Introduction

The following should be read in conjunction with the Company's unaudited condensed consolidated financial statements, including the respective notes thereto, all of which are included in this Form 10-Q. Unless stated to the contrary, or unless the context otherwise requires, references to "PBSI," "the Company," "we," "our" or "us" in this report include Point Blank Solutions, Inc. and subsidiaries.

We are a leading manufacturer and provider of bullet, fragmentation and stab resistant apparel and related ballistic accessories, which are used domestically and internationally by military, law enforcement, security and corrections personnel, as well as governmental agencies. We also manufacture and distribute sports medicine, health support and other products, including a variety of knee, ankle, elbow, wrist and back supports and braces that assist serious athletes, weekend sports enthusiasts and general consumers in their respective sports and everyday activities.

We are organized as a holding company that currently conducts business through three operating subsidiaries. Sales to the U.S. military comprise the largest portion of our business, followed by sales to federal, state and local law enforcement agencies, including correctional facilities. Accordingly, any substantial increase, reduction in or delay in government spending or change in emphasis in defense and law enforcement programs would have a material effect on our business.

We derive substantially all of our revenue from sales of our products. Our ability to increase revenue levels is highly dependent on continued demand for body armor and projectile-resistant clothing. There is no assurance, however, that in the event that governmental agencies refocus their expenditures due to changed circumstances, that we will be able to diversify into alternate markets or alternate products, or that we will be able to increase market share through acquisitions of other businesses.

Our market share is highly dependent upon the quality of our products and our ability to deliver products in a prompt and timely fashion. Our current strategic focus is on product quality and accelerated delivery, which we believe are the key elements in obtaining additional orders under new as well as existing procurement contracts with the U.S. military and other governmental agencies.

Critical Accounting Policies

Our management believes that our critical accounting policies include:

Revenue recognition-We recognize revenue when there is persuasive evidence of an arrangement, delivery of the product has occurred, the price for the goods is fixed or determinable and collectibility is reasonably assured.

We enter into contracts with all of our customers. These contracts specify the material terms and conditions of each sale, including prices and delivery terms for each product sold.

Ballistics apparel and accessory products sold to the U.S. military are manufactured to specifications provided by the U.S. military. Prior to shipment, each manufactured product is inspected by U.S. military representatives. Once the goods pass inspection by the U.S. Government Quality Assurance Specialist (denoted on Form DD 250), the U.S military immediately accepts risk of ownership associated with those goods.

Non-military contracts specify that customers may return products to us only if such products do not meet agreed upon specifications. Ballistics apparel products sold to other customers besides the U.S. military for use in combat comply with National Institute of Justice ("NIJ") standards, and are subjected to internal and external quality control procedures. Because of these internal and external quality control procedures, warranty returns of products sold to law enforcement agencies and to distributors are minimal.

We warrant that our ballistics apparel products will be free from manufacturing defects for a period of five years from the date of purchase. From time to time, individual ballistics apparel products may be returned because they are the incorrect size. In most cases, the product returned for sizing is retailored and reshipped to the customer. Returns for sizing, along with the cost involved in tailoring the units, are minimal.

We do not offer any general rights of return, express or implied, associated with any of our military sales or our sports medicine and health support sales. Ballistic resistant apparel and other accessories sold to non-military customers have a 30-day right of return. At the time of sale, the sales transactions meet the conditions of Financial Accounting Standards Board ("FASB") Statement No. 48, "Revenue Recognition When Right of Return Exists," and revenue is recognized at the time of sale.

All our contracts specify that products will be shipped FOB shipping point or FOB destination. Shipments to the U.S. military are made FOB shipping point. We recognize revenue for military sales and for those non-military sales sent FOB shipping point when the related products are shipped. We defer revenue recognition for those sales that are shipped FOB destination until the related goods are received at the customers' designated receiving locations.

Inventories-Inventories are stated at the lower of cost (determined on the first-in, first-out basis) or market. An allowance for potential non-saleable inventory due to excess stock, obsolescence or defects in quality is based upon a detailed review of inventory components, past history, and expected future usage.

