865 was recorded as a receivable from the State of Israel and
 reclassified to
Other Current Assets at September 30, 2005, as the Company expects to recover the fair
market value of the building from the State of Israel.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

6

---

---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)

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

| | (A)
Basis of Presentation
| | -------------------------

| | The
accompanying condensed consolidated financial statements are presented in United States
dollars under accounting principles generally accepted in the United States of America.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (B)
Principles of Consolidation
| | -------------------------------

| | The
condensed consolidated 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. and its 76% owned subsidiary Achidatex
Nazareth Elite for all periods presented and Owen Mills (see Note 2) since its
acquisition on February 28, 2005 (collectively, the Company). The minority
interest represents the minority shareholders proportionate share of Achidatex.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
intercompany accounts and transactions have been eliminated in consolidation.
| | ---------------------------------------------------------------------------------

| | (C)
Use of Estimates
| | --------------------

| | The
preparation of condensed consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make
estimates and assumptions that effect the reported amounts of assets and liabilities and
disclose the nature of contingent assets and liabilities at the date of the condensed
consolidated financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (D)
Per Share Data
| | ------------------

| | Basic
net income(loss) per common share is computed based on the weighted average number of
common shares outstanding during the period. Diluted net income per common share is
computed based on the weighted average number of common shares and common stock
equivalents outstanding during the period. There were no common stock equivalents
outstanding during the periods presented. Accordingly, a reconciliation between basic and
diluted earnings per share is not presented.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (E)
Interim Consolidated Financial Statements
| | ---------------------------------------------

| | The
condensed consolidated financial statements as of and for the nine months ended  September
30, 2005 and 2004 are unaudited. In the opinion of management, such condensed
consolidated financial statements include all adjustments (consisting only of normal
recurring accruals) necessary for the fair presentation of the consolidated financial
position and the consolidated results of operations. The consolidated results of
operations for the three and nine months ended September 30, 2005 and 2004 are not
necessarily indicative of the results to be expected for the full year. The consolidated
balance sheet information as of December 31, 2004 was derived from the audited
consolidated financial statements included in the Companys annual report Form
10-KSB. The interim condensed consolidated financial statements should be read in
conjunction with that report.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

---

---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)

| | (F)
Recent Accounting Pronouncements
| | ------------------------------------

| | In
December 2004, the Financial Accounting Standards Board (FASB) issued Statements of  Financial Accounting Standards Board (FASB)
No. 123 (R), Share-Based Payment. SFAS
No. 123 (R) revises SFAS No. 123, Accounting for Stock-Based Compensation and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS
No. 123 (R) focuses primarily on the accounting for transactions in which an entity
obtains employee services in share-based payment transactions. SFAS No. 123 (R) requires
companies to recognize in the statement of operations the cost of employee services
received in exchange for awards of equity instruments based on the grant-date fair value
of those awards (with limited exceptions). SFAS No. 123 (R) is effective as of the first
interim or annual reporting period that begins after June 15, 2005 for non-small business
issuers and after December 15, 2005 for small business issuers. The Company is currently
evaluating the provisions of SFAS No. 123 (R) and has not yet determined the impact, if
any, that SFAS No. 123 (R) will have on its financial statement presentation or
disclosures.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and Error
Corrections: a replacement of Accounting Principles Board (APB) Opinion No. 20 and FASB
Statement No. 3 which requires companies
to apply voluntary changes in accounting principles retrospectively whenever it is
practicable. The retrospective application requirement replaces APB 20s
requirement to recognize most voluntary changes in accounting principle by including the
cumulative effect of the change in net income during the period the change occurs.
Retrospective application will be the required transition method for new accounting
pronouncements in the event that a newly-issued pronouncement does not specify transition
guidance. SFAS No. 154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

---

---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)

| | (G)
Goodwill and Other Intangible Assets
| | ----------------------------------------

| | In
accordance with SFAS No.141,
the Company allocates the purchase price of its acquisitions to the tangible assets,
liabilities and intangible assets acquired based on their estimated fair values. The
excess purchase price over those fair values is recorded as goodwill. The fair value
assigned to intangible assets acquired is either based on valuations prepared by
independent third party appraisal firms using estimates and assumptions provided by
management or negotiated at arms-length between the Company and the seller of the
acquired assets. In accordance with SFAS No. 142, goodwill and purchased intangibles with
indefinite lives are not amortized, but will be reviewed periodically for impairment.
Purchased intangibles with finite lives will be amortized on a straight-line basis over
their respective useful lives.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 2 |  | BUSINESS COMBINATION
|------ |  | --------------------

| | Effective
February 28, 2005, the Company acquired all of the outstanding shares of Rizzo Inc.
(doing business as Owen Mills Company), a Los Angeles-based manufacturing and service
company specializing in military and industrial sewing of marine and ballistic fabric
products. Under the terms of the agreement, the Company purchased all of the outstanding
stock of Owen Mills Company in consideration for a $200,000 note payable and shares of
the Companys common stock having a value of $200,000, based on the average closing
price per share of the Companys common stock for the ten trading days preceding the
issuance of such shares. The Company shall pay the $400,000 of aggrigate consideration as follows:
(i) $3,333.33 each month commencing on March 31, 2005 and thereafter on the last business
day of each successive month until the Company has paid the former shareholder of Owen
Mills Company a total of $200,000; the present value of the cash payments is $172,401 (ii)
$40,000 in the form of shares of common stock of the Company payable within fifteen (15)
business days from the date of the agreement, (on April 27, 2005 the Company issued
36,463 common shares having a fair value of $40,000 to the former shareholder of Owen
Mills Company); and (iii) $40,000 in the form of the Companys common stock payable
to the former shareholder of Owen Mills Company on each of the last business days of
February 2006, February 2007, February 2008, and of February 2009. The Company acquired
assets totaling $576,190 (consisting of cash of $20,415, accounts receivable, net of
$232,224, inventories of $179,306, property, plant and equipment, net of $140,380, and
other current assets of $3,865) and assumed liabilities of $284,689 (consisting of
accounts payable of $30,973, other current liabilities of $160,046, and long-term debt of
$93,670), which resulted in the recording of $80,900 in goodwill.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)

