---

---

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

# FORM 10-Q

|x | Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchangez Act of 1934 for the
quarterly period ended June 30, 2008 or
|- | ----------------------------------------------------------------------------------------------------------------------------------------

|o | Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
transition period from ____to ___
|- | ----------------------------------------------------------------------------------------------------------------------------------

Commission file number:
0-30105

# DEFENSE
INDUSTRIES INTERNATIONAL, INC.

(Exact Name of
Registrant as Specified in Its Charter)

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

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

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

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

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

Yes x
 No  o

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

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

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

Yes o
No x

As of August 14, 2008 the issuer had
28,991,111 shares of Common Stock, par value $0.0001, outstanding.



---

---



# DEFENSE INDUSTRIES
INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX

|                                |                                                                                                                                                         | Page
|------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|
|
|PART I - FINANCIAL INFORMATION: |                                                                                                                                                        
|                               
|Item 1.                         | Condensed Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007                                                             | 2   
|                               
|                                | Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six
Months Ended June 30, 2008 and June 30, 2007 (Unaudited) | 4   
|                               
|                                | Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and
June 30, 2007 (Unaudited)                                    | 5   
|                               
|                                | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                                        | 6   
|                               
|Item 2.                         | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                                   | 12  
|                               
|Item 3.                         | Quantitative and Qualitative Disclosures About Market Risk                                                                                              | 20  
|                               
|Item 4T.                        | Controls and Procedures                                                                                                                                 | 20  
|                               
|PART II - OTHER INFORMATION:    |                                                                                                                                                        
|                               
|Item 1.                         | Legal Proceedings                                                                                                                                       | 21  
|                               
|Item 1A.                        | Risk Factors                                                                                                                                            | 21  
|                               
|Item 2.                         | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                             | 21  
|                               
|Item 6.                         | Exhibits and Reports on Form 8-K                                                                                                                        | 21  
|                               
|SIGNATURES                      | 22                                                                                                                                                     

1

---

---

DEFENSE INDUSTRIES INTERNATIONAL, INC.
 AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2008 (UNAUDITED) AND DECEMBER 31, 2007

ASSETS

|                                                            | June 30, 2008 | December 31, 2007
|----------------------------------------------------------- | ------------- | -----------------
|
|
|
|
|CURRENT ASSETS                                              |               |                  
|Cash and cash equivalents                                   |               |                  
|Bank deposit                                                |               |                  
|Accounts receivable, net of allowance for doubtful accounts |               |                  
|of $252,537 and $208,464, respectively                      |               |                  
|Accounts receivable - related parties                       |               |                  
|Inventories                                                 |               |                  
|Trading securities                                          |               |                  
|Deferred taxes                                              |               |                  
|Other current assets                                        |               |                  
|                                                            |               |                  
|Total Current Assets                                        |               |                  
|                                                            |               |                  
|                                                            |               |                  
|PROPERTY, PLANT AND EQUIPMENT, NET                          |               |                  
|                                                            |               |                  
|                                                            |               |                  
|OTHER ASSETS                                                |               |                  
|Funds in respect of employee rights upon retirement         |               |                  
|Deferred taxes                                              |               |                  
|                                                            |               |                  
|Total Other Assets                                          |               |                  
|                                                            |               |                  
|                                                            |               |                  
|TOTAL ASSETS                                                |               |                  
|                                                            |               |                  

