---

---

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

# FORM 10-QSB

|x | Quarterly
 report  under  Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 for the
 quarterly period ended September 30, 2007
|- | ------------------------------------------------------------------------------------------------------------------------------------------

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

Commission file number:
000-30105

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

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

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

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

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

Yes  x  No o

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

Yes o No x

As of November 12, 2007, the Issuer
had 28,867,272 shares of Common Stock, $.0001 par value per share, outstanding.

Transitional
Small Business Disclosure Format (check one):

Yes o No x



---

---



# DEFENSE INDUSTRIES
INTERNATIONAL, INC. AND SUBSIDIARIES

# INDEX

|                                |                                                                     | Page
|------------------------------- | ------------------------------------------------------------------- | ----
|
|
|
|
|Part I - Financial Information: |                                                                    
|                               
|Item 1.                         | Condensed Consolidated Balance Sheets as of September 30, 2007      |     
|                                | (Unaudited) and December 31, 2006                                   | 1   
|                               
|                                | Condensed Consolidated Statements of Operations and                
|                                | Comprehensive Income (Loss) for the Three and Nine Months          
|                                | Ended September 30, 2007 and 2006 (Unaudited)                       | 3   
|                               
|                                | Condensed Consolidated Statements of Cash Flows                    
|                                | for the Nine Months Ended September 30, 2007 and 2006 (Unaudited)   | 5   
|                               
|                                | Notes to Condensed Consolidated Financial Statements (Unaudited)    | 7   
|                               
|                                | Item 2. Management's Discussion and Analysis or Plan of Operation   | 13  
|                               
|                                | Item 3A. Controls and Procedures                                    | 23  
|                               
|                                | Part II - Other Information:                                       
|                               
|                                | Item 1. Legal Proceedings                                           | 25  
|                               
|                                | Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 25  
|                               
|                                | Item 3. Default Upon Senior Securities                              | 25  
|                               
|                                | Item 4. Submission of Matters to a Vote of Security Holders         | 25  
|                               
|                                | Item 5. Other Information                                           | 25  
|                               
|                                | Item 6. Exhibits and Reports on Form 8-K                            | 25  

i

---

---

# DEFENSE INDUSTRIES INTERNATIONAL,
INC. 
AND SUBSIDIARY
COMPANIES

# CONDENSED CONSOLIDATED
BALANCE SHEETS AS OF SEPTEMBER 30,
2007 (UNAUDITED) AND DECEMBER 31, 2006

ASSETS

|                                                            | September 30,
2007 | December 31,
2006
|----------------------------------------------------------- | ------------------ | -----------------
|
|
|
|
|CURRENT ASSETS                                              |                    |                  
|Cash and cash equivalents                                   |                    |                  
|Accounts receivable, net of allowance for doubtful accounts |                    |                  
|of $217,505 and $206,954, respectively                      |                    |                  
|Accounts receivable - related parties, net of allowance for |                    |                  
|doubtful accounts of $112,009 and $106,389, respectively    |                    |                  
|Inventories                                                 |                    |                  
|Trading securities                                          |                    |                  
|Deferred taxes                                              |                    |                  
|Other current assets                                        |                    |                  
|                                                            |                    |                  
|Total Current Assets                                        |                    |                  
|                                                            |                    |                  
|                                                            |                    |                  
|PROPERTY, PLANT AND EQUIPMENT, NET                          |                    |                  
|                                                            |                    |                  
|                                                            |                    |                  
|OTHER ASSETS                                                |                    |                  
|Funds in respect of employee rights upon retirement         |                    |                  
|Deferred taxes                                              |                    |                  
|Intangible assets, net                                      |                    |                  
|                                                            |                    |                  
|Total Other Assets                                          |                    |                  
|                                                            |                    |                  
|                                                            |                    |                  
|TOTAL ASSETS                                                |                    |                  
|                                                            |                    |                  

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

1

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC. 
AND SUBSIDIARY
COMPANIES

# CONDENSED CONSOLIDATED
BALANCE SHEETS

# LIABILITIES AND
SHAREHOLDERS EQUITY

|                                                     | September 30,
2007 | December 31,
2006
|---------------------------------------------------- | ------------------ | -----------------
|
|
|
|
|CURRENT LIABILITIES                                  |                    |                  
|Accounts payable                                     |                    |                  
|Short-term debt                                      |                    |                  
|Common stock to be issued                            |                    |                  
|Embedded derivatives at fair value                   |                    |                  
|Other current liabilities                            |                    |                  
|                                                     |                    |                  
|Total Current Liabilities                            |                    |                  
|                                                     |                    |                  
|                                                     |                    |                  
|LONG-TERM LIABILITIES                                |                    |                  
|Long-term portion of debt                            |                    |                  
|Liability for employee rights upon retirement        |                    |                  
|Deferred taxes                                       |                    |                  
|Common stock to be issued                            |                    |                  
|Embedded derivatives at fair value                   |                    |                  
|                                                     |                    |                  
|Total Long-Term Liabilities                          |                    |                  
|                                                     |                    |                  
|                                                     |                    |                  
|TOTAL LIABILITIES                                    |                    |                  
|                                                     |                    |                  
|                                                     |                    |                  
|Minority interest                                    |                    |                  
|                                                     |                    |                  
|COMMITMENTS AND CONTINGENCIES                        |                    |                  
|                                                     |                    |                  
|SHAREHOLDERS' EQUITY                                 |                    |                  
|Preferred stock, $.0001 par value, 50,000,000 shares |                    |                  
|authorized, none issued and outstanding              |                    |                  
|Common stock, $.0001 par value, 250,000,000 shares   |                    |                  
|authorized, 28,867,272 and 28,793,198, respectively, |                    |                  
|issued and outstanding                               |                    |                  
|Additional paid-in capital                           |                    |                  
|Warrants                                             |                    |                  
|Retained earnings                                    |                    |                  
|Cumulative effect of adopting new accounting         |                    |                  
|pronouncement (*)                                    |                    |                  
|Accumulated other comprehensive loss                 |                    |                  
|                                                     |                    |                  
|Total Shareholders' Equity                           |                    |                  
|                                                     |                    |                  
|                                                     |                    |                  
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY           |                    |                  
|                                                     |                    |                  

(*)
          see Note 1 G.