| | The
acquisition of Owen Mills Company was accounted for as a purchase under SFAS No. 141,
Business Combinations. Accordingly, the operating results of Owen Mills Company have been
included in the consolidated statements of operations after the acquisition date of February
28, 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table reflects the unaudited pro forma combined results of operations for the
three and nine months ended September 30, 2005 and 2004, assuming the acquisition had
occurred at the beginning of 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | For the Three
Months Ended
September 30,
2004 | For the Nine
Months Ended
September 30,
2005 | For the Nine
Months Ended
September 30,
2004
| |  | --------------------------------------------- | -------------------------------------------- | --------------------------------------------
|
|
|
|
| |  |                                               | Revenue                                      |                                             
| |  |                                               |                                              |                                             
| |  |                                               | Net income                                   |                                             
| |  |                                               |                                              |                                             
| |  |                                               | Net income per share - basic                 |                                             
| |  |                                               | and diluted                                  |                                             
| |  |                                               |                                              |                                             

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

| | Inventories
consisted of the following:
| | ---------------------------------------

| |  | September 30,
2005 | December 31, 2004
| |  | ------------------ | -----------------
|
|
|
|
| |  |                    | Raw materials    
| |  |                    | Work in process  
| |  |                    | Finished goods   
| |  |                    |                  
| |  |                    |                  
| |  |                    |                  

|NOTE 4 |  | NOTES PAYABLE
|------ |  | -------------

| | On
July 29, 2005, the Company borrowed $563,456 at an interest rate of 6.25%. The loan is 24
monthly payments commencing August 29, 2005 with each payment consisting of principal
along with accrued interest. As of September 30, 2005, the balance of the loan was
$501,103, of which $266,368 is included in current portion of long-term debt.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

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---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)

| | On
July 31, 2005, the Company borrowed $450,765 at an interest rate of 6.25%. The loan is
repayable in 24 monthly payments commencing August 31, 2005 with each payment consisting
of a fixed amount of principal along with accrued interest. As of September 30, 2005, the
balance of the loan was $400,817, of which $208,786 is included in current portion of
long-term debt.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 18, 2005, the Company borrowed $22,729 at an interest rate of 6%. The loan is
repayable 48 monthly payments commencing May 18, 2005 with each payment consisting of a
fixed amount of principal along with accrued interest. As of September 30, 2005, the
balance of the loan was $19,847, of which $5,187 is included in current portion of
long-term debt
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 18, 2005, the Company borrowed $30,608 at an interest rate of 6%. The loan is
repayable 48 monthly payments commencing May 18, 2005 with each payment consisting of a
fixed amount of principal along with accrued interest. As of September 30, 2005, the
balance of the loan was $26,725, of which $6,984 is included in current portion of
long-term debt
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 5 |  | SEGMENT INFORMATION AND CONCENTRATIONS
|------ |  | --------------------------------------

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

| | (A)
Sales and Income from Operations:
| | -------------------------------------

| |  | Civilian
Local | Military Local         | Military
Export | Consolidated
| |  | -------------- | ---------------------- | --------------- | ------------
|
|
|
|
| |  |                | September 30, 2005     |                 |             
| |  |                | Net sales              |                 |             
| |  |                | Income from operations |                 |             
| |  |               
| |  |                | September 30, 2004     |                 |             
| |  |                | Net sales              |                 |             
| |  |                | Income from operations |                 |             

| | (B) Single
Customers Exceeding 10% of Sales:
| | --------------------------------------------

| |  | For the Nine
Months Ended
September 30,
2005 | For the Nine
Months Ended
September 30,
2004
| |  | -------------------------------------------- | --------------------------------------------
|
|
|
|
| |  |                                              | Customers                                   
| |  |                                              | Customer A (Military Local)                 
| |  |                                              | Customer B (Military Export)                
| |  |                                              | Customer C (Military Export)                
| |  |                                              | Customer D (Military Export)                

11

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---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)

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

| | (A)
Israeli Gaza Strip Operations:
| | ----------------------------------

| | 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 owned and leased in the Erez Industrial Zone. The Israeli
Governments decision to evacuate the Gaza Strip was supported by certain
resolutions, as well as the Evacuation 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, however, the amount of
the compensation has not been finalized.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company incurred $217,477 in costs related to the evacuation of its
facilities located in the Erez Industrial Zone in
the Gaza Strip, which includes $89,612 in moving expenses and $127,865, of net book value
for the building that was abandoned. The Company believes that it will
be reimbursed in full for all costs related to the evacuation as well as the fair market
value of the facilities abandoned in the Erez Industrial Zone. As a result, the Company
has reclassified the net book value of the assets abandoned as well as the evacuation
costs to a receivable from the State of Israel in the amount of $217,447 which is included
in Other Current Assets in the Condensed Consolidated Balance Sheet at September 30, 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since the Company believes that it will be reimbursed for the fair market value of the building
that was abandoned, there is a potential gain contingency that will be recorded when and if realized.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (B)
Securities Purchase Agreement:
| | ----------------------------------

| | On
June 15, 2005, the Company executed a Securities Purchase Agreement (the Agreement)
with a group of investors for a $1.1 million private placement of its common stock.
Pursuant to the Agreement, the Company agreed to issue 1,833,334 shares of its common
stock to the investors at a price of $0.60 per share. The Company also agreed to issue
the investors 365,000 warrants to purchase its common stock at an exercise price of $0.94
share, exercisable until June 30, 2007, and 182,500 warrants at an exercise price of
$2.40 per share, exercisable until June 30, 2010. The Agreement also provided for the
issuance by the Company to the investors of up to an additional 1,368,191 shares of its
common stock if, one year after the closing, there has been a decrease in the Companys
share price of $0.60 per share.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Company agreed to issue 82,133 shares of its common stock, as well as
60,000 warrants at an exercise price of $0.94 (exercisable until June 30, 2007) and
20,000 warrants at an exercise price of $2.40 per share (exercisable until June 30, 2010)
as a finders fee for services provided in connection with the transaction.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