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

2

---

---

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

LIABILITIES AND SHAREHOLDERS' EQUITY

|                                                      | June 30, 2008 | December 31, 2007
|----------------------------------------------------- | ------------- | -----------------
|
|
|
|
|CURRENT LIABILITIES                                   |               |                  
|Accounts payable                                      |               |                  
|Accounts payable - related parties                    |               |                  
|Short-term debt                                       |               |                  
|Common stock to be issued                             |               |                  
|Deferred income                                       |               |                  
|Other current liabilities                             |               |                  
|                                                      |               |                  
|Total Current Liabilities                             |               |                  
|                                                      |               |                  
|                                                      |               |                  
|LONG-TERM LIABILITIES                                 |               |                  
|Long-term portion of debt                             |               |                  
|Liability for employee rights upon retirement         |               |                  
|Common stock to be issued                             |               |                  
|                                                      |               |                  
|                                                      |               |                  
|Total Long-Term Liabilities                           |               |                  
|                                                      |               |                  
|                                                      |               |                  
|TOTAL LIABILITIES                                     |               |                  
|                                                      |               |                  
|                                                      |               |                  
|Minority interest                                     |               |                  
|                                                      |               |                  
|COMMITMENTS AND CONTINGENCIES                         |               |                  
|                                                      |               |                  
|SHAREHOLDERS' EQUITY                                  |               |                  
|Preferred stock, $0.0001 par value, 50,000,000 shares |               |                  
|authorized, none issued and outstanding               |               |                  
|Common stock, $0.0001 par value, 250,000,000 shares   |               |                  
|authorized, 28,991,111 and 28,867,272 respectively,   |               |                  
|issued and outstanding                                |               |                  
|Additional paid-in capital                            |               |                  
|Retained earnings                                     |               |                  
|Accumulated other comprehensive gain                  |               |                  
|                                                      |               |                  
|Total Shareholders' Equity                            |               |                  
|                                                      |               |                  
|                                                      |               |                  
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY            |               |                  
|                                                      |               |                  

3

---

---

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

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

4

---

---

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

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

# SUPPLEMENTAL SCHEDULE OF
NON-CASH INVESTING AND FINANCING ACTIVITIES:

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

5

---

---

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

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

| | A. | The accompanying unaudited interim consolidated financial statements as of June
               30, 2008 and for the three and six month periods then ended (the Interim
               Financial Statements) were prepared in a condensed form in accordance with
               the instructions for Form 10-Q and, therefore, do not include all disclosures
               necessary for a complete presentation of financial condition, results of
               operations, cash flows and all the data and notes which are required when
               preparing annual financial statements, in conformity with generally accepted
               accounting principles accepted in the United States.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | The accounting principles used in the presentation of the Interim Financial
               Statements are consistent with those principles used in the presentation of the
               latest annual financial statements. All significant accounting policies have
               been applied consistently with the year ended December 31, 2007.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

6

---

---

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

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

| | Basic
net income per share of common stock is computed based on the weighted average number of
shares of common stock outstanding during the period. Diluted net income per share of
common stock is computed based on the weighted average number of shares of common stock
and common stock equivalents outstanding during the period. For the three and six month
periods ended June 30, 2008 and 2007 common stock equivalents to purchase 202,500 shares
of common stock were not included in diluted loss per share because their effect is
anti-dilutive.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

| | The
Companys trading securities are measured at fair value based on quoted market prices in
active markets for identical assets (Level 1). The effect of the first-time
adoption of this statement had no material impact on the Companys financial
position and results of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

7

---

---

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

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

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

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

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

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

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

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

| |                                                 | Six months ended
June 30
| | ----------------------------------------------- | ------------------------
|
|
|
|
| | Net Income                                      |                         
| | Net change in cumulative translation adjustment |                         
| | Net Comprehensive Income                        |                         

8

---

---

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

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

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

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

Consist
of:

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

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

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

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

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

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

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

9

---

---

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

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

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

10

---

---

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

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

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

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

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

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

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

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

| | The
Israeli Governments decision to evacuate the Gaza Strip was supported by certain
resolutions, as well as the Evacuation Compensation Law that was adopted by
the Israeli Parliament, to compensate the Israeli Gaza Strip settlers as well as business
and property owners in the Gaza Strip and in the Erez Industrial Zone. In February 2006,
three subsidiaries, Export Erez, Mayotex and Achidatex filed claims for compensation
pursuant to the Evacuation Compensation Law.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | On February 18, 2008 Export Erez Ltd., Mayotex Ltd. and Achidatex Nazareth Elite (1997) Ltd. signed
definitive agreements with SELA, a government agency, established pursuant to the Evacuation
Compensation Law, for compensation of approximately $6 million, net of 5% related taxes, receipt of the
previous advance payment and the other associated costs. The Company received and recorded gain in the
amount of $4,910,541 during the six months ended June 30, 2008. The change in the dollar amount from the
amount reported in the first quarter resulted from the appreciation of the NIS against the U.S. dollar.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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