2

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC. 
AND SUBSIDIARY
COMPANIES

# CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS 
AND COMPREHENSIVE
INCOME (LOSS) FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 
(UNAUDITED)

|                                                    | For the Three Months
Ended September 30, | For the Nine Months
Ended September 30,
|--------------------------------------------------- | ---------------------------------------- | ---------------------------------------
|
|
|
|
|NET REVENUES                                        |                                          |                                        
|                                                    |                                          |                                        
|COST OF SALES                                       |                                          |                                        
|                                                    |                                          |                                        
|                                                    |                                          |                                        
|GROSS PROFIT                                        |                                          |                                        
|                                                    |                                          |                                        
|OPERATING EXPENSES                                  |                                          |                                        
|Selling                                             |                                          |                                        
|General and administrative                          |                                          |                                        
|                                                    |                                          |                                        
|Total Operating Expenses                            |                                          |                                        
|                                                    |                                          |                                        
|                                                    |                                          |                                        
|INCOME (LOSS) FROM OPERATIONS                       |                                          |                                        
|                                                    |                                          |                                        
|                                                    |                                          |                                        
|OTHER INCOME (EXPENSES)                             |                                          |                                        
|Financial income (expenses), net                    |                                          |                                        
|Gain on fair value adjustment to embedded           |                                          |                                        
|derivatives                                         |                                          |                                        
|Other income (expenses), net                        |                                          |                                        
|                                                    |                                          |                                        
|Total Other Income                                  |                                          |                                        
|                                                    |                                          |                                        
|                                                    |                                          |                                        
|INCOME (LOSS) BEFORE INCOME TAXES                   |                                          |                                        
|                                                    |                                          |                                        
|Less: income tax (expenses) benefit                 |                                          |                                        
|                                                    |                                          |                                        
|                                                    |                                          |                                        
|Income (loss) before minority interest in income in |                                          |                                        
|subsidiary                                          |                                          |                                        
|                                                    |                                          |                                        
|Minority interest income (loss)                     |                                          |                                        
|                                                    |                                          |                                        
|                                                    |                                          |                                        
|NET INCOME (LOSS)                                   |                                          |                                        
|                                                    |                                          |                                        
|OTHER COMPREHENSIVE INCOME (LOSS)                   |                                          |                                        
|Foreign currency translation income (loss), net of  |                                          |                                        
|minority interest portion                           |                                          |                                        
|                                                    |                                          |                                        
|Other comprehensive income (loss) before tax        |                                          |                                        
|Income tax benefit (expenses) related to items of   |                                          |                                        
|other comprehensive income                          |                                          |                                        
|                                                    |                                          |                                        
|                                                    |                                          |                                        
|TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX |                                          |                                        
|                                                    |                                          |                                        

3

---

---

# DEFENSE INDUSTRIES
INTERNATIONAL, INC. 
AND SUBSIDIARY
COMPANIES

# CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME (LOSS)
(UNAUDITED)

|                                                                       | For the Three Months
Ended September 30, | For the Nine Months
Ended September 30,
|---------------------------------------------------------------------- | ---------------------------------------- | ---------------------------------------
|
|
|
|
|COMPREHENSIVE INCOME (LOSS)                                            |                                          |                                        
|                                                                       |                                          |                                        
|                                                                       |                                          |                                        
|Net income (loss) 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 NINE MONTHS
ENDED SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)

|                                                                            | For the Nine Months
Ended September 30,
|--------------------------------------------------------------------------- | ---------------------------------------
|
|
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                       |                                        
|Net income (loss)                                                           |                                        
|Adjustments to reconcile net income to net cash provided by (used in)       |                                        
|operating activities:                                                       |                                        
|Items not effecting cash:                                                   |                                        
|Depreciation and amortization                                               |                                        
|Gain from sale of property, plant and equipment                             |                                        
|Provision for doubtful accounts                                             |                                        
|Gain on fair value adjustment to embedded derivatives                       |                                        
|Net realized and unrealized gain on marketable securities                   |                                        
|Minority interest in income (loss) of subsidiary                            |                                        
|Gain from erosion of long-term loans                                        |                                        
|(Increase) decrease in deferred taxes                                       |                                        
|Changes in assets and liabilities:                                          |                                        
|(Increase) decrease in funds in respect of employee rights upon  retirement |                                        
|Increase in accounts receivable                                             |                                        
|Decrease in other assets                                                    |                                        
|(Increase) in inventories                                                   |                                        
|(Increase) decrease in trading securities                                   |                                        
|Increase in accounts payable                                                |                                        
|Increase (decrease) in other liabilities                                    |                                        
|Increase (decrease) in liability for employee rights upon retirement        |                                        
|                                                                            |                                        
|Net cash provided by (used in) operating activities                         |                                        
|                                                                            |                                        
|                                                                            |                                        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                       |                                        
|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:                                       |                                        
|Proceeds from (payments on) short-term debt, net                            |                                        
|Payments on long-term debt                                                  |                                        
|Proceeds from long -term loans                                              |                                        
|                                                                            |                                        
|Net Cash (used in) provided by financing activities                         |                                        
|                                                                            |                                        
|                                                                            |                                        
|EFFECT OF CHANGES IN EXCHANGE RATES ON CASH                                 |                                        
|                                                                            |                                        
|                                                                            |                                        
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                   |                                        
|                                                                            |                                        
|CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                             |                                        
|                                                                            |                                        
|                                                                            |                                        
|CASH AND CASH EQUIVALENTS - END OF PERIOD                                   |                                        
|                                                                            |                                        
|                                                                            |                                        
|INTEREST PAID                                                               |                                        
|                                                                            |                                        
|                                                                            |                                        
|TAXES PAID                                                                  |                                        
|                                                                            |                                        

5

---

---

# DEFENSE INDUSTRIES INTERNATIONAL,
INC. 
AND SUBSIDIARY
COMPANIES

# CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)

# SUPPLEMENTAL SCHEDULE OF
NON-CASH FINANCING ACTIVITIES:

On May 1, 2007, the Company issued
74,074 shares of common stock, having a fair value of $40,000 at date of issuance, to the
former owner of Owen Mills. The shares were issued pursuant to the agreement signed on
February 28, 2005 to acquire the business of Owen Mills.