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---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)

| | As
part of the Agreement, the Company agreed to file a registration statement with the U.S.
Securities and Exchange Commission to register for resale the shares issued in the
private placement as well as the shares underlying the warrants, no later than 180 days
after the closing. If the registration statement is not declared effective by this date,
the Agreement provides for the return of all funds to the investors along with annual
interest of 5% on the $1.1 million.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On August 10, 2005 the Company filed a registration statement with the U.S. Securities and
Exchange Commission to register for resale the shares issued in the private placement. On November
2, 2005 the Company filed Amendment No. 1 to the above mentioned
registration statement. Due
to the contingency relating to the Agreement, the Company has not recorded the receipt of
the cash or the issuance of common stock or warrants in the accompanying condensed
consolidated financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of September 30, 2005, all cash, shares and warrants involved in the private placement
transaction remained in escrow and had not been disbursed to the various parties. The
Company had incurred approximately $130,000 in professional fees related to the
transaction, which are non-refundable and are shown as deferred private placement costs
in the condensed consolidated balance sheet at September 30, 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (C)
Operating Lease Agreements:
| | -------------------------------

| | The
Companys executive offices, are located in 8 Brisel Street, Industrial Zone,
Sderot. The Companys manufacturing, production and distribution facilities are
scattered over several locations in Israel as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Nazareth
Industrial Area: the production activities of the Companys subsidiary, Achidatex
are located in a 6,000 square meter building in Nazareth Industrial Area which is owned
by affiliated party. The annual rental expense for this facility is $180,000. The lease
expires in December 2008. The rent for 2005 will be allocated equally between those two
subsidiaries.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Petah-Tikva:
Achidatex leases approximately 300 square meters for its executive offices in Petah-Tikva
at annual rental expense of $21,600. The lease expires in December 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

---

---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)

| | Erez Industrial Area: The Company leased 2,000 square meter space in Erez Industrial Area, for
its sewing operations and for its storage, in a building that was owned by Mr. Joseph
Postbinder, its Chief Executive Officer and Chairmen of its board of directors. This
lease was extended in 2005, and the annual rental expense for this building in 2005 was
$68,400. The lease expired on August 31, 2005. Export Erez leased an
additional 400 square meters, in the same building, from a non affiliated party, at an
annual rental expense of $19,200. That lease also expired on August 31, 2005, from the same reason.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Industrial
Area of Ashdod: Mayotex leases a 230 square meter space in the Industrial Area of Ashdod
for its car armor installations. The annual rental expense for this space is $12,000. The
lease expires on December 31, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Industrial
Area of Sderot: as of January 2, 2005, Mayotex leases an approximately 1,250 square meter
space in the Industrial Area of Sderot primarily for its cut and sew operations. The
lease expires on December 31, 2005 and is renewable for an additional one year term. The
annual rental expense for this space will be $43,884 in 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Van
Nuys, California: as of September 1, 2003, Owen Mills leases an approximately 9,000
square feet space in Van Nuys, California for its operations. The lease expires on August
31, 2008. The annual rental expense for this space is $54,000.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

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

This
information 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,
2004 contained in our 2004 Annual Report on Form 10-KSB. The discussion and analysis which
follows may contain trend analysis and other forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with
respect to future events and financial results. These include statements regarding our
earnings, projected growth and forecasts, and similar matters that are not historical
facts.

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

# Critical Accounting
Policies

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

Revenues
and Revenue Recognition. Revenues from sales of products are recognized upon shipment
to customers. We provide a warranty on goods ranging from three to four years. Our policy
is to consider the establishment of a reserve for warranty expenses. Based upon historical
experience of no warranty claims, we have not established a reserve at September 30, 2005. If we change any of our assumptions with regard to our
recognition of revenues, or if there is a change with respect to warranties expenses our
financial position and results of operations may change materially.

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

15

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

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

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

# Overview

We
are a manufacturer and global provider of personal military and civilian protective
equipment and supplies. Our products are used by military, law enforcement, border patrol
enforcement, 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.

From
time to time we have provided bulletproof vests developed by us to laboratories in the
United States for testing, and following the tests, the products were deemed to have met
the American National Institute of Justice (NIJ) standards. The American NIJ standards are
the accepted standards worldwide for bulletproof vests and compliance with these standards
has enabled us to enter into the North American market as well as other new markets for
our bulletproof vests. Similarly, we have submitted our ballistic ceramic plates for
testing by German laboratories and following the tests, the products were deemed to have
met the German qualification standard. Obtaining this standard has enabled us to enter the
German and other European marketsfor these products.

16

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Our
strategy is to capitalize on our significant research and development capabilities and the
strength of our brand identity and achieve greater economies of scale. Due to ever-present
international tensions we believe that the demand for our products will continue to grow.
We expect to address this growth by offering a comprehensive array of high quality branded
security products to meet the needs of our customers around the world. We intend to
enhance our leadership position in the industry through additional strategic acquisitions
and by creating a broad portfolio of products and services to satisfy all of our
customers increasingly complex security products needs. The following elements
define our growth strategy.

| |  | Capitalize
on Exposure to Military Problems. We believe that the events of September 11,
2001, the subsequent War on Terrorism, the continuing conflict in Iraq, the
increasing likelihood of military conflicts abroad, and recent events where lives have
been saved due to the performance of armor systems, are all likely to result in
additional interest in our products.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Expand
Distribution, Networks and Product Offerings. We expect to continue to leverage our
distribution network by expanding our range of branded law enforcement equipment through
the acquisition of niche defensive security products manufacturers and by investing in
the 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Pursue
Strategic Acquisitions. In addition to our recent acquisition of Owen Mills Company,
or Owen Mills, we intend to continue to selectively pursue strategic acquisitions that
complement and/or expand our product offerings, provide access to new geographic markets,
and provide additional distribution channels and new customer relations.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Material Trends

Local
Military Market.The Israeli Military defense budget has been subject to reductions
since the second half of 2003. As a result, the demand for our products declined in the
second half of 2003 and stabilized at a lower level in 2004 and in the first nine months
of 2005. In 2004 and in the first nine months of 2005 sales to the Israeli Ministry of
Defense were $2,094,590 and $2,297,837, respectively, accounting for 17.4% and 23.9% of
our sales, respectively.