This discussion should be read in conjunction with the condensed consolidated financial
statements and notes included in Item 1 of Part I of this Quarterly Report and the audited
consolidated financial statements and notes thereto, and Managements Discussion and
Analysis of Financial Condition and Results of Operations for the Year Ended December 31,
2007 contained in our 2007 Annual Report on Form 10-KSB. The discussion and analysis which
follows may contain trend analysis and other forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with
respect to future events and financial results. These include statements regarding our
earnings, projected growth and forecasts, and similar matters that are not historical
facts.

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

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

Overview

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

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

We
believe that current international tensions, the war on terrorism, and the continuing
conflict in Iraq are all likely to result in additional interest in our products, and that
the demand for our products will continue to grow.

We
expect to address this growth by offering a comprehensive array of high quality branded
security products that meet our customers increasingly complex security products
requirements. We intend to enhance our position in the industry through additional
strategic acquisitions that will broaden our portfolio of products.

The
following elements define our growth strategy:

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

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

# Material Trends

Local
Military Market. After the war between Israel and the Hezbollah in Lebanon in July and
August of 2006, increased orders by the Israeli Ministry of Defense increased the demand
for our products in this market. During the first six months of 2008 the demand for our
products decreased compared to the same period of 2007, but was significantly higher than
in 2006. We believe that the demand for our products from the Israeli Ministry of Defense
will remain stable at the current levels in the remainder of 2008 and for the beginning of
2009.

12

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As
of August 11, 2008, we had a backlog of firm orders from the Israeli Ministry of Defense
of approximately $4.3million, including orders of approximately $1.6million that we received subsequent to June 30, 2008. In the six months ended June 30,
2008 and 2007, sales to the Israeli Ministry of Defense were $2.8 millionand $4.8
million, accounting for36.6% and 50.6% of our sales, respectively.

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

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

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

The
following table presents details of our export military sales during the three and six
months ended June 30, 2008 and 2007:

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

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

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

Backlog.
          We had approximately $4.4 million of unfilled customer orders at June 30,
          2008, compared to $7.0 million of unfilled customer orders at June 30, 2007. As
          of June 30, 2008, our backlog included approximately $2.7 million that was
          attributable to orders from the Israeli Ministry of Defense, approximately $100,000 that was
          attributable to orders from civilian and military customers in Africa and Asia,
          approximately $870,000 that was attributable to orders from the local civilian market, and
          approximately $750,000 that was attributable to orders from civilian and
          military customers in South America. The decrease in our backlog is primarily
          the result of decrease in orders from the Israeli Ministry of Defense.

13

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# Operations in the Erez
Industrial Zone

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

The
Israeli Governments decision to evacuate the Gaza Strip was supported by certain
resolutions, including the Evacuation Compensation Law that was adopted by the
Israeli Parliament to compensate the Israeli Gaza Strip settlers as well as business and
property owners in the Gaza Strip and in the Erez Industrial Zone. In February 2006, three
of our subsidiaries, Export Erez, Mayotex and Achidatex filed claims for compensation
pursuant to the Evacuation Compensation Law. In 2005, we recorded a receivable from the
Israeli Government of $217,477 related to our direct moving costs and loss on abandoned
properties.

In
2006, we were notified that we would receive advance payments in the aggregate amount of
$523,000. We applied this payment against the receivable established in 2005 and recorded
the excess payment of $240,658, net of taxes, as extraordinary gain.

