---

---

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

# FORM 20-F

|o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
1934
|- | ----------------------------------------------------------------------------------------------

OR

|x | ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF           1934
|- | ----------------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2008

OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

OR

|o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|- | -------------------------------------------------------------------------------------------

Date of event requiring this shell company report __________

For the transition period from ___________ to _____________

Commission
file number 001-14184



B.O.S. BETTER ONLINE
SOLUTIONS LTD. (Exact name of Registrant as specified in its charter)

ISRAEL(Jurisdiction of incorporation or organization)

20 Freiman Street,
Rishon LeZion, 75100, Israel(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act: Ordinary Shares, nominal
value NIS 4.00 per share

Securities registered or to be registered pursuant to Section 12(g) of the Act: NONE

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: NONE



---

---

Indicate the number of outstanding
shares of each of the issuers classes of capital or common stock as of the close of
the period covered by the annual report: 13,027,514 ordinary shares, nominal value
NIS 4.00 per share, as of December 31, 2008 and 13,027,514 ordinary shares, nominal value
NIS 4.00 per share, as of May 31, 2009.

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No x

If this report is an annual or
transition report, indicate by check-mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o No x

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

Yes x No o

Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files)*.

Yes o No x

*The registrant has not yet been
phased into the interactive data requirements.

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

Large accelerated filer o     Accelerated filer o     Non-accelerated filer x

Indicate by check mark which
financial statement item the registrant has elected to follow:

Item 17 o Item 18 x

Indicate by check mark which basis of
accounting the registrant has used to prepare the financial statements included in this
filing:

U.S.  GAAP  x      International  Financial  Reporting  Standards  as  issued  by the  International  Accounting
Standards Board  o     Other o

If Other has been checked
in response to the previous question, indicate by check mark which financial statement
item the registrant has elected to follow.

Item 17 o Item 18 o

If this is an annual report, 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

ii

---

---

TABLE OF CONTENTS

|                                                                                      |   
|------------------------------------------------------------------------------------- | --
|
|
|
|
|PART I                                                                                | 1 
|ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                         | 1 
|ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE                                       | 1 
|ITEM 3: KEY INFORMATION REGARDING B.O.S                                               | 1 
|ITEM 4: INFORMATION ON THE COMPANY                                                    | 17
|ITEM 4A: UNRESOLVED STAFF COMMENTS                                                    | 29
|ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                  | 29
|ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                    | 53
|ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                             | 65
|ITEM 8: FINANCIAL INFORMATION                                                         | 69
|ITEM 9: THE OFFER AND LISTING                                                         | 70
|ITEM 10: ADDITIONAL INFORMATION                                                       | 72
|ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                    | 85
|ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 86
|PART II                                                                               | 86
|ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 86
|ITEM 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 87
|ITEM 15: CONTROLS AND PROCEDURES                                                      | 87
|ITEM 16: [RESERVED]                                                                   | 88
|ITEM 16A: AUDIT COMMITTEE FINANCIAL EXPERT                                            | 88
|ITEM 16B: CODE OF ETHICS                                                              | 88
|ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES                                      | 88
|ITEM 16D: EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                  | 89
|ITEM 16E: PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      | 89
|ITEM 16F: CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT                                | 89
|ITEM 16G: CORPORATE GOVERNANCE                                                        | 89
|PART III                                                                              | 89
|ITEM 17: FINANCIAL STATEMENTS                                                         | 89
|ITEM 18: FINANCIAL STATEMENTS                                                         | 89
|ITEM 19: EXHIBITS                                                                     | 90
|SIGNATURES                                                                            | 92

iii

---

---

PART I

|Item 1: |  | Identity of Directors, Senior Management and Advisors
|------- |  | -----------------------------------------------------

Not required.

|Item 2: |  | Offer Statistics and Expected Timetable
|------- |  | ---------------------------------------

Not required.

|Item 3: |  | Key Information Regarding BOS
|------- |  | -----------------------------

Unless the  context  in which such terms are used would  require a  different  meaning,  all  references  to "BOS",
"we",  "our" or the "Company" refer to B.O.S. Better Online Solutions Ltd. and its subsidiaries.

|3A. | Selected
Consolidated Financial Data
|--- | ------------------------------------