In
late summer 2005, Israel evacuated the Gaza strip. The evacuation process resulted in our incurring
expenses of $217,477 in costs related to the evacuation of its facilities located in the Erez Industrial Zone
in the Gaza Strip, which includes $89,612 in moving expenses and $127,865, of net book value for the building
that was abandoned, and caused a reduction in the funds that were initially budgeted for the procurement of
new products.

17

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---

Export
Military Market.Our customers in this market are military and law enforcement
organizations, mostly in South America, North America and Europe. Their budgets are
fluctuating and as a result we cannot identify definite trends in these markets. In 2004
and in the first nine months of 2005, we had sales of $2,792,702 and $587,512,
respectively, in South America sales of $4,036,584 and $1,271,099, respectively, in North
America and sales of $776,305 and $3,219,118, respectively, in Europe.

Since
2003, we have increased our export efforts and sales as a consequence of the worldwide
environment resulting from the events of September 11, 2001, the subsequent War on
Terrorism and the continuing conflict in Iraq. We are continuing our efforts to
strengthen our position in our existing export markets in the U.S., South America, Asia
and Europe, and to extend our presence to new export markets in South America and Europe.
We believe that those markets 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.

As
a result of the above, we expect instability in that our export military business will be
under pressure in the next year, and that we will experience growth in the next two to
three years.

Local
Civilian Market.Our product range to the civilian market is diversified. In 2004 our
local market business grew, due to the improvement of the economic situation in Israel. We
expect modest increase in this market in 2006 and in the future.

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

Backlog.We had approximately $3.85 million of unfilled customer orders at September
          30, 2005, out of which approximately $2.7 million was attributable to orders
          from military customers in South America and Asia, approximately $250,000 was
          attributable to orders from civilian customers in Europe, approximately $300,000
          was attributable to the local civilian market, approximately $100,000 was
          attributable to the U.S. civilian market and approximately $500,000 was
          attributable to the Israeli Military of Defense.

# Recent Developments

On
November 17, 2003, in response to concerns from the law enforcement community, the U.S.
Department of Justice announced an initiative to address the reliability of body armor
used by law enforcement personnel and to examine the future of bullet-resistant technology
and testing. These concerns followed the failure of a relatively new Zylon®-based body
armor vest worn by a Pennsylvania police officer. As part of this initiative, the American
NIJ, examined Zylon®-based bullet-resistant vests (both new and used) and reviewed the
existing process by which bullet-resistant vests are certified. Zylon® (or PBO fiber
 poly-p-phenylene benzobisoxazole) is a high-strength organic fiber produced by
Toyobo Co., Ltd.

18

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On
August 24, 2005, the American NIJ released a status report of its examination to the
Department of Justice in which the American NIJ announced, among other things, that
although the test results do not conclusively prove that all Zylon®-containing body
armor models have performance problems, they show that used Zylon®-containing body
armor may not provide the intended level of ballistic resistance. The test results also
imply that a visual inspection of body armor and its ballistic panels does not indicate
whether a particular piece of Zylon®-containing body armor has maintained its
ballistic performance. On such date, the American NIJ also issued a Body Armor Standard
Advisory Notice advising that it has identified Zylon® as a material that appears to
create a risk of death or serious injury as a result of degraded ballistic performance
when used in body armor. The American NIJ also introduced the American NIJ 2005 Interim
Requirements for Bullet-Resistant Body Armor, or the American NIJ Interim Requirements,
modifying and supplementing NIJ Standard 0101.04 (Ballistic Resistance of Personal Body
Armor), or the American NIJ Standard 0101.04.

Under
the NIJ Interim Requirements, any body armor model that was found by NIJ to be compliant
with NIJ Standard 0101.04 prior to the effective date of NIJ Interim Requirements must, in
order to comply with NIJ Interim Requirements, obtain from NIJ a notice of compliance by,
among other things, submitting to NIJ either: (i) evidence that demonstrates to the
satisfaction of NIJ that the body armor model will maintain ballistic performance over its
declared warranty period; or (ii) a written certification (the sufficiency of which shall
be determined by NIJ) that the model contains no material listed in an NIJ Body Armor
Standard Advisory Notice in effect at the time of submission.

As
a result of these developments, legal proceedings have been filed against certain U.S.
based manufacturers. In addition, certain major U.S. based manufacturers have initiated
exchange and upgrade programs for bullet-resistant vests resulting in increased expenses.
These developments have caused a general decline in sales of bullet-resistant vests.

Our
products do not contain Zylon®. In accordance with the American NIJ Interim
Requirements, we intend to immediately apply to the American NIJ to obtain a notice of
compliance with the NIJ Interim Requirements with respect to our products that were
previously found by the American NIJ to be compliant with the American NIJ Standard
0101.04. However, the general decline in sales of bullet-resistant vests have affected us,
and our sales of bullet-resistant vests, which account for approximately 40% of our
revenues, have decreased in the last two quarters of 2005.

# 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 evacuated our remaining operations
from the Erez Industrial Zone in August 2005. The Israeli Governments decision to
evacuate the Gaza Strip was supported by certain resolutions as well as the
Evacuation 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, however, the amount of the compensation has not been
finalized.

We
owned facilities, leased other facilities and maintained equipment and inventory within
this area. During the last half of 2004, we prepared for the eventual evacuation by
merging existing production facilities. We moved one of our light cut and sew
operations from the Erez Industrial Zone to Sderot and some of our webbing equipment to
Nazareth.

19

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At
September 30, 2005 we recorded a receivable in the amount of $217,447, which represents costs incurred
related to the evacuation of the Erez Industrial Zone, which according to the Evacuation Law we will
recover from the State of Israel. Of theses costs, $127,865 represents the net book value of the facilities
abandoned and $89,612 represents all other moving costs.