On February 18, 2008 Export Erez, Mayotex and Achidatex signed definitive agreements with SELA, a
government agency, established pursuant to the Evacuation Compensation Law, for compensation of
approximately $6.0 million, net of 5% related taxes, receipt of the previous advance payment and the
other associated costs. The Company received and recorded gain in the amount of $4,910,541 during the six
months ended June 30, 2008. The change in the dollar amount from the amount reported in the first
quarter, resulted from the appreciation of the NIS against the U.S. dollar.

Results of Operations

Key Indicators

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

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

Net
Revenues. Net revenues for the three months ended June 30, 2008 decreased to $4,477,086 from $5,650,978 in the
         same period in 2007, a decrease of 20.7%. The decrease is primarily attributable to a decrease of
     approximately $2 million in our major market segment, the local military market, which was offset in
     part by an increase of $790,900 in our local civilian market and by a $141,272 increase in our export
           military sales. The decreased revenues in our local military market segment is attributable to a
general decrease in demand from the Israeli Ministry of Defense.

In
the three months ended June 30, 2008, Achidatex, Export Erez and Owen Mills accounted for
$972,549 or 21.7%, $3,180,382 million or 71.1%, and $324,155 or 7.2% of our revenues,
respectively. In the three months ended June 30, 2007, Achidatex, Export Erez and Owen
Mills accounted for $1,845,721 or 32.7%, $3,575,207 or 63.3%, and $230,050 or 4% of our
revenues, respectively.

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

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

14

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Gross
profit. Gross profit for the three months ended June 30, 2008 was $1.2 million
compared to $2.4 million for the same period in 2007. This decrease in gross profit is
primarily attributable to the decrease in revenues, resulting in the increased absorption
of fixed manufacturing expenses allocated to lower sales during the three months ended
June 30, 2008 compared to the same period in 2007. In the three months ended June 30,
2008, Achidatex, Export Erez, and Owen Mills accounted for 45.0%, 46.0% and 9.0%, of our
gross profit, respectively. In the three months ended June 30, 2007, Achidatex, Export
Erez, and Owen Mills accounted for 33.9%, 61.6% and 4.5%, of our gross profit,
respectively.

Our
gross profit margin for the three months ended June 30, 2008 declined to 26.3% compared to
41.9% for the three months ended June 30, 2007 primarily due to the decrease in revenues,
resulting in a high level of fixed manufacturing expensesallocated to lower sales,
and a change in our product mix to products having lower margins. Achidatexs gross
margin for the three months ended June 30, 2008 was 34.8% compared to 37.2% for the three
months ended June 30, 2007. Export Erezs gross margin for the three months ended
June 30, 2008 was 17.2% compared to 39.6% for the three months ended June 30, 2007. Owen
Mills gross margin for the three months ended June 30, 2008 was 33.5% compared to
19.4% for the three months ended June 30, 2007.

Selling
Expenses. Selling expenses for the three months ended June 30, 2008 increased to
$372,690 from $314,796 for the same period in 2007. The increase in our selling expenses
was attributable to the increase in the export sales and to higher commission paid on
these sales.Achidatexs selling expenses for the three months ended June 30,
2008 were $96,551 compared to $32,271 for the three months ended June 30, 2007. Export
Erezs selling expenses for the three months ended June 30, 2008 were $270,695
compared to $280,999 for the three months ended June 30, 2007. Owen Mills selling
expenses for the three months ended June 30, 2008 were $5,444 compared to $1,526 for the
three months ended June 30, 2007.

General
and Administrative Expenses. General and administrative expenses for the three months
ended June 30, 2008 decreased to $602,904 from $658,508 for the same period in 2007,
mainly as a result of the decreased scope of our operations.

Financial
Expenses. We had financial expense, net of $151,243 for the three months ended June
30, 2008 as compared to financial income, net of $36,203 for the same period in 2007. The
expense is primarily due to the change in the exchange rate of U.S. Dollar versus the NIS,
which resulted in a loss of $134,483 for the three months ended June 30, 2008 and a gain
of $82,743 for the same period in 2007.