The  consolidated  statement  of
 operations  data for B.O.S.  Better  Online  Solutions  Ltd. set forth below with
respect to the years  ended  December  31,  2008,  2007 and 2006,  and the  consolidated
 balance  sheet data as of December 31, 2008 and 2007, have been derived from the
Consolidated  Financial  Statements listed in Item 18, which have been  prepared in
 accordance  with  generally  accepted  accounting  principles  in the United  States
("U.S. GAAP"). The consolidated  statement of operations data set forth below with
respect to the years ended December 31, 2005 and 2004, and the  consolidated  balance
sheet data as of December 31, 2006,  2005 and 2004, have been derived from other
 consolidated  financial  statements not included  herein and have been prepared in
accordance with U.S. GAAP. The financial  statements for the years ended December 31,
2008,  2007,  2006,  2005 and 2004 were audited by Kost Forer  Gabbay & Kasierer,  an
 independent  registered  public  accounting  firm and a member of Ernst & Young Global.
 The financial  statements of BOS - Supply Chain Solutions (Lynk) Inc.  (formerly,  Lynk,
USA Inc.) and its subsidiaries  for the years ended  December  31,  2008 and 2007 were
 audited by Arik  Eshel,  CPA & Assoc.,  PC an independent  registered public accounting
firm. The selected consolidated  financial data presented below should be read in
 conjunction  with Item 5:  "Operating  and Financial  Review and Prospects" and the
Notes to the Financial Statements included in this Form 20-F.

The Company has accounted for
discontinued  operations,  in accordance with EITF 03-13 "Applying the Conditions in
Paragraph 42 of FASB  Statement  144 in  Determining  Whether to Report  Discontinued
 Operations".  As such,  the results of discontinued  operations,  including revenues,
 cost of revenues,  operating expenses, and other income and  expenses,  related  to the
 prior  periods  of the  discontinued  operation  have  been  reclassified  in the
accompanying  statements of operations (see Note 1c to the  Consolidated  Financial
 Statements for the year ended December 31, 2008).

On May 29, 2003, the Company  effected a one-for-four  reverse stock split.  All share and per share numbers herein
reflect adjustments resulting from this reverse stock split.

- 1 -

---

---

Statement of Operations Data: (In U.S. thousands of dollars with the exception of per share data)

|                                               | Year Ended December 31,
|---------------------------------------------- | -----------------------
|
|
|
|
|Revenues                                       |                        
|Cost of revenues                               |                        
|                                               |                        
|Gross profit                                   |                        
|Operating expenses:                            |                        
|Research and development, net                  |                        
|In process Research and development            |                        
|Sales and marketing                            |                        
|General and administrative                     |                        
|Impairment of goodwill                         |                        
|                                               |                        
|Total operating expenses                       |                        
|                                               |                        
|Operating income (loss):                       |                        
|Financial income (expense), net                |                        
|Other income (expenses), net                   |                        
|                                               |                        
|                                               |                        
|Income (loss) before tax on income             |                        
|Tax benefit (taxes on income)                  |                        
|                                               |                        
|Equity in losses of an affiliated company      |                        
|Minority interest in earnings of a             |                        
|subsidiary                                     |                        
|                                               |                        
|Loss from continuing operations                |                        
|Net income (loss) related to discontinued      |                        
|operations                                     |                        
|                                               |                        
|Net income (loss)                              |                        
|                                               |                        
|Basic and diluted net loss per share           |                        
|from continuing operations                     |                        
|                                               |                        
|Basic and diluted net income (loss)            |                        
|per share from discontinued operations         |                        
|                                               |                        
|Basic and diluted net income (loss) per share  |                        
|                                               |                        
|Weighted average number of shares used in      |                        
|computing basic net earning (loss) per share   |                        
|                                               |                        
|Weighted average number of shares used in      |                        
|computing diluted net earning (loss) per share |                        
|                                               |                        