# Results of Operations

# Three Months Ended
September 30, 2005 Compared with Three Months Ended September 30, 2004

Net
Revenues and Gross Profit Margin. Net revenues for the three months ended September
30, 2005 decreased to $1,992,642 from $3,181,111 in the same period in 2004, a decrease of
37.4%. The decrease is primarily attributable to the decrease in export sales resulting
from the general decline in sales of bullet-resistant vests. The decrease in sales of the
bullet-resistant vests is due to the previously mentioned failure of a relatively new
Zylon®-based body armor vest, and the new requirements of the American NIJ for
certifying new bullet-resistant vests.In
the three months period ended September 30, 2005 Export Erez, Achidatex, and Owen Mills
accounted for $952,382 or 47.8%, $730,026 or 36.6% and $310,234 or 15.6% of our revenues,
respectively.  In the three months period ended September 30, 2004 Achidatex and Export
Erez accounted for $1,651,921 or 52% and $1,529,190 or 48% of our revenues, respectively.

The
following table sets forth the breakdown of sales by segment for the three months ended
September 30, 2005 and 2004.

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

A
decline in export sales is expected as a result of the general decline in sales of
bullet-resistant vests. This expectation is based, among other things, on the fact that we
have broadened our export customers base. While we believe that the trend of growth in the
local civilian market (which includes sales in the amount of $310,234 in the U.S. by Owen
Mills, our U.S. subsidiary) is a stable one, it is difficult to predict the trend of the
local military market.

20

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---

We
anticipate that our revenues for the remainder of 2005 will decrease as a result of the
general decline in sales of bullet-resistant vests comparable to the same period in 2004.

Gross
profit for the three months ended September 30, 2005 was $531,405 compared to $1,153,412
for the same period in 2004. This decrease in gross profit is principally attributable to
decrease in sales.          In the three months period ended September 30, 2005
Achidatex, Export Erez and Owen Mills accounted for 51%, 39%, and 10%,  of our gross
profit, respectively. In the three months period ended September 30, 2004 Achidatex and
Export Erez accounted for 43% and 57% of our gross profit, respectively.

Our gross profit
margin for the three months ended September 30, 2005 was 26.7% compared to 36.3% for the
same period in 2004.  Achidatexs gross margin for the September 30, 2005 period was 37% compared to 33% for
the same period in 2004. Export Erezs gross margin for the September 30, 2005 period was 22% compared to 40%
for the same period in 2004. Owen Mills gross margin for the three months period was 17%. We believe that
the fourth quarter of 2005 will be characterized by an increased demand worldwide for raw materials, that may
result in significant extensions in the regular delivery schedules and an increase in raw material prices
which will likely affect our cost of production and our gross profit margin.

Selling
Expenses. Selling expenses remained substantially consistent in both periods with expenses of $224,941 during the three
months ended September 30, 2005 compared to $222,231 for the same period in 2004. Achidatexs selling
expenses for the three months period ended September 30, 2005 was $118,502 compared to $149,670 for the same
period in 2004. Export Erezs selling expenses for the three months period ended September 30, 2005 was
$106,439 compared to $72,561 for the same period in 2004. Owen Mills did not accrued any selling expenses
for the three months period ended September 30, 2005. We anticipate a decrease in our selling expenses in the
remainder of 2005 as a result of an expected decrease in export sales.

General
and Administrative Expenses. General and administrative expenses for three months
ended September 30, 2005 increased to $431,620 from $367,941 for the same period in
2004. This increase is mainly a result of the growth in professional fees and additional
expenses due to the acquisition of Owen Mills.

Income
Tax (Expense) Benefit. Our income tax benefit for the three months ended September 30, 2005
was $28,569 as compared to a tax expense of $212,583 for the comparable period in 2004,
reflecting the decrease in our profits. Achidatexs income tax expense for the period ended September 30, 2005
was $15,949 compared to $31,923 for
the same period in 2004. Export Erezs income tax expense for the period ended September 30, 2005 was $27,853
compared to $36,632 for the same period in 2004. We do not anticipate any material change in our general and
administrative expenses for the remainder of 2005.

Financial
Income (Expenses), Net. We had financial expense, net of $11,286 for the three months
ended September 30, 2005 as compared to financial expense, net of $47,787 for the same
period in 2004. This decrease in financial expenses is mainly attributable to our
conversion of short term loans to long term loans having lower interest rates.

Other
Income (Expense), Net. We had other income, net for the three months ended September
30, 2005 of $39,763 as compared to other expense, net of $39,947for the same
period in 2004. The other income, net in 2005 is primarily attributable to a gain from sales of
marketable securities in the amount of $35,944.

Other
Comprehensive Income (Loss).We recorded other comprehensive loss for the three
months ended September 30, 2005 of $8,145 as compared to other comprehensive income of
$6,275for the same period in 2004. This loss is principally attributable to a
slight increase in the exchange rate of the US dollar against the NIS.

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, 2005, we
recognized and recorded the minority share in our loss of $12,568 compared to minority
share in our profit of $13,515 for the same period in 2004.

21

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Net
Income. In the three months ended September 30, 2005 we had net income of $55,542 as
compared to net income of $249,408 for the three months period ended September 30, 2004.
 Achidatexs net income for the three months ended September 30, 2005 was $50,851
compared to $142,936 for the three months ended September 30, 2004. Export Erezs
net income for the three months ended September 30, 2005 was $147, 561 compared to
$456,794 for the three months ended September 30, 2004. Achidatexs and Export Erezs
net income were offset by the losses of Owen Mills.

# Nine Months Ended
September 30, 2005 Compared with Nine Months Ended September 30, 2004

Net
Revenues and Gross Profit Margin. Net revenues for nine months ended September 30,
2005 decreased slightly to $9,584,813 from $9,753,915 in the same period in 2004, a
decrease of 1.7%. The decrease is primarily attributable to the decrease in export sales,
resulting from the general decline in sales of bullet-resistant vests. The decrease in
sales of the bullet-resistant vests is due to the previously mentioned failure of a
relatively new Zylon®-based body armor vest, and the new requirements of the American
NIJ for certifying new bullet-resistant vests.
In
the nine months period ended September 30, 2005 Export Erez, Achidatex, and Owen Mills
accounted for $4,763,652 or 49.7%, $4,149,724 or 43.3% and $671,437 or 7% of our
revenues, respectively. The revenues attributed to Owen Mils relate to the period
beginning from February 28, 2005.  In the period ended September 30, 2004 Achidatex and
Export Erez accounted for $3,443,809 or 35% and $6,310,106 or 65% of our revenues,
respectively.