6

---

---

|DEFENSE
INDUSTRIES INTERNATIONAL, INC. 
AND
SUBSIDIARY COMPANIES 
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
SEPTEMBER
30, 2007
|------------------------------------------------------------------------------------------------------------------------------------------

|
|

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

| | A. | The
accompanying unaudited interim consolidated financial statements as of
               September 30, 2007 and for the three and nine month periods then ended
(the                Interim Financial Statements) were prepared in a
condensed form in                accordance with the instructions for Form 10-Q and,
therefore, do not include                all disclosures necessary for a complete
presentation of financial condition,                results of operations, cash flows and
all the data and notes which are required                when preparing annual financial
statements, in conformity with generally                accepted accounting principles
accepted in the United States.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | The
accounting principles used in the presentation of the Interim Financial
               Statements are consistent with those principles used in the presentation
of the                latest annual financial statements. All significant accounting
policies have                been applied consistently with year ended December 31, 2006,
as noted in G below.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | The
preparation of the Interim Financial Statements requires management to
               make estimates and assumptions that affect the reported amounts of assets
and                liabilities, the disclosure of contingent assets and liabilities at
the date of                the financial statements, and the reported amounts of revenues
and expenses                during the reported period. Actual results could differ from
those estimates. In                the opinion of management, all adjustments (consisting
of normal recurring                accruals) considered necessary for fair presentation
of the Interim Financial                Statements have been included. The results of
operations for the three and nine                months period ended September 30, 2007,
are not necessarily indicative of the                results that may be expected for the
year ending December 31, 2007. The Interim                Financial Statements should be
read in conjunction with the Companys                annual financial statements as
of December 31, 2006 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, its 76% owned subsidiary, Achidatex Nazareth Elite
(1997) Ltd., for all periods presented and Owen Mills (collectively, the Company).
The minority interest represents the minority shareholdersproportionate share of
Achidatex Nazareth Elite (1997) Ltd. All intercompany accounts and transactions have been
eliminated in consolidation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

---

---

|DEFENSE
INDUSTRIES INTERNATIONAL, INC. 
AND
SUBSIDIARY COMPANIES 
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
SEPTEMBER
30, 2007
|------------------------------------------------------------------------------------------------------------------------------------------

|
|

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

| | Basic
and diluted earning per common share is presented in conformity with SFAS No.128, Earnings
Per Share for all periods presented. Basic earnings per common share is computed by
dividing net income, by the weighted average number of shares of outstanding common
shares. Diluted earnings per common share is computed by dividing net income, by the
weighted average number of shares of outstanding common shares adjusted to include
incremental common shares that would have been outstanding if potentially dilutive common
shares had been issued.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Recent
accounting pronouncements
| | -- | --------------------------------

| | In
March 2007, the Financial Accounting Standards Board (FASB) ratified Emerging
Issues Task Force (EITF) Issue No. 06-10, Accounting for Collateral
Assignment Split-Dollar Life Insurance Arrangements (EITF No. 06-10).
EITF No. 06-10 requires an employer to recognize a liability for the postretirement
benefit related to a collateral assignment split-dollar life insurance arrangement in
accordance with either Statement of Financial Accounting Standards (SFAS) No.
106 or Accounting Principles Board (APB) Opinion No. 12 if the employer has
agreed to maintain a life insurance policy during the employees retirement or
provide the employee with a death benefit. EITF No. 06-10 also requires an employer to
recognize and measure an asset based on the nature and substance of the collateral
assignment split-dollar life insurance arrangement. EITF No. 06-10 is effective for
fiscal years beginning after December 15, 2007 with early adoption permitted. The Company
is evaluating the impact that the adoption of EITF No. 06-10 will have on its financial
statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. | Accounting for registration payment
arrangements
| | -- | ------------------------------------------------

| | The
Company adopted as of January 1, 2007, FSP EITF 00-19-2, Accounting for
Registration Payment Arrangements (FSP), which addresses an issuers
accounting for registration payment arrangements. This FSP specifies that the contingent
obligation to make future payments or otherwise transfer consideration under a
registration payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement, should be separately recognized
and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. This
FSP further clarifies that a financial instrument subject to a registration payment
arrangement should be accounted for in accordance with other applicable generally
accepted accounting principles (GAAP) without regard to the contingent obligation to
transfer consideration pursuant to the registration payment arrangement.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of our adoption of the FSP, the Interim Financial
Statements includes a cumulative-effect adjustment to the opening balance of retained
earnings, liabilities and equity as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

---

---

|DEFENSE
INDUSTRIES INTERNATIONAL, INC. 
AND
SUBSIDIARY COMPANIES 
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
SEPTEMBER
30, 2007
|------------------------------------------------------------------------------------------------------------------------------------------

|
|

| |                   | As of January 1, 2007
| | ----------------- | ---------------------
|
|
|
|
| | Total liabilities |                      
| |                   |                      
| | Retained earning  |                      
| |                   |                      
| | Warrants          |                      

|NOTE 2 | INVENTORIES
|------ | -----------

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

| |                  | September 30,
2007 | December 31,
2006
| | ---------------- | ------------------ | -----------------
|
|
|
|
| | Raw materials    |                    |                  
| | Work in progress |                    |                  
| | Finished goods   |                    |                  
| |                  |                    |                  
| |                  |                    |                  
| |                  |                    |                  