Other
Income (Expenses), Net. We had other expense, net for the three months ended June 30,
2008 of $56,189 as compared to other income, net of $35,580 for the same period in 2007.
Our other expense in 2007 is primarily attributable to loss from sales of highly liquid
tradable securities managed by professional broker firms.

Income
Tax Expense.     Our income tax expense for the three months ended June 30, 2008 was $9,310. Although we had a net loss
    from operating activities on a consolidated basis, Achidatex had taxable income for which tax expenses
   were provided, presented net of a tax benefit received by Export Erez. We did not record a tax benefit
related to the loss incurred by our U.S. operation due to our deferred tax valuation allowance.

Extraordinary
Income.For the three months ended June 30, 2008, we recognized extraordinary income
of $228,703, net of tax. We did not recognized any extraordinary income in the comparable
2007 period. This amount was received by Export Erez, Mayotex and Achidatex, as
compensation from the Israeli Government pursuant to the Evacuation Compensation Law.

Minority
Interest. Minority interest in the profits and losses of one of our consolidated
subsidiaries represents the minority shareholders share of the profits or losses in
such majority owned subsidiary. For the three months ended June 30, 2008, we recorded
minority interests in profits of $18,042 compared to minority interests in
profits of $99,157 for the three months ended June 30, 2007.

15

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Net
Income (Loss). In the three months ended June 30, 2008, we had consolidated net income
of $195,087 compared to consolidated net income of $648,316 for the three months ended
June 30, 2007. Achidatexs net income for the three months ended June 30, 2008 was
$161,647 compared to net income of $313,997 for the three months ended June 30, 2007.
Export Erezs net loss for the three months ended June 30, 2008 was $18,106 compared
to net income of $407,067 for the three months ended June 30, 2007. Owen Mills net
loss for the three months ended June 30, 2008 was $11,336 compared to a net loss of $971
for the three months ended June 30, 2007. Defense Industries net income for the
three months ended June 30, 2008 was $62,882 compared to a net loss of $71,777 for the
three months ended June 30, 2007.

Six Months Ended June 30,
2008 Compared with Six Months Ended June 30, 2007

Net
Revenues.     Net revenues for the six months ended June 30, 2008 decreased to $7.6 million from $9.6 million in the
         same period in 2007, a decrease of 20.8%. The decrease is primarily attributable to a decrease of
      approximately $2.2 million in our local military market segment and the loss of our customer in the
      export civilian market which was offset in part by an increase of approximately $1.1 million in our
    local civilian market. The decreased revenues in our local military market segment is attributable to a
general decrease in demand from the Israeli Ministry of Defense.

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

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

Gross
profit for the six months ended June 30, 2008 was $1.9 million compared to $3.7 million for the
same period in 2008. This decrease in gross profit is principally attributable to the
decrease in revenues resulting in the increased absorption of fixed manufacturing expenses
allocated to lower sales, and a product mix with lower margins. In the six months ended
June 30, 2008, Achidatex, Export Erez, and Owen Mills accounted for 35.4%, 57.8% and 6.8%,
of our gross profit, respectively. In the six months ended June 30, 2007, Achidatex,
Export Erez, and Owen Mills accounted for 33.3%, 62.6% and 4.1%, of our gross profit,
respectively.

Our
gross profit margin for the six months ended June 30, 2008 declined to 25.3% compared to
38.3% for the six months ended June 30, 2007 primarily due to the decrease in
revenues, resulting in a high level of fixed manufacturing expenses allocated to
lower sales and a change in our product mix to products having lower margins.
Achidatexs gross margin for the six months ended June 30, 2008 was 25.2% compared to
31.8% for the six months ended June 30, 2007. Export Erezs gross margin for the six
months ended June 30, 2008 was 20.6% compared to 35.7% for the six months ended June 30,
2007. Owen Mills gross margin for the six months ended June 30, 2008 was 21.9%
compared to 16.7% for the six months ended June 30, 2007.

