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

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

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

Overview

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

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

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

Material Trends

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

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

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

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

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

                                        Three Months Ended           Six Months Ended
                                             June 30,                    June 30,
                                    --------------------------- ---------------------------
                                        2009          2008          2009          2008
                                    ------------- ------------- ------------- -------------


Sales to South America              $   453,889   $   394,962   $ 1,208,416   $   439,949
Sales to North America                  176,654       129,572       176,654       236,251
Sales to Europe and Asia                372,923       340,597       832,657       613,194
Sales to Africa                         201,136       563,129     1,387,491       750,732
                                    -----------   -----------   -----------   -----------
    Total Export Military Sales     $ 1,204,602   $ 1,428,260   $ 3,605,218   $ 2,040,126
                                    -----------   -----------   -----------   -----------

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

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

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

In addition, we develop products in Israel and sell them in Israel, North and South America, Asia, Africa and several European countries. Our sales in Israel are denominated in NIS, while most of our export sales are denominated in U.S. dollars. Under U.S. GAAP we report all of our sales in U.S. dollars. Accordingly, appreciation of the U.S. dollar against the NIS reduces our reported sales while the devaluation of the U.S. dollar against the NIS increases our reported sales.

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

Former Operations in the Erez Industrial Zone

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

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

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

Tentative acquisitions

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

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

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

- In consideration of the above, Mayotex will pay Sarino $1 million, out of which, $300,000 will be non-refundable to Mayotex upon 24 months following the execution of the Isorad agreement, as detailed below and the remaining $700,000 will be earned by Sarino based on 10% of sales over $3 million and up to $10 million during the first 36 months of operations. Amounts not earned are to be refunded to Mayotex, including interest of Libor + 2% per annum. The refundable consideration is secured by Sarino's interest in Mayosar. The $1 million payment is currently being held in escrow pending completion of the Isorad Transaction.

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

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

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

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

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

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

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

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

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

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

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

                                Three Months Ended
                                     June 30,
                            ---------------------------
                                2009          2008
                            ------------- -------------


 Local civilian market      $   334,054   $ 1,265,945
 Export civilian market         262,394       324,155
 Local military market        1,775,087     1,458,726
 Export military market       1,204,602     1,428,260
                            -----------   -----------
             Total          $ 3,576,137   $ 4,477,086
                            -----------   -----------

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

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

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

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

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

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

Extraordinary Income. We didn't record any extraordinary income for the three months ended June 30, 2009. For the three months ended June 30, 2008, we recognized and recorded extraordinary income of $228,703, net of tax, from the payments to our three subsidiaries, Export Erez, Mayotex and Achidatex, by the Israeli Government with respect to their evacuation from the Gaza Industrial Zone.

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

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

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

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

--------------------------------------------------------------------------------
                                 Six Months Ended
                                     June 30,
                            ---------------------------
                                2009          2008
                            ------------- -------------


 Local civilian market      $ 1,155,330   $ 2,186,102
 Export civilian market         422,853       591,372
 Local military market        4,206,024     2,784,788
 Export military market       3,605,218     2,040,126
                            -----------   -----------
             Total          $ 9,389,425   $ 7,602,388
                            -----------   -----------

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

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

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

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

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

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

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

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

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

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

The current economic climate and the uncertainty in the global financial markets resulting from the disruption in credit markets may affect our ability to raise additional funds in the future, if required. There can be no assurance that such additional financing will be available to us, or if available, will be on terms favorable to our company.

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

Cash Flows
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