9

---

---

|DEFENSE
INDUSTRIES INTERNATIONAL, INC. 
AND
SUBSIDIARY COMPANIES 
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
SEPTEMBER
30, 2007
|------------------------------------------------------------------------------------------------------------------------------------------

|
|

|NOTE 3 | SEGMENT
INFORMATION AND CONCENTRATIONS
|------ | --------------------------------------

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

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

|                           | Civilian | Military |  
|-------------------------- | -------- | -------- | -
|
|
|
|
|For the nine months        |          |          |  
|ended September 30, 2007:  |          |         
|                           |          |         
|Revenue from sales         |          |          | $
|Income from operations     |          |          |  
|                           |          |         
|For the nine months        |          |         
|ended September 30, 2006:  |          |         
|                           |          |         
|Revenue from sales         |          |          | $
|Loss from operations       |          |          |  
|                           |          |         
|For the three months ended |          |         
|September 30, 2007:        |          |         
|                           |          |         
|Revenue from sales         |          |          | $
|Income from operations     |          |          |  
|                           |          |         
|For the three months ended |          |         
|September 30, 2006:        |          |         
|                           |          |         
|Revenue from sales         |          |          | $
|Loss from operations       |          |          |  

10

---

---

|DEFENSE
INDUSTRIES INTERNATIONAL, INC. 
AND
SUBSIDIARY COMPANIES 
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
SEPTEMBER
30, 2007
|------------------------------------------------------------------------------------------------------------------------------------------

|
|

| | B. | Geographic
Areas  Financial Data: Net Sales
| | -- | --------------------------------------------

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

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

|                            | For the three months
ended September 30 | For the nine months
ended September 30
|--------------------------- | --------------------------------------- | --------------------------------------
|
|
|
|
|Customer A (Military Local) |                                         |                                       

|NOTE 4 | Income
taxes
|------ | ------------

| | In
July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 48,
Accounting for Uncertainty in Income Taxes  an Interpretation of FASB
Statement No. 109, (FIN 48), which clarifies the accounting for uncertain income tax
positions. This interpretation prescribes a financial statement recognition threshold and
measurement attribute for any tax position taken or expected to be taken in a tax return.
The interpretation also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
January 1, 2007, the Company adopted FIN 48. Upon adoption, the Company determined that
there were no unrecognized income tax benefits or liabilities. The Company recognizes
accrued interest and penalties related to uncertain tax positions in income tax expense.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of January 1, 2007, the Companys Israeli subsidiaries income tax returns filed with
the Israeli Tax Authorities prior to 2003, were no longer subject to examination by the
Israeli tax authorities. During 2006, the Israeli tax authorities commenced an
examination of certain of the subsidiaries income tax returns for the years 2003
through 2005. The Company did not anticipate at January 1, 2007 or during the first
quarter of 2007, that the examination commenced in 2006 would have a material effect on
its financial position.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

---

|DEFENSE
INDUSTRIES INTERNATIONAL, INC. 
AND
SUBSIDIARY COMPANIES 
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
SEPTEMBER
30, 2007
|------------------------------------------------------------------------------------------------------------------------------------------

|
|

| | During
the second quarter of 2007, the Israeli Tax authorities proposed certain adjustments to
the subsidiaries tax positions related to the allocation of costs within the group
and management fees made by the Company. During the period ended September 30,
2007, each of Mayotex Ltd. and Export Erez Ltd. reached a settlement with the Israeli Tax
Authorities regarding their tax positions from 2003 through 2005 for an aggregate of
$214,620 (including accumulated interest) related to allocation of costs within the group
and management fees made by the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of these tax settlements and based upon the enforcement of Israeli statutory tax
regulations, the Company recognized a tax expense and a current tax liability of
approximately $41,000 (including anticipated interest), since it is more likely than not
that the settlement achieved will be sustained by the Israeli Tax Authorities with
respect to the Companys other subsidiaries in Israel and for all the Israeli
subsidiaries for 2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Of
the amounts mentioned above, $207,620 was recognized during the second quarter of 2007
and $48,000 was recognized during the third quarter of 2007.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 5 | Significant
related party transactions
|------ | --------------------------------------

| | Pursuant
to an employment agreement with the President of the Company, he is entitled to
additional compensation of 1.5% of the growth in the Companys total sales since
2002, by cash payment or at his discretion, by receiving options to purchase shares of
common stock in lieu of cash.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of September 30, 2007, the President was entitled to bonus compensation in the amount of
$104,989, or 104,989 options, each exercisable for two shares of the Companys
common stock, in lieu of such compensation, which may be realized over a vesting period
of three years (having a fair value of $117,588 as of September 30, 2007). The Interim
Financial Statements include a liability of $104,989 for such bonus.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

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# Item 2.
Managements Discussion and Analysis or Plan of Operation

This
information should be read in conjunction with the condensed consolidated financial
statements and notes included elsewhere in this Quarterly Report on Form 10-QSB and the
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,
2006 contained in our 2006 Annual Report on Form 10-KSB. The discussion and analysis which
follows may contain trend analysis and other forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with
respect to future events and financial results. These include statements regarding our
earnings, projected growth and forecasts, and similar matters that are not historical
facts.

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

# Critical Accounting
Policies

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

Revenue
Recognition. Revenues from sales of products are recognized upon shipment to
customers. We provide a warranty on goods ranging from three to four years. Our policy is
to consider the establishment of a reserve for warranty expenses, based upon our
historical experience. We did not establish a reserve as at September 30, 2007 and
December 31, 2006. If we change any of our assumptions with regard to our recognition of
revenues or if there is a change with respect to warranties expenses, our financial
position and results of operations may change materially.

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

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

13

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Most
of our large export purchase orders are supported by letters of credit. As a result, we
believe that we have limited exposure to doubtful accounts receivables. We have
historically achieved net profits on an annual basis, but our quarterly profits are not
consistent on a quarter to quarter basis. Nevertheless, we have striven to balance our
accounts payable and accounts receivable.