Stock Compensation-New, modified and unvested equity-based payment transactions with employees, such as stock options (which we refer to as warrants) and restricted stock, are recognized in our consolidated financial statements based on their fair value and as compensation expense over the service period, in our case, the vesting period.

Income taxes-We use the asset and liability approach to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Other-Judgments and estimates underlying our accounting policies vary based on the nature of the judgment or estimate. We use judgments and estimates to determine our allowance for doubtful accounts, which are determined through analysis of the aging of the accounts receivable at the date of the consolidated financial statements, assessments of collectibles based on an evaluation of historic and anticipated trends, the financial condition of customers and an evaluation of the impact of economic conditions. We also use judgments and estimates to determine the valuation allowances on our deferred tax assets to establish reserves for income taxes, each of which relate to our income taxes critical accounting policy. We base these estimates on projections of future earnings, effective tax rates and the impact of economic conditions. These judgments and estimates are based upon empirical data as applied to present facts and circumstances. Judgments and estimates are susceptible to change because the projections that they are based upon do not always turn out to be correct and unanticipated issues may arise that are not considered in our assumptions.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingent assets and liabilities in the financial statements and accompanying notes. Significant estimates inherent in the preparation of the accompanying consolidated financial statements include the carrying value of long-lived assets and allowances for receivables and inventories. Actual results could differ from these estimates and the differences could be material.

Result of Operations

The events that occurred in 2008 presented a significant challenge to our Company, Stockholders, Vendors, Directors and Management. Although we disclosed in previous annual and quarterly reports about the risks associated with our current business model, our dependence on government contracting for body armor, and the budgetary risks associated with our non-military customer base, it was difficult to anticipate the perfect storm in our industry. The significant delays in the military's contracting for body armor and related products and in evaluations of incoming raw material quality assessments, the uncertainties in the transition from the current NIJ 05 standard to the NIJ 06 standard, the continuing and deepening economic challenges facing our country, as well as the crisis in the credit markets substantially reduced sales during 2008. While this storm created a difficult reporting period for us, we believe that it also highlighted the value and correctness of our Strategic Vision and Plan to build upon our current platform in a way that makes us less dependent on sales of body armor to the government.

The first nine months of the year were particularly difficult in the body armor industry. Lay-offs, plant closings, and other cost cutting measures were employed industry-wide in an attempt to cope with the dramatic down tick in sales. While we did take some cost cutting measures to include lay-offs and not replacing personnel that left the Company, we were able to find savings and manage our way through this difficult period without taking the draconian steps that would have adversely affected our ability to reach our normal capability quickly. By preserving important capabilities, we believe that we are in position to provide the US Army with vests to meet their Bridge Buy of 150,000 units, as well as the Outer tactical vest and the ballistic components order while at the same time completing our current and anticipated orders. We believe that we have the capacity and continue to pursue additional business consistent with our strategic plan.

Our current business plan and structure withstood a significant downturn. With the additional funding provided by our lender for the short-term period, we believe that we have sufficient access to capital to fund our operations. Our Company accomplished this in a period of dramatic decrease in sales and with continuing legacy costs that, are still significant. We believe that this reinforces the soundness of our Company and our strength as a solid platform for growth consistent with our Strategic Vision. Sales and backlog have increased significantly at the end of the Third Quarter and during the Fourth Quarter. In large part, this change is due to our successful proposal in the US Army's Bridge Buy for 150,000 Improved Outer Tactical Vests, OTVs and ballistic components and we believe that sales will continue to grow in the Fourth Quarter.

NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2007

                             ANALYSIS OF NET SALES

                 Nine Months Ended September 30, 2008 and 2007

                                 (In thousands)



                                                   2008                 2007             Dollar Change
Net sales
Military and Federal Government              $ 49,912    54.7 %   $ 221,169    85.9 %   $      (171,257 )
Domestic/Distributors                          26,447    29.0 %      30,213    11.7 %            (3,766 )
International                                  10,940    12.0 %         526     0.2 %            10,414
Sports and Health Products                      4,599     5.0 %       6,207     2.4 %            (1,608 )
Other                                              -      0.0 %          46     0.0 %               (46 )

Total                                          91,898   100.6 %     258,161   100.3 %          (166,263 )
Less Discounts, Returns and Allowances            584     0.6 %         692     0.3 %              (108 )

Net Sales                                    $ 91,314   100.0 %   $ 257,469   100.0 %   $      (166,155 )

For the nine months ended September 30, 2008, our consolidated net sales were $91.3 million, a decrease of 64.5 % over consolidated net sales of $257.5 million for the nine months ended September 30, 2007. Soft and body armor products net sales decreased 65.3% from $251.9 million for the nine months ended September 30, 2007 to $87.3 million for the nine months ended September 30, 2008 due primarily to delays in military and contract awards. Over the last nine months, we had several solicitations extended, including for the 150,000 Improved Outer Tactical Vests (IOTV's) contract. These delays have significantly affected net sales and results of operations. Because of the delay in the timing of such awards, revenues associated with such awards may be reflected in future periods, if at all. Additionally, during the first nine months of 2007, we targeted certain contract opportunities for aggressive pricing strategy.

For the nine months ended September 30, 2008, Domestic/Distributor sales were $26.4 million, a decrease of 12.5% from the comparable prior year period of $30.2 million. This decrease was due to the domestic/distributor market's anticipation of the upcoming change in NIJ standards for soft body armor, as well as higher fuel costs and the economic downturn in the national economy, which had a direct impact on state and local governments' spending.

We believe that it is important to understand the nature of contracting with the federal government and the possible effect of the federal government's budgeting process on operating results and production backlog in any given year. Frequently, there may be events surrounding the U.S. and defense budgets that create fluctuations in our backlog and portfolio of contracts with the federal government. These include availability of year-end monies to accomplish important last minute contracts for supplies and services, enactment of a continuing resolution which limits spending to the previous year's level until a budget is signed into law, late approval of a new budget, use and timing of a supplemental appropriation and other possible events. These events can significantly affect the amount of orders we have in backlog and the number as well as size of major contracts we have for our products. In fact, requests for proposals and the awarding of contracts continued to be delayed and impacted this quarter.

For the nine months ended September 30, 2008, International sales were $10.9 million compared to $526,000 for the comparable period. This increase is due to contract awards for the soft and body armor products to the Middle East.

For the nine months ended September 30, 2008, Sports and Health Product sales were $4.6 million, a decrease of 25.9% over the comparable period. This decrease is due to a decline in revenues associated with a contract completed in early 2008 and the loss of a retail customer.

Gross profit for the nine months ended September 30, 2008 was $11.8 million (12.9% of net sales), as compared to $47.0 million (18.2% of net sales) for the same period in 2007. The decline in gross profit margin as a percentage of net sales is due primarily to lower volume as a result of delays in contract awards, constraints on price increases due to the competitive market, higher raw materials costs and under absorbed overhead costs as a result of our levels of production. To offset increases in raw material prices, we entered into a joint venture agreement on March 18, 2008 for the purpose of manufacturing woven ballistic fabric for our body armor products. As a result of this strategic action, we believe we are the only soft body armor manufacturer with a vertically-integrated weaving operation, which is intended to reduce material costs and allow us to competitively price our products to grow top line sales as well as improve our margins. Additionally, 50% of the operating results generated from the joint venture will be consolidated into our Consolidated Statement of Operations. In order to capture a greater share of this market, we adopted an aggressive pricing structure on certain military contracts. Improving gross profit margin will require passing on material cost increases to our customers, enhancing the manufacturing process, planning inventory purchases carefully and reducing costs. These initiatives will be balanced with a marketing and sales strategy that addresses an unusually competitive environment.