Selling
Expenses. Selling expenses for the six months ended June 30, 2008 decreased to
$529,834from $554,561 for the same period in 2007. The decrease in our selling
expenses was attributable to lower commissions paid on the export sales.Achidatexs selling expenses for the six months ended June 30, 2008 were $159,065
compared to $108,634 for the six months ended June 30, 2007. Export Erezs selling
expenses for the six months ended June 30, 2008 were $362,498 compared to $437,458 for the
six months ended June 30, 2007. Owen Mills selling expenses for the six months ended
June 30, 2008 were $8,271 compared to $8,469 for the six months ended June 30, 2007.

16

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General
and Administrative Expenses. General and administrative expenses for the six months
ended June 30, 2008 increased to $1,141,229 from $1,072,401 for the same period in 2007,
primarily due to an increase in our provisions to doubtful accounts receivables and costs
associated with our compliance with the requirements of the Sarbanes-Oxley Act of 2002.

Financial
Expenses. We had financial expenses, net of $266,501 for the six months ended June 30,
2008 as compared to financial expenses, net of $48,069 for the same period in 2007. The
increase is primarily due to the change in the U.S. Dollar exchange rate versus the NIS,
which resulted in a expense of $261,540 for the six months ended June 30, 2008 and a gain
of $32,176 for the six months ended June 30, 2007.

Other
Income (Expenses), Net. We had other expense, net for the six months ended June 30,
2008 of $96,669 as compared to other income, net of $77,584 for the same period in 2007.
Our other expense in 2008 is attributable to loss from sales of tradable securities.

Income
Tax Expense. Our income tax expense for the six months ended June 30, 2008 was $89,004. Although we had a net loss
    from operating activities on a consolidated basis, Achidatex had taxable income for which tax expenses
    were provided, presented net of a tax benefit received by Export Erez. We did not record a tax benefit
related to the loss incurred by our U.S. operation due to our deferred tax valuation allowance.

Extraordinary
Income.For the six months ended June 30, 2008, we recognized and recorded
extraordinary income of $4,910,541, net of tax. This amount was received by our three
subsidiaries, Export Erez, Mayotex and Achidatex, as compensation from the Israeli
Government pursuant to the Evacuation Compensation Law.

Minority
Interest. Minority interest in the profits and losses of one of our consolidated
subsidiaries represents the minority shareholders share of the profits or losses in
such majority owned subsidiary. For the six months ended June 30, 2008, we recognized and
recorded minority  interest in profit of $59,459 compared to  minority  interest in profit
of $122,267 for the six months ended June 30, 2007.

Net
Income. In the six months ended June 30, 2008, our consolidated net income was $4,647,751
million compared to net income of $1,052,226 for the six months ended June 30, 2007.
Achidatexs net income for the six months ended June 30, 2008 was $397,318 compared
to net income of $387,17 for the six months ended June 30, 2007. Export Erezs net
income for the six months ended June 30, 2008 was $4,260,854 million compared to net income of
$791,275 for the six months ended June 30, 2007. Owen Mills net loss for the six
months ended June 30, 2008 was $91,626 compared to a net loss of $62,742 for the six
months ended June 30, 2007. Defense Industries net income for the six months ended
June 30, 2008 was $81,199 compared to net loss of $63,485 for the six months ended June
30, 2007.

# Liquidity and Capital
Resources

As
of June 30, 2008, we had $1.8 million in cash and cash equivalents, $4.4 million in
trading securities, $2.0 million in bank deposits and working capital of $12.5 million as
compared to $1.1 million in cash and cash equivalents, $2.9 million in trading securities
and working capital of $6.7 million at December 31, 2007. The improvement in our liquidity
and capital resources is primarily attributable to the extraordinary income of $4.9
million, net of tax, that we recorded during the six months ended June 30, 2008 when our
three subsidiaries, Export Erez, Mayotex and Achidatex, received compensation from the
Israeli Government with respect to the evacuation of the Gaza Industrial Zone.