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

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

# Overview

We
are a manufacturer and global provider of personal military and civilian protective
equipment and supplies. Our products are used by military, law enforcement, border patrol
enforcement, 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, as well as terror attacks in Europe, Asia and
Africa in recent years, the continuing 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.

14

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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 and we believe that these acquisitions will also assist us to
broaden our portfolio of products.

Material Trends

Local
Military Market. The Israeli Military defense budget has been subject to reductions
since the second half of the 2003. As a result, the demand for our products declined in
the second half of 2003 and stabilized at a lower level during the three years ended
December 31, 2006.

In
the second half of 2005, the Israeli Government evacuated the Gaza strip. As a result of
the Israeli Governments decisions and the evacuation, the Israeli Defense Forces, or
IDF, indicated that it would slightly reduce its manpower and that its battlefield
equipment will be stored for long periods in environments that will promote battlefield
readiness and the capability of quick deployment. In addition, as a result of the war
between Israel and the Hezbollah in Lebanon, which started in July 2006, many Israeli
reserve forces were activated, and a large amount of stored equipment was removed from
dry-storage compartments and mobilized. Since then our military business has grown as a
result of an increase in the demand for our dry storage systems products, bulletproof
vests and other military gear. The growth began in the fourth quarter of 2006 and has
continued in 2007. In the nine months ended September 30, 2007 our sales to the Israeli
Ministry of Defense grew to $7.6 million from $1.5 million in the nine months ended
September 30, 2006, accounting for 53.5% and 21.0 % of our sales during these periods. As
of November 11, 2007, we had a backlog of firm orders from the Israeli Ministry of Defense
of approximately $4.0 million, including orders of approximately $500,000 that we received
subsequent to September 30, 2007. We anticipate that we will ship approximately $1.0million of this backlog during the fourth quarter of 2007.

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 prevailing environment
resulting from the events of September 11, 2001, the subsequent war on terrorism and the
continuing conflict in Iraq. We are continuing our efforts to strengthen our position in
our existing export markets in the U.S., South America, Asia and Europe, and to extend our
presence to new export markets in South America and Europe and Australia. We believe that
those markets are growing and that any future success in such markets is mainly dependent
on our ability to be competitive in our pricing and the quality of our products.

As
a result of the above, we expect that our export military business will grow in the next
two to three years.

15

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The
following table presents details of our export military sales:

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

Local
Civilian Market. Our product range for the civilian market is diversified. In 2006 and
2005, our local market business grew as a result of the improvement of the economic
situation in Israel.

Export
Civilian Market. Our product range for the export civilian market consists of a range
of several similar products to the agriculture sector to a single US based customer. The
products we manufacture are distributed by us directly to end users located worldwide.

Industry
Consolidation. Prior to 2005, we encountered additional competition as a result of a
trend toward consolidation among our competitors. This trend abated in 2006 and is not as
relevant at present. However, there can be no assurance that additional consolidation
among our competitors will not take place in the future.

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

Backlog.          We
had approximately $5.0 million of unfilled customer orders at September 30,
          2007, out of which approximately $3.5 million was attributable to the Israeli
          Ministry of Defense, approximately $300,000 was attributable to the Israeli
          civilian market, approximately $470,000 was attributable to the U.S. market,
and           approximately $680,000 was attributable to orders from Europe, Asia and
Africa.

# Prior operations in the
Erez Industrial Zone

During
2004, the Israeli Government decided to evacuate persons and companies from the Erez
Industrial Zone in the Gaza Strip where part of our operations was located. During the
second half of 2004, we prepared for the eventual evacuation of facilities we owned and
leased within this area by merging existing production facilities. We moved one of our
light cut and sew operations to Sderot and some of our webbing equipment to
Nazareth. We evacuated our remaining operations from the Erez Industrial Zone in August
2005. The Israeli Governments decision to evacuate the Gaza Strip was supported by
certain resolutions as well as the Israeli Evacuation Compensation Law (2005) 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. On
November 30, 2006, we were notified that the Israeli Government determined that Export
Erez Ltd. and Mayotex Ltd. are entitled to advanced payments in the amounts of
approximately $452,000 and $71,000, respectively, which amounts exceeded the receivables
on our financial statements. We received those sums in January 2007. Further negotiations
are currently taking place with respect to the final amount of compensation to be paid to
our subsidiaries under their claims. However, we cannot provide any assurance that the
claims, will be approved in full, or to what extent, or when the compensation will be
paid.

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# Results of Operations

Key Indicators

Our
management team 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. Our management team believes
that the upward trend in our revenues is reflective of an industry-wide increase in demand
for our types of products, and we currently expect that this trend will continue for the
remainder of 2007. While our management team 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
September 30, 2007 Compared with Three Months Ended September 30, 2006

Net
Revenues and Gross Profit Margin. Net revenues for the three months ended September
30, 2007 increased to $4.6 million from $3.5 million in the same period in 2006, an
increase of 30.9%. The increase is primarily attributable to an increase in our major
market segment, the local military market. In the three months ended September 30, 2007,
Achidatex, Export Erez and Owen Mills accounted for $1.3 million or 27.0%, $3.0 million or
64.5%, and $394,000 or 8.5 % of our revenues, respectively. In the three months ended
September 30, 2006, Achidatex, Export Erez, and Owen Mills accounted for $870,000 or
24.5%, $2.4 million or 67.3%, and $289,000 or 8.2% of our revenues, respectively.

The
following table sets forth the breakdown of sales by segment for the three months ended
September 30, 2007 and 2006.