- 2 -

---

---

|                           | As of December 31,
|-------------------------- | ------------------
|
|
|
|
|Cash and Cash Equivalents  |                   
|                           |                   
|Working Capital (*)        |                   
|                           |                   
|Total Assets               |                   
|                           |                   
|Short-term banks loan      |                   
|and current maturities     |                   
|of long-term bank loans    |                   
|and convertible note       |                   
|                           |                   
|Long-term liabilities      |                   
|                           |                   
|Minority interest in a     |                   
|subsidiary                 |                   
|                           |                   
|Share Capital              |                   
|                           |                   
|Additional paid in Capital |                   
|                           |                   
|Shareholders' equity       |                   
|                           |                   
|(*)Working capital         |                   
|comprises of:              |                   
|                           |                   
|Current assets             |                   
|                           |                   
|Less: current liabilities  |                   
|                           |                   
|                           |                   
|                           |                   

|3B. | Capitalization
and Indebtedness
|--- | -------------------------------

Not applicable

|3C. | Reasons
for the Offer and Use of proceeds
|--- | -----------------------------------------

Not applicable

- 3 -

---

---

|3D. | Risk
Factors
|--- | ------------

The following factors, in addition to
other information contained or incorporated by reference in this Form 20-F, should be
considered carefully. Our business, financial condition or results of operations could be
materially adversely affected by any of these risks. The risks described below are not the
only risks facing our company. Additional risks and uncertainties that we are not aware of
or that we currently believe are immaterial may also adversely affect our business,
financial condition, results of operation and liquidity. The trading price of our ordinary
shares could decline due to any of these risks, and you may lose all or part of your
investment.

Forward Looking Statements

This report on Form 20-F contains
forward-looking statements that are intended to be, and are hereby identified as, forward
looking statements for the purposes of the safe harbor provisions of the Private
Securities Reform Act of 1995. These statements address, among other things: our strategy;
the anticipated development of our products; the results of completed acquisitions and our
ability to make future acquisitions; our projected capital expenditures and liquidity; our
development of additional revenue sources; our development and expansion of relationships;
the market acceptance of our products; and our technological advancement. Actual results
could differ materially from those anticipated in these forward-looking statements as a
result of various factors, including all the risks discussed below and elsewhere in this
report.

We urge you to consider that
statements which use the terms believe, do not believe,
expect, plan, intend, estimate,
anticipate, projections, forecast and similar
expressions are intended to identify forward-looking statements. These statements reflect
our current views with respect to future events and are based on assumptions and are
subject to risks and uncertainties. Except as required by applicable law, including the
federal securities laws of the United States, we do not intend to update or revise any
forward-looking statements, whether as a result of new information, future events or
otherwise.

Market data and forecasts used in
this report have been obtained from independent industry sources. We have not
independently verified the data obtained from these sources and we cannot assure you of
the accuracy or completeness of the data. Forecasts and other forward-looking information
obtained from these sources are subject to the same qualifications and additional
uncertainties accompanying any estimates of future market size.

# Risks relating to our
financial results and capital structure:

The global economic
slowdown has and may continue to have an adverse impact on our financial results.

We,
like other companies, have been and are subject to the effects of market slowdowns. If
general economic conditions fail to improve, or if they continue to deteriorate, our
revenues, operating results and financial condition would be adversely affected. Our
revenues for the first quarter of 2009 decreased by 21.7% to $9 million from $11.5 million
in the fourth quarter of 2008, which reflects the impact of the economic slowdown on our
business. The sharpest decrease in revenues was in our subsidiary, BOS  Supply Chain
Solutions (Summit), Inc. (formerly known as Summit Radio Corp.) (Summit),
whose revenues decreased from $3.7 million in the fourth quarter of year 2008 to $2.7
million in the first quarter of year 2009, a 27% decrease.

Our
intangible assets as of December 31, 2008 amounted to $7.8 million. Following the economic
slowdown we recorded a goodwill impairment charge of $1.9 million in 2008 related to our
Supply Chain Solutions segment. If general economic conditions fail to improve, we may be
required to record additional impairment charges.

- 4 -

---

---

Our
customers debt is derived from sales to customers located primarily in Israel, South
America, North America and Europe. We do not have any collateral or credit insurance in
respect of the customers debt. The balance of allowance for bad debt as of December 31,
2008 amounted to $65,000, which was determined by the management to be sufficient. If
general economic conditions fail to improve, we may be required to record additional and
significant allowances for bad debts.

We have had a history of
losses and our future levels of sales and ability to achieve profitability are unpredictable.