                                OPERATING COSTS

                 Nine Months Ended September 30, 2008 and 2007

                                 (In thousands)



                                                 2008          2007        Dollar Change
Selling and Marketing                          $   6,461     $  6,965     $          (504 )
Research and Development                           1,251        1,519                (268 )
Equity-Based Compensation                          5,056        2,916               2,140
Other General and Administrative                  11,948       17,642              (5,694 )

Selling, general and administrative expenses      24,716       29,042              (4,326 )
Litigation and Cost of Investigations              6,220        7,364              (1,144 )
Employment Tax Withholding Credit                (26,034 )       (737 )           (25,297 )

Total Operating Costs                          $   4,902     $ 35,669     $       (30,767 )

Operating costs were $4.9 million or 5.4% of net sales for the nine months ended September 30, 2008 versus $35.7 million or 13.8% of net sales for the nine months ended September 30, 2007. The decrease in operating costs for the nine months ended September 30, 2008 of $30.8 million from the nine months ended September 30, 2007 was principally due to the following:

• During the second quarter of 2008, the statute of limitations for the major portion of the 2004 employment tax withholding obligations expired. Accordingly, the charge and related liability originally recorded during 2004, totaling $26.1 million, was reversed during the second quarter of 2008. Operating costs for the first nine months of 2007 include a credit to earnings of approximately $.7 million for the employment tax withholding obligation relating to that period.

• The decrease in operating costs during the third quarter of 2008 was partially offset by an increase in equity-based compensation of $2.9 million due to a change in the majority of the Board of Directors of the Company. At the Annual Meeting of Stockholders that was held on August 19, 2008, five nominees from Steel Partners II, L.P. were elected to the Board of Directors of the Company. This change triggered an acceleration of the equity-based compensation expense and the total unvested and unamortized fair value of the equity-based compensation became vested immediately and was expensed in the accompanying financial statements.

• Lower general and administrative expenses due mainly to lower legal and professional fees in 2008 compared to 2007 of $2.8 million. Additionally, there was a decrease in salaries of approximately $2.3 million principally due to reductions in incentive compensation and personnel.

• Lower litigation and costs of investigations expenses. We will continue to incur costs associated with the investigations described in Part II, Item 1 of this Form 10-Q in future periods and these costs could be material.

Interest expense for the nine months ended September 30, 2008 was $0.7 million compared to $ 0.5 for the same period in 2007. The increase is attributable to higher outstanding balances in our revolving line of credit for the nine month period ended September 30, 2008 compared to the same period in 2007. In addition, interest expense was incurred during 2008 on the $2,500 note payable for Lifestone.

Our effective tax rate was 48.6% and 40.0% for the nine months ended September 30, 2008 and 2007, respectively. The effective tax rate differs from the statutory rate primarily due to state income tax expense and equity based and officer's compensation in excess of the Internal Revenue Code Section 162
(m) limitation.

We are currently under examination by the Internal Revenue Service for our U.S. Corporate Income Tax Return for the tax years ended December 31, 2003 through 2007. There have been no adjustments proposed in connection with the examination. We are also under examination by the State of New York for the years 2002 through 2004 and received a proposed assessment of $1.8 million in additional taxes and interest related to the proposed disallowance of losses on discontinued operations, inter-company interest expense and other inter-company charges. We filed a protest with the State of New York. We believe we have a meritorious defense and anticipate the ultimate resolution of the assessment will not result in a material adjustment to our financial statements.

THREE MONTHS ENDED SEPTEMBER 30, 2008, COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2007

                             ANALYSIS OF NET SALES

                 Three Months Ended September 30, 2008 and 2007

                                 (In thousands)



                                                2008                   2007              Dollar Change
Net sales
Military and Federal Government           $  9,619     31.7 %    $ 61,681     85.9 %    $       (52,062 )
Domestic/Distributors                        9,375     30.9 %       7,922     11.0 %              1,453
International                                9,959     32.8 %          50      0.1 %              9,909
Sports and Health Products                   1,503      5.0 %       2,352      3.3 %               (849 )
Other                                           -       0.0 %          14      0.0 %                (14 )