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

Gross
profit in each of the three months periods ended September 30, 2007 and 2006 was
approximately $1.2 million. Our gross profit did not increase in line with the increase in
our revenues, mainly due to the mixture of products sold during this quarter compared to
the two pervious quarters. In the three months ended
September 30, 2007 Achidatex, Export Erez, and Owen Mills accounted for 29.7%, 71.0%, and
(0.7)%, of our gross profit, respectively. In the three months ended September 30, 2006,
Achidatex, Export Erez and Owen Mills accounted for 33.0%, 58.8%, and 8.2%, of our gross
profit, respectively.

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Selling
Expenses. Selling expenses for the three months ended September 30, 2007 increased to
$219,000 from $197,000for the same period in 2006. The increase in our selling
expenses was attributable to the higher sales commissionspaid on export sales.Achidatexs selling expenses for the three months ended September 30, 2007 were
$121,000 compared to $ 27,000 for the three months ended September 30, 2006. Export
Erezs selling expenses for the three months ended September 30, 2007 were $95,000
compared to $165,000 for the three months ended September 30, 2006. Owen Mills
selling expenses for the three months ended September 30, 2007 were $2,600 compared to
$5,000 for the three months ended September 30, 2006.

General
and Administrative Expenses. General and administrative expenses for the three months
ended September 30, 2007 slightly decreased to $529,000 from $536,000 for the same period
in 2006, as a result of the stability of our operations in this period.

Financial
Expenses. We had financial expense, net of $ 128,000 for the three months ended
September 30, 2007 as compared to financial expenses, net of $95,000for the same
period in 2006. This expense is primarily due to the change in the exchange rate of the
U.S. Dollar versus the NIS, which resulted in a loss of $89,000 for the three months ended
September 30, 2007 compared to a loss of $44,000 for the same period in 2006.

Other
Income (Expenses), Net. We had other expense, net for the three months ended September
30, 2007 of $24,000 as compared to other income, net of $18,000 for the same
period in 2006. Our other expense in 2007 is attributable to losses from sales of our
tradable securities.

Income
Tax Expense (Benefit). Our income tax expense for the three months ended September 30,
2007 was $199,000 as compared to an income tax expense of $24,000 for the comparable
period in 2006. Our income tax expense of $199,000 resulted from Export Erez Ltd.s
tax settlement with the Israeli tax authorities regarding its tax position from 2003
through 2005. As a result of Export Erez Ltd.s tax settlement and based upon the
enforcement of statutory tax regulations, we recognized a tax expense and a current tax
liability of approximately $41,000during the three months ended September 30,
2007, related to the above unrecognized tax expenses in respect of our other subsidiaries
in Israel, since it is more likely than not that the proposed settlement will be sustained
by the Israeli tax authorities.

As
an Israeli taxpayer, we are unable to include the losses of Owen Mills in our consolidated
income tax filings in Israel. Achidatexs income tax expense for the three months
ended September 30, 2007 was $16,000 compared to income tax benefit of $2,000 for the
three months ended September 30, 2006. Export Erezs income tax expense for the three
months ended September 30, 2007 was $57,000 compared to income tax expense of $26,000 for
the three months ended September 30, 2006. The increase in income tax expense was mainly
due to our subsidiary tax settlement. In 2007, the corporate statutory tax rate in Israel
was reduced to 29%. Defense Industries did not have any tax expense for the three months
ended September 30, 2007 and 2006. Owen Mills did not have any tax expense for the three
months ended September 30, 2007 and 2006.

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Minority
Interest. Minority interest in the profits and losses of one of our consolidated
subsidiaries represents the minority shareholders share of the profits or losses in
such majority owned subsidiary. For the three months ended September 30, 2007, we
recognized and recorded minority share in our subsidiary profit of $6,400 compared to
minority share in our subsidiary profit of $68,000 for the three months ended September
30, 2006.

Net
Income (Loss). In the three months ended September 30, 2007, we had consolidated net
income of $184,000compared to net income of $275,000for the three months
ended September 30, 2006. Achidatexs net income for the three months ended September
30, 2007 was $20,000 compared to a net income of $147,000for the three months
ended September 30, 2006. Export Erezs net income for the three months ended
September 30, 2007 was $252,000 compared to a net income of $262,000 for the three months
ended September 30, 2006. Owen Mills net loss for the three months ended September
30, 2007 was $14,000 compared to a net loss of $5,500 for the three months ended September
30, 2006. Defense Industries net income for the three months ended September 30,
2007 was $15,000 compared to a net loss of $139,000 for the three months ended
September 30, 2006.

Other
Comprehensive Income (Loss). We had other comprehensive income, for the three months
ended September 30, 2007 of $215,000 compared to other comprehensive income of $120,000 for the three months ended September 30, 2006. This comprehensive loss is principally
attributable to the change in the US Dollar exchange rate versus the NIS.

Nine Months Ended
September 30, 2007 Compared with Nine Months Ended September 30, 2006

Net
Revenues and Gross Profit Margin. Net revenues for the nine months ended September 30,
2007 increased to $14.2 million, from $7.2 million in the same period in 2006, an increase
of 97.0%. The increase is primarily attributable to a general increase the local military
and export military market segments. In the nine months ended September 30, 2007,
Achidatex, Export Erez and Owen Mills accounted for $4.2 million, or 29.6%, $9.1 million,
or 64.0%, and $904,000, or 6.4% of our revenues, respectively. In the nine months ended
September 30, 2006, Achidatex, Export Erez, and Owen Mills accounted for $2.2 million, or
30.5%, $4.3 million, or 59.1%, and $747,000, or 10.4% of our revenues, respectively.

The
following table sets forth the breakdown of sales by segment for the nine months ended
September 30, 2007 and 2006.

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

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Gross
profit for the nine months ended September 30, 2007 was $4.8 million, compared to $1.7
million, for the same period in 2006. This increase in gross profit is principally
attributable to the increase in sales and the increase in production resulting in the
increased absorption of fixed manufacturing expenses during the nine months ended
September 30, 2007 compared to the same period in 2006. In the nine months ended September
30, 2007 Achidatex, Export Erez, and Owen Mills accounted for 32.4%, 64.7% and 2.9%, of
our gross profit, respectively. In the three months ended September 30, 2006, Achidatex,
Export Erez and Owen Mills accounted for 32.6%, 58.5% and 8.9%, of our gross profit,
respectively.