On
February 28, 2005, we acquired all of the outstanding shares of Owen Mills, a company that
specializes in military and industrial sewing of marine and ballistic fabric products. For
the nine months ended September 30, 2005, Owen Mills had revenues of $671,437 (from date of the acquisition).

The
following table sets forth the breakdown of sales by segment for the nine months ended
September 30, 2005 and 2004.

|                                   | Nine Months Ended September 30,
|---------------------------------- | -------------------------------
|
|
|
|
|Sales to the local civilian market |                                
|Sales to the local military market |                                
|Export military sales              |                                
|                                   |                                
|Total                              |                                
|                                   |                                

Gross
profit for the nine months ended September 30, 2005 was $2,360,972compared to
$2,974,178 for the same period in 2004. This decrease in gross profit is principally
attributable to the decrease in gross profit in the first quarter of 2005 due to a higher
parentage of transactions which were characterized by lower profit margins, the temporary
lower operating efficiency in the first quarter of 2005 resulting from the partial
relocation of certain manufacturing lines from Erez Industrial Zone to Sderot, and a
decrease in the gross profit in our third quarter of          2005. In the
period ended September 30, 2005 Achidatex, Export Erez and Owen Mills accounted for
54.3%, 40.7%, and 5%,  of our gross profit, respectively. The revenues attributable to Owen Mils relate to
the period beginning from February 28, 2005.  In the nine months period ended September 30, 2004 Achidatex
and Export Erez accounted for 36% and 64% of our gross profit, respectively.

Gross
profit margin for the nine months ended September 30, 2005 was 24.6% compared to 30.5% for the
same period in 2004.  Achidatexs gross margin for the nine months period ended September 30, 2005 was 30.9%
compared to 30.7% for the same period in 2004. Export Erezs gross margin for the period ended September 30,
2005 was 20.2% compared to 30.4% for the same period in 2004. Owen Mills gross margin for the period since
its acquisition was 17.5%.

22

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Selling
Expenses. Selling expenses for the nine months ended September 30, 2005 slightly
decreased 1.6% to $603,751 from $613,587 for the same the same period in 2004. The
decrease in our selling expenses was attributable to the decrease in export sales. Achidatexs
selling expenses for the period ended September 30, 2005 was $391,139 compared to $216,707
for the same period in 2004. Export Erezs selling expenses for the period ended September 30, 2005 was
$212,612 compared to $396,879 for the same period in 2004. Owen Mills selling expenses for the period since
its acquisition was $178,755.

General
and Administrative Expenses. General and administrative expenses for the nine months
ended September 30, 2005 increased 32.1% to $1,389,667 from $1,051,530for the same
period in 2004. This increase is mainly a result of the growth in professional fees and
additional expenses due to the acquisition of Owen Mills.

Income Tax Expense.
Our income tax expense for the nine months ended September 30,
2005 was $153,460 as compared to a tax expense of $496,284 for the comparable period in
2004, reflecting the decrease in income before tax and the reduction in tax rates in
Israel from 35% to 34%. Our effective tax rate was 36.1 % in the 2005 period, compared to
40.8% in the 2004 period, as a result of the reduction of tax rates by the Israeli
Government. Achidatexs income tax expense for the nine months period ended September 30, 2005 was $84,503 compared to
$96,352 for the same period in 2004. Export Erezs income tax expense for the nine months period ended
September 30, 2005 was $52,613 compared to $255,904 for the same period in 2004. Owen Mills did not have any
income tax expense in this nine months period.

Financial
Expenses. We had financial expenses, net of $46,723 for the nine months ended
September 30, 2005 as compared to $110,582 for the same period in 2004. This decrease in
financial expenses is mainly attributable to our conversion of short term loans to long
term loans having lower interest rates.

Other
Income, Net. We had other income, net for the nine months ended September 30, 2005 of
$104,475 as compared to other income, net of $18,960 for the same period in 2004. The
increase is attributable mainly to gain from marketable securities.

Other
Comprehensive Income (Loss).We had other comprehensive loss, for the nine
months ended September 30, 2005 of $242,712 as compared to other comprehensive loss of
$82,618 for the same period in 2004. This loss is principally attributable to the
increase of the US dollar exchange rate against the NIS.

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, 2005, we
recognized and recorded minority share in our profit of $39,037, substantially consistent
with the minority share in our profit of $39,413 for the same period in 2004.

Net
Income. In the nine months ended September 30, 2005 we had net income of $232,809 as
compared to net income of $681,742 for the nine months period ended September 30, 2004.
 Achidatexs net income for the nine months ended September 30, 2005 was $195,602
compared to $224,947 for the nine months ended September 30, 2004. Export Erezs net
income for the nine months ended September 30, 2005 was $147, 561 compared to $456,794
for the nine months ended September 30, 2004. Achidatexs and Export Erezs net
income were offset by the losses of Owen Mills and our parent company.

# Liquidity and Capital
Resources

As
of September 30, 2005, we had $656,927 in cash and cash equivalents, $729,316 in
marketable securities and working capital of $4,290,990 as compared to $505,013 in cash
and cash equivalents, $808,102 in marketable securities and $4,344,566 in working capital
at December 31, 2004.

Net
cash provided from operating activities was $582,582 for the nine months ended September
30, 2005 as compared to $225,752 provided from operating activities for the same period in
2004. This was primarily attributable to net income of $232,809, a $443,842 decrease in
inventory, depreciation of $261,571 and a decrease in accounts receivable of $301,559.
During the nine months ended September 30, 2005, cash used in operating activities was
used mainly to reduce accounts payable by $184,247, decrease accrued liabilities by
$265,958 and decrease other current liabilities by $265,374.

23

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Our
revenues for the nine months ended September 30, 2005, decreased by approximately $169,102 compared to the same period
in 2004, resulting in a decrease in our accounts receivable and a decrease in inventory
that was partially offset by the decrease in accounts payable , decrease in accrued
liabilities and decrease in other current liabilities. In the nine months ended September
30, 2005 we invested net $491,169 in fixed assets (mainly in new molding equipment) and
entered into $172,625 of short and long term loans.