17

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# Cash Flows

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

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

Net
cash used in operating activities was $1.9 million for the six months ended June 30, 2008
as compared to net cash provided by operating activities of $753,997 for the same period
in 2007. This was primarily attributable to net loss from operating activities of
$262,790, an $1.7 million increase in inventories in order to support future sales, new
product lines and also reflects the production of a significant amount of finished and
semi finished products that were delivered at the beginning of the third quarter, increase
in trading securities of $1.1 million, an increase in other current assets of $152,008,
and decrease in accounts payable of $107,757 offset by a decrease in accounts receivable
of $511,218, depreciation of $288,893 and an increase in deffered income of
$461,013.

Net
cash used in investing activities was $2.0 million for the six months ended June 30, 2008 as compared to $266,197 in the six months ended June 30, 2007. During the six months ended
June 30, 2008, purchases of fixed assets were $125,682 and $1.9 million comprises bank
deposits compared to purchases of fixed assets of $292,762 during the six months ended
June 30, 2007.

Net
cash used in financing activities was $309,460 for the six months ended June 30, 2008 as
compared to $734,003 of net cash used in financing activities for the six months ended
June 30, 2007. During the six months ended June 30, 2008, we decreased our short-term debt
by $69,361 and we repaid $288,312 of long-term debt.

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

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

We
anticipate that our research and development expenses in 2008 will reflect an annualized
spending of approximately $100,000per year.

On
January 17, 2008 we obtained a short-term credit facility of $250,000 from Bank Leumi USA.
The interest rate for such credit facility is Libor + 2%. The credit facility is due
November 17, 2008. As of June 30, 2008 the credit facility was utilized in full. On June 2,
2008 we obtained a short-term credit facility of $250,000 from Bank Leumi USA. The
interest rate for such credit facility is Libor + 2%. The credit facility is due December
31, 2008. As of June 30, 2008, the credit facility had not been utilized.

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

# Foreign Currency
Exchange Risk

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

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

18

---

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In the year ended December 31, 2007,
the inflation rate in Israel was 2.9% and the NIS appreciated in relation to the U.S.
dollar at a rate of 8.97%, from NIS 4.225 per $1 on December 31, 2006 to NIS 3.846
per $1 on December 31, 2007. In the six month period ended June 30, 2008, the inflation in
Israel was 2.34% while the NIS appreciated in relation to the U.S. dollar at a rate of
12.84%. We will be adversely affected if the U.S. dollar, the standard currency used in
our export sales, continues to depreciate against the Euro or the NIS, the currencies used
for many of our purchases of raw material and labor costs.

We
did not enter into any foreign exchange contracts or hedging transactions in the six
months ended June 30, 2008.

# Contractual Obligations

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

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

# Critical Accounting
Policies

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

Recent Accounting
Pronouncements

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

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

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

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

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

Not
applicable.

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

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

# Plan for Remediation of
Material Weaknesses

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

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

# Changes in Internal
Control over Financial Reporting

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

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# PART II  OTHER
INFORMATION:

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

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

In
February 2006, three of our subsidiaries, Export Erez, Mayotex and Achidatex filed claims
for compensation pursuant to the Evacuation Compensation Law. In January 2007 we received
advanced payments in the amounts of approximately $523,000.  On
February 18, 2008 our three subsidiaries, Export Erez, Mayotex and Achidatex signed
definitive agreements with SELA, a government agency established pursuant to the
Evacuation Compensation Law, for compensation of approximately $6 million, net of the
$523,000 we received in 2007. The net compensation payments after our payment of
approximately $600,000 of expenses was recognized as an extraordinary gain net of the 5%
taxes payment on such payment.

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

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

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

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

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

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

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

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

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

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

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# SIGNATURES

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

|Dated: August 14, 2008 |  | DEFENSE INDUSTRIES INTERNATIONAL, INC.By: /s/ Joseph Postbinder
Joseph PostbinderChairman and Chief Executive Officer
|---------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------

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