Total                                       30,456    100.4 %      72,019    100.2 %            (41,563 )
Less Discounts, Returns and Allowances         129      0.4 %         176      0.2 %                (47 )

Net Sales                                 $ 30,327    100.0 %    $ 71,843    100.0 %    $       (41,516 )

For the three months ended September 30, 2008, our consolidated net sales were $ 30.3 million, a decrease of 57.8% over consolidated net sales of $71.8 million for the three months ended September 30, 2007. Soft and Body armor products net sales decreased 58.4% from $69.7 million for the three months ended September 30, 2007 to $29.0 million for the three months ended September 30, 2008 due primarily to delays in military and contract awards. We had several solicitations extended, including for the 150,000 Improved Outer Tactical Vests (IOTV's) contract. These delays have significantly affected net sales and results of operations. Because of the delay in the timing of such awards, revenues associated with such awards may be reflected in future periods, if at all.

For the three months ended September 30, 2008, Domestic/Distributor sales were $9.4 million, an increase of 18.3% from the comparable prior year period of $7.9 million. These represent sales to wholesalers, non-military and non-federal buyers. This category of sales allows us to diversify our revenue base. We plan to focus our marketing efforts on this customer category going forward.

For the three months ended September 30, 2008, International sales were $10.0 million compared to $0.1 million for the comparable period. This increase is due to contract awards for the soft and body armor products to the Middle East.

For the three months ended September 30, 2008, Sports and Health Product sales were $1.5 million, a decrease of 36.1 % over the comparable period. This decrease is due to a decline in revenues associated with a contract completed in early 2008 and the loss of a retail customer.

Gross profit for the quarter ended September 30, 2008 was $3.4 million (11.1% of net sales), as compared to $11.5 million (16.0% of net sales) for the three months ended September 30, 2007. The decline in gross profit margin as a percentage of net sales is due primarily to lower volume as a result of delays in contract awards, constraints on price increases due to the competitive market, higher raw materials costs and overhead costs incurred and not capitalized resulting from lower production levels. To offset increases in raw material prices, we entered into a joint venture agreement on March 18, 2008 for the purpose of manufacturing woven ballistic fabric for our body armor products. As a result of this strategic action, we believe we are the only soft body armor manufacturer with a vertically-integrated weaving operation, which is intended to reduce material costs and allow us to competitively price our products to grow top line sales as well as improve our margins. Additionally, 50% of the net income generated from the joint venture will be accretive to our earnings. In order to capture a greater share of this market, we adopted an aggressive pricing structure on certain military contracts. Improving gross profit margin will require passing on material cost increases to our customers, enhancing the manufacturing process, planning inventory purchases carefully and reducing costs. These initiatives will be balanced with a marketing and sales strategy that addresses an unusually competitive environment.

                                OPERATING COSTS

                 Three Months Ended September 30, 2008 and 2007

                                 (In thousands)



                                                   2008       2007      Dollar Change
  Selling and Marketing                          $  2,030   $  2,033   $            (3 )
  Research and Development                            466        543               (77 )
  Equity-Based Compensation                         3,341      1,212             2,129
  Other General and Administrative                  4,099      5,679            (1,580 )

  Selling, general and administrative expenses      9,936      9,467               469
  Litigation and Cost of Investigations             2,531      2,203               328
  Employment Tax Withholding Credit                    37         -                 37

  Total Operating Costs                          $ 12,504   $ 11,670   $           834

Operating costs were $12.5 million or 41.2% of net sales for the three months ended September 30, 2008 as compared to $11.7 million or 16.2% of net sales for the three months ended September 30, 2007. The increase in expenses for the three months ended September 30, 2008 of $.8 million from the three months ended September 30, 2007 was principally due to the following:

• The increase in operating costs during the third quarter of 2008 was mainly due to an increase in equity-based compensation of $2.9 million due to a change in the majority of the Board of Directors of the Company. At the Annual Meeting of Stockholders that was held on August 19, 2008, five nominees from Steel Partners II, L.P. were elected to the Board of . . .