Net
cash used in investing activities was $409,044 for the nine months ended September 30, 2005 as compared
to $152,106 in the nine months ended September 30, 2004.  During the nine months ended September 30, 2005,
$491,169 (net of sales of fixed assets in the amount of $26,592), was used to purchase fixed assets, while
$61,710 (net of purchases of marketable securities) was provided from sales of our marketable securities, and
$20,415 was obtained in connection with our acquisition of Owen Mills. Of the $491,169 used to purchase fixed
assets $437,918 was used by Achidatex, $78,755 was used by Export Erez and $1,088 was used by Owen Mills.

Net
cash provided from financing activities was $42,635 for the nine months ended September
30, 2005 as compared to $193,192used in the nine months ended September 30, 2004.
During the nine months ended September 30, 2005, we decreased our short-term debt by
$121,175 and we received $293,810 (net of proceeds from new long term debt) of long term
debt. During
the nine month ended September 30, 2005 we had deferred private placement costs in the
amount of $130,000.

All
of our large contracts are supported by letters of credit. As a result, we believe that we
have limited exposure to doubtful accounts receivables. We have historically achieved net
profits on an annual basis, but our quarterly profits are not consistent on a quarter to
quarter basis. Nevertheless, we have striven to balance our accounts payable and account
receivable. Subject to an unexpected growth in inventories as a result of a future growth
in sales or a significant change in raw material prices, we intend to use our cash flow
from operations for the acquisition of companies or equipment.

During
2005, we decided to reduce our projected spending for research and development. We
anticipate that our research and development expenses for the remainder of 2005 and for
2006 will reflect annualized spending of approximately $70,000 per year.

24

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On
June 15, 2005, we executed a securities purchase agreement, with a group of investors for
a $1.1 million private placement of our common stock. Pursuant to such agreement, we
issued 1,833,334 shares of our common stock to the investors at a price of $0.60 per
share. As of November 14, 2005, all cash, shares and warrants involved in the private
placement transaction remained in escrow and had not been disbursed to the various
parties. The escrow agent will transfer to us the amount of $1.1 million and to the
investors 1,915,467 shares of our common stock as well as warrants to purchase 627,500
shares of common stock within three days form the receipt of a notice confirming the
effectiveness of this registration statement prior to December 12, 2005. In such event,
the remaining 1,368,191 shares of common stock will remain in escrow for the purpose of
price protection, as defined in Section (g) of the securities purchase agreement. If the
escrow agent has not received such notice prior to December 12, 2005 then, on the seventh
business day thereafter the $1.1 million will be returned to the investors and the shares,
the warrants and any interest yield with regards to the $1.1 million held by the escrow
agent will be transferred to us. Notwithstanding the above, in the event that the
registration statement will not be declared effective by December 12, 2005, the investors
will be able to elect to receive the Shares and Warrants, and in such event we will
receive the $1.1 million and any interest yield with regard to the $1.1 million. In
addition, during until December 12, 2005, we may draw up to $550,000 from the escrowed
funds for the purpose of purchasing fixed assets, in the sole discretion of our board of
directors. In such event as a condition to the delivery of the funds, we have agreed to
pledge all of the assets purchased with such funds to the investors. In the event that the
$1.1 million is returned to the investors, then within seven business days from December
12, 2005 we will return all the funds that have been drown from escrow account to the
investors.

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

# Recent Accounting
Pronouncements

In
December 2004, the Financial Accounting Standard Board ( FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 123 (R),
Share-Based Payment. SFAS No. 123 (R) revises SFAS No. 123, Accounting
for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. SFAS No. 123 (R) focuses primarily on the accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123 (R) requires companies to recognize in the statement of
operations the cost of employee services received in exchange for awards of equity
instruments based on the grant-date fair value of those awards (with limited exceptions).
SFAS No. 123 (R) is effective as of the first interim or annual reporting period that
begins after June 15, 2005 for non-small business issuers and after December 15, 2005 for
small business issuers. The Company is currently evaluating the provisions of SFAS No. 123
(R) and has not yet determined the impact, if any, that SFAS No. 123 (R) will have on its
financial statement presentation or disclosures.

In
May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and
Error Corrections: a replacement of Accounting Principles Board (APB) Opinion
No. 20 and FASB Statement No. 3 which requires companies to apply
voluntary changes in accounting principles retrospectively whenever it is practicable. The
retrospective application requirement replaces APB 20s requirement to recognize
most voluntary changes in accounting principle by including the cumulative effect of the
change in net income during the period the change occurs. Retrospective application will
be the required transition method for new accounting pronouncements in the event that a
newly-issued pronouncement does not specify transition guidance. SFAS No. 154 is
effective for accounting changes made in fiscal years beginning after December 15,
2005.

25

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# Foreign Currency
Exchange Risk

We
develop products in Israel and sell them in South America, Asia and several European
countries. As a result, our financial results could be affected by factors such as changes
in foreign currency exchange rates or weak economic conditions in foreign markets.

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

During
2005, the NIS devalued approximately 6.7% against the dollar. Among the factors
contributing to the devaluation were the increase in the interest rate for dollars
investments compared to interest rate for NIS investments. The inflation in Israel was
approximately 0.5% for the nine month ended September 2005 compared to an annual deflation
of 1.9% in 2004.

Since
most of our sales are quoted in dollars, and a portion of our expenses are incurred in
NIS, our results may be adversely affected by a change in the rate of inflation in Israel
or if such change in the rate of inflation is not offset, or is offset on a lagging basis,
by a corresponding devaluation of the NIS against the dollar and other foreign currencies.
We will also be adversely affected if the dollar depreciates against the Euro, the
currency used for many of our purchases of raw material.

We
did not enter into any foreign exchange contracts in 2004 or the first three quarters of
2005.