Selling
Expenses. Selling expenses for the nine months ended September 30, 2007 increased to
$773,000 from $415,000 for the same period in 2006. The increase in our selling expenses
was attributable to an increase in the export sales and commissions paid on export sales.
Achidatexs selling expenses for the nine months ended September 30, 2007 were $229,
000 compared to $133,00 for the nine months ended September 30, 2006. Export Erezs
selling expenses for the nine months ended September 30, 2007 were $533,000 compared to
$271,000 for the nine months ended September 30, 2006. Owen Mills selling expenses
for the nine months ended September 30, 2007 were $3,500 compared to $11,000 for the nine
months ended September 30, 2006.

General
and Administrative Expenses. General and administrative expenses for the nine months
ended September 30, 2007 slightly increased to $1.6 million, from $1.5 million, for the
same period in 2006, as a result of the stability of our operations in this period.

Financial
Expenses. We had financial expenses, net of $176,000 for the nine months ended
September 30, 2007 as compared to financial expenses, net of $253,000 for the same period
in 2006. The decrease is primarily due to the change in the U.S. Dollar exchange rate
versus the NIS, which resulted in a loss of $41,000for the nine months ended
September 30, 2007 and a loss of $108,000for the same period in 2006.

Other
Income (Expenses), Net. We had other income, net for the nine months ended September
30, 2007 of $54,000 as compared to other income, net of $32,000 for the same period in
2006. Our other income in 2007 is attributable to profit from sales of tradable securities
and from sales of fixed assets.

Income
Tax Expense (Benefit). Our income tax expense for the nine months ended September 30,
2007 was $958,000 as compared to an income tax benefit of $20,000for the
comparable period in 2006. Approximately $215,000 of our income tax expense of $958,000resulted from Mayotex Ltd.s and Export Erez Ltd. tax settlement with the Israeli
tax authorities regarding its tax position from 2003 through 2005. As a result of Mayotex
Ltd.s and Export Erez Ltd. tax settlement and based upon the enforcement of
statutory tax regulations, we recognized a tax expense and a current tax liability of
approximately $41,000 during the nine months ended September 30, 2007, related to the
above unrecognized tax expenses, in respect of our other subsidiaries in Israel, since it
is more likely than not that the proposed settlement will be sustained by the Israeli tax
authorities.

20

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As
an Israeli taxpayer, we are unable to include the losses of Owen Mills in our consolidated
income tax filings in Israel. Achidatexs income tax expense for the nine months
ended September 30, 2007 was $234,000 compared to income tax benefit of $23,000 for the
nine months ended September 30, 2006. Export Erezs income tax expense for the nine
months ended September 30, 2007 was $724,000 compared to income tax expense of $43,000 for
the nine months ended September 30, 2006. The increase in income tax expense was due to
our improved operating results in the period. In 2007, the corporate statutory tax rate in
Israel was reduced to 29%. Defense Industries did not have any tax expense for the nine
months ended September 30, 2007 and 2006. Owen Mills did not have any tax expense for the
nine months ended September 30, 2007 compared to $800 for the nine months ended September
30, 2006.

Minority
Interest. Minority interest in the profits and losses of one of our consolidated
subsidiaries represents the minority shareholders share of the profits or losses in
such majority owned subsidiary. For the nine months ended September 30, 2007, we
recognized and recorded minority share in our profit of $129,000 compared to minority
share in our loss of $27,000for the nine months ended September 30, 2006.

Net
Income (Loss). In the nine months ended September 30, 2007, our consolidated net
income was $1.2 million, compared to net a net loss of $430,000for the nine
months ended September 30, 2006. Achidatexs net income for the nine months ended
September 30, 2007 was $407,458 compared to a net loss of $227,000 for the nine months
ended September 30, 2006. Export Erezs net income for the nine months ended
September 30, 2007 was $1.0 million, compared to net income of $121,000 for the nine
months ended September 30, 2006. Owen Mills net loss for the nine months ended
September 30, 2007 was $167,000 compared to a net loss of $114,000 for the nine months
ended September 30, 2006. Defense Industries net loss for the nine months ended
September 30, 2007 was $48,000 compared to a net loss of $210,000 for the nine months
ended September 30, 2006.

Other
Comprehensive Income (Loss). We had other comprehensive income, for the nine months
ended September 30, 2007 of $131,000 compared to other comprehensive income of $165,000for the nine months ended September 30, 2006. This comprehensive income is principally
attributable to the change in the exchange rate of U.S. Dollar versus the NIS.

# Liquidity and Capital
Resources

As
of September 30, 2007, we had cash and cash equivalents of $2.9million, $801,000
of trading securities, and working capital of $6.2 millionas compared to $1.7
million in cash and cash equivalents,  $805,000  of trading securities and $4.8
millionof working capital at December 31, 2006.

Net
cash provided by operating activities was $3.0 million for the nine months ended September
30, 2007 as compared to net cash used in operating activities of $489,000 for the same
period in 2006. This was primarily attributable to net income of $1.2 million, an increase
in accounts payable of $1.2 million, a decrease in other assets of 461,000, depreciation
of $362,000 and an increase in other liabilities of $891,000offset by an increase
in inventory of $873,000 and an increase in accounts receivable of $310,000.

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Net
cash used in investing activities was $335,000for the nine months ended September
30, 2007 as compared to $208,000 in the nine months ended September 30, 2006. During the
nine months ended September 30, 2007, purchases of fixed assets were $362,000compared to $228,000during the nine months ended September 30, 2006.

Net
cash used in financing activities was $1.5 millionfor the nine months ended
September 30, 2007 as compared to $497,000 of net cash provided by financing activities
for the nine months ended September 30, 2006. During the nine months ended September 30,
2007, we decreased our short-term debt by $1.1 million and we repaid $630,000of
long-term debt.

The
following table summarizes our minimum contractual obligations and commercial commitments
as of September 30, 2007 and the effect we expect them to have on our liquidity and cash
flow in future periods:

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

As
of September 30, 2007, our principal commitments consisted of $1.8 million of long-term
debt, estimated interest payments on long-term debt obligations, and operating lease
obligations. Of such amount, we incurred $1.2 million in long-term debt in order to
support the increased scope of our operations. We currently do not have significant
capital expenditures or purchase commitments. We anticipate that our cash resources will
be used primarily to fund our operating activities. We believe that our spending for
research and development for the remainder of 2007 will be approximately $30,000.

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

Recent Accounting
Pronouncements

In
March 2007, the Financial Accounting Standards Board (FASB) ratified Emerging
Issues Task Force (EITF) Issue No. 06-10, Accounting for Collateral
Assignment Split-Dollar Life Insurance Arrangements (EITF No. 06-10).
EITF No. 06-10 requires an employer to recognize a liability for the postretirement
benefit related to a collateral assignment split-dollar life insurance arrangement in
accordance with either Statement of Financial Accounting Standards (SFAS) No.
106 or Accounting Principles Board (APB) Opinion No. 12 if the employer has
agreed to maintain a life insurance policy during the employees retirement or
provide the employee with a death benefit. EITF No. 06-10 also requires an employer to
recognize and measure an asset based on the nature and substance of the collateral
assignment split-dollar life insurance arrangement. EITF No. 06-10 is effective for fiscal
years beginning after December 15, 2007 with early adoption permitted. We are evaluating
the impact that the adoption of EITF No. 06-10 will have on our financial statements.

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# Foreign Currency
Exchange Risk

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

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

During
2006, the NIS rose approximately 8.2% against the dollar. In the period ending in
September 30, 2007, there was inflation in Israel of 2.29% and the U.S. dollar depreciated
in relation to the NIS at a rate of 5.02%, from NIS 4.225 per $1.00 on December 31, 2006
to NIS 4.0313 per $1 on September 30, 2007. If future inflation in Israel exceeds the
devaluation of the NIS against the U.S. dollar or if the timing of such devaluation lags
behind increases in inflation in Israel, our results of operations may be materially
adversely affected. We will also be adversely affected if the dollar depreciates against
the Euro, the currency used for many of our purchases of raw material.

We
did not enter into any foreign exchange contracts in the year ended December 31, 2006 and
the nine months ended September 30, 2007.

# Item 3A. Controls and
Procedures

We
maintain disclosure controls and procedures designed to ensure that information required
to be disclosed in our Securities and Exchange Commission reports is recorded, processed,
summarized and reported within applicable time periods. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in our reports that we file or submit under the Securities
Exchange Act of 1934 (the Exchange Act) is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. Management has
concluded that there were material weaknesses in the effectiveness of our disclosure
controls and procedures as of December 31, 2006, March 31, 2007 and June 30, 2007 in
connection our Annual Report on Form 10-KSB for the year ended December 31, 2006 and our
Quarterly Reports on Form 10-QSB for the three month period ended March 31, 2007 and the
six month period ended June 30, 2007. We are working towards correcting these material
weaknesses and intend to shortly file an Amended Annual Report on Form 10-KSB/A for the
year ended December 31, 2006 and Amended Quarterly Reports on Form 10-QSB/A for the three
month period ended March 31, 2007 and the six month period ended June 30, 2007.

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As
required by the Exchange Act Rule 13a-15(e) we conducted an evaluation, under the
supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as of September 30, 2007. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by us in our reports that we
file or submit under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.

# Changes in Internal
Controls over Financial Reporting

There
were no changes to our internal controls over financial reporting that occurred during the
period covered by this quarterly report on Form 10-QSB that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting.

# Compliance with Section
404 of Sarbanes-Oxley Act

Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 (the Act), beginning with our Annual
Report on Form 10-KSB for our 2007 fiscal year, we will be required to furnish a report by
our management on our internal controls over financial reporting. This report will
contain, among other matters, an assessment of the effectiveness of our internal controls
over financial reporting as of the end of our fiscal year, including a statement as to
whether or not our internal controls over financial reporting is effective. This
assessment must include disclosure of any material weaknesses in our internal controls
over financial reporting identified by management. If we identify one or more material
weaknesses in our internal controls over financial reporting, we will be unable to assert
our internal controls over financial reporting are effective. Currently, our independent
registered public accountants will be required to issue an attestation report on
managements assessment of such internal controls and a conclusion on the operating
effectiveness of those controls for our 2008 fiscal year.

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# PART II  OTHER
INFORMATION

# DEFENSE INDUSTRIES
INTERNATIONAL, INC. AND SUBSIDIARIES

# Item 1. Legal
Proceedings

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

# Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds

On
May 1, 2007, we issued 74,074 shares of common stock, having a fair market value of
$40,000 at date of issuance, 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 3. Default Upon
Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

# Item 5. Other Information

None.

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

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

| | 3.1 | Certificate
of Incorporation, incorporated herein by reference from the filing on Form 10-KSB for the
year ended December 31, 2001.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------

| | 3.1.1 | Certificate
of Amendment to the Certificate of Incorporation, incorporated herein by reference from
the Filing on Schedule 14C, filed with the Commission on December 30, 2002.
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.2 | By-laws,
incorporated herein by reference from the Filing on Schedule 14C, filed with the
Commission on June 14, 2002.
| | --- | ----------------------------------------------------------------------------------------------------------------------

| | 10.1 | Translation
of Employment Agreement with Mr. Tosh, incorporated herein by reference from the filing
on Form 10-KSB for the year ended December 31, 2003.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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# SIGNATURES

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

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

| |  | By: /s/ Tsippy Moldovan
Tsippy Moldovan Chief Accounting and Financial Officer
| |  | --------------------------------------------------------------------------------------------

Date: November 14 , 2007

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