# Contractual Obligations

The
following table summarizes our contractual obligations and commercial commitments as of
September 30, 2005.

|Contractual Obligations             | Payments due by Period
|----------------------------------- | ----------------------
|
|
|
|
|Long-term debt obligations          |                       
|Capital (finance) lease obligations |                       
|Operating lease obligations         |                       
|Purchase obligations                |                       
|Other long-term liabilities         |                       
|reflected on the Company's          |                       
|balance sheet under  U.S. GAAP      |                       
|                                    |                       
|Total                               |                       
|                                    |                       

26

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# Cautionary Statement
Regarding Forward-Looking Information and Risk Factors

This report contains
forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995. Words such as anticipate, expect, intend,
plan, believe, seek, outlook and
estimate as well as similar words and phrases signify forward-looking
statements. Our forward-looking statements are not guarantees of future results and
conditions and important factors, risks and uncertainties may cause our actual results to
differ materially from those expressed in our forward-looking statements. These
uncertainties and other factors include, but are not limited to, the following and other
risk factors contained in our Annual Report on Form 10-KSB:

| |  | If
the decline in sales of bullet bullet-resistant vests continue, our operating results
will be negatively affected.
| | - | ---------------------------------------------------------------------------------------------------------------------

| |  | Our
significant international operations subject us to financial and regulatory risks.
| | - | --------------------------------------------------------------------------------------

| |  | Currency
exchange rate fluctuations in the world markets in which we conduct business could have a
material adverse effect on our business, results of operations and financial condition.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Sales
of our products are subject to governmental procurement procedures and practices;
termination, reduction or modification of contracts with our customers, and especially
with the government of Israel, or a substantial decrease in our customers budgets
may adversely affect on us.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
loss of one or more of our key customers would result in a loss of a significant amount
of our revenues.
| | - | ------------------------------------------------------------------------------------------------------------

| |  | Our
markets are highly competitive. Any inability to compete effectively will adversely
affect us.
| | - | --------------------------------------------------------------------------------------------------

| |  | Limited
sources for some of our raw materials may significantly curtail our manufacturing
operations.
| | - | -----------------------------------------------------------------------------------------------------

| |  | Our
resources may be insufficient to manage the demands imposed by any future growth.
| | - | -------------------------------------------------------------------------------------

27

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|Item 3. |  | Controls and Procedures
|------- |  | -----------------------

Our
management, including our chief executive officer and chief financial officer, evaluated
the effectiveness of our disclosure controls and procedures (as defined in Exchange Act
Rule 13a-15(e)) as of the end of the period covered by this quarterly report on Form
10-QSB. Based upon that evaluation, our chief executive officer and chief financial
officer have concluded that, as of such date, our disclosure controls and procedures were
effective to ensure that information required to be disclosed by our company in reports
that we file or submit under the U.S. Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms and that such information was
made known to them by others within the company, as appropriate to allow timely decisions
regarding required disclosure.

# Changes in Internal
Controls Over Financial Reporting

In
connection with the evaluation of the Companys internal controls as of the end of
the period covered by this quarterly report, our chief executive officer and chief
financial officer have determined that there were no changes to our internal controls over
financial reporting that have materially affected, or are reasonably likely to materially
effect, the Companys internal controls over financial reporting.

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

28

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# PART II  OTHER
INFORMATION

# DEFENSE INDUSTRIES
INTERNATIONAL, INC. AND SUBSIDIARIES

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

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

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

On
June 15, 2005, we executed a Securities Purchase Agreement, (the Agreement),
with a group of investors for a $1.1 million private placement of our common stock.
Pursuant to the Agreement, we agreed to issue 1,833,334 shares of our common stock to the
investors at a price of $0.60 per share. We also agreed to issue the investors a right to
purchase up to an aggregate of 365,000 additional shares of common stock at $0.94 per
share issuable upon the exercise of warrants which exercisable until June 30, 2007 and a
right to purchase up to an aggregate of 182,500 additional shares of common stock at $2.40
per share issuable upon the exercise of warrants which exercisable until June 30, 2010. In
addition, pursuant to the Agreement, under certain circumstances, the investors will have
the right to receive up to an additional 1,368,191 shares of common stock if on June 16,
2006 there has been a decrease in the share price of our common stock below $0.60 per
share. In consideration for their services in connection with this private placement, we
agreed to issue 82,133 shares of Common Stock, a right to purchase up to an aggregate of
60,000 additional shares of common stock at $0.94 per share issuable upon the exercise of
warrants which exercisable until June 30, 2007 and a right to purchase up to an aggregate
of 20,000 additional shares of common stock at $2.40 per share issuable upon the exercise
of warrants which exercisable until June 30, 2010. The issuance of shares will be made
pursuant to an exemption from registration under section 4(2) of the Securities Act of
1933, and Rule 506 of Regulation D under the 1933 Act.

As
part of the Agreement, we agreed to file a registration statement with the U.S. Securities
and Exchange Commission (SEC) to register for resale the shares to be issued in the
private placement as well as the shares underlying the warrants, no later than 180 days
after the closing. If the registration statement is not declared effective by this date,
the Agreement provides for the return of all funds to the investors along with annual
interest of 5% on the $1.1 million. As of August 12, 2005, all cash, shares and warrants
involved in the private placement transaction remained in escrow and had not been
disbursed to the various parties.

On
August 10, 2005 we filed a registration statement with the SEC to register for resale the
shares issued in the private placement. On November 2, 2005 we filed an amendment to the
registration statement.

29

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|Item 3. |  | Default Upon Senior Securities
|------- |  | ------------------------------

| | None.
| | -----

|Item 4. |  | Submission of Matters to a Vote of Shareholders
|------- |  | -----------------------------------------------

| | None.
| | -----

|Item 5. |  | Other Information
|------- |  | -----------------

| | None.
| | -----

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

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

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

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

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

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

|(b) | Reports
on Form 8-K filed during the last quarter of the period covered by this report:
|--- | ---------------------------------------------------------------------------------------

| | None.
| | -----

30

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# SIGNATURES

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

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

| |  | BY: /S/ Tsippy Moldovan
Tsippy MoldovanChief Accounting and Financial Officer
| |  | -------------------------------------------------------------------------------------------

Date: November 30, 2005

31

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