As
of March 31, 2009, we had an accumulated deficit of $58 million. In 2008 we had a net loss
of $6.4 million and in the first quarter of 2009 we had net loss of $0.7 million. Our
ability to maintain and improve future levels of sales and achieve profitability depends
on many factors, which include:

| |  | successful
 integration  of Summit which was acquired in November  2007 and of the assets of Dimex
Systems (1988)            Ltd. and Dimex Hagalil Ltd. (collectively Dimex Systems),
which           were purchased in March 2008;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | servicing
the debt we have incurred for the financing of our acquisitions;
| | - | --------------------------------------------------------------------------

| |  | financing
working capital needs by debt or equity;
| | - | --------------------------------------------------

| |  | continuing
growth in the Aerospace industry and continued demand for our existing products;
| | - | -------------------------------------------------------------------------------------------

| |  | developing
and selling new RFID and Mobile Solutions products to meet customer needs;
| | - | -------------------------------------------------------------------------------------

| |  | controlling
costs and successfully implementing our business strategy; and
| | - | --------------------------------------------------------------------------

| |  | manufacture
and delivery of products in a timely manner.
| | - | --------------------------------------------------------

There
can be no assurance that we will be able to meet our challenges and experience any growth
in sales or achieve profitability in the future or that the levels of historic sales or
profitability experienced during previous years will continue in the future or that our
net losses will not increase in the future.

We may be unable to
maintain our gross profit margins.

Our
sales and profitability may vary in any given year, and from quarter to quarter. In order
to increase sales and enter into new markets with new products we may find it necessary to
decrease prices in order to be competitive. Additionally, the gross profit margin of our
Supply Chain Segment, whose sales accounted for 76% of our total sales in 2008 and 89% in
2007, tends to fluctuate mainly due to variety and mix of products of the Supply Chain
Solutions Segment. We may not be able to maintain current gross profit margins in the
future, which would have a material adverse effect on our business.

We require a significant amount
of cash to satisfy our debt obligations. If we fail to generate sufficient cash flow from
operations, we may need to renegotiate or refinance our debt, obtain additional financing,
postpone capital expenditures or sell assets. If we are forced to repay our short and long
term bank loans in cash, we may not have enough cash to fund our operations.

As
of March 31, 2009 we had $10.3 million of short term bank loans drawn under a revolving
credit facility, $661,000 current maturities of long term loans and $2.9 million of long
terms loans. We depend mainly on our cash generated by continuing operating activities to
make payments on our debt. We cannot assure that we will generate sufficient cash flow
from operations to make the scheduled payments on our debt. Our ability to meet our debt
obligations will depend on whether we can successfully implement our strategy, as well as
on economic, financial, competitive and technical factors. (See Section 5B.
Liquidity and Capital Resources)

- 5 -

---

---

Some
of the factors are beyond our control, such as economic conditions in the markets where we
operate or intend to operate, changes in our customers demand for our products, and
pressure from existing and new competitors. Also, because part of our loans bear interest
at floating rates, we are susceptible to an increase in interest rates. (See Item
11. Quantitative and Qualitative Disclosures about Market Risk)

If
we cannot generate sufficient cash flow from operations to make scheduled payments on our
debt obligations, we may need to renegotiate the terms of our debt, refinance our debt,
obtain additional financing, delay planned capital expenditures or sell assets.

If
our lenders decline to renegotiate the terms of our debt in these circumstances, the
lenders could declare all amounts borrowed and all amounts due to them under the
agreements due and payable.

In
addition, our short and long term bank loans contain certain provisions, restrictions and
financial covenants, which if violated, could result in the full principal amounts
together with interest and other amounts becoming immediately due and payable in cash. One
of the restrictions is on the transfer of funds between our Israeli and U.S. subsidiaries.

If
we do not have the cash resources to repay our indebtedness in such circumstances, our
lenders could foreclose on our assets that are subject to liens and sell our assets to
satisfy the debt. (See Section 5B. Liquidity and Capital
Resources)

We depend on two banks
which provide our short and long term loans.

The
Company manages its loans in two banks: (i) Bank Leumi Le Israel Ltd. (Bank
Leumi) which provides credit to the Company and its Israeli subsidiaries and (ii)
JPMorgan Chase Bank (JPMorgan Chase) which provides credit to Summit. In case
of adverse changes in the financial position of either of these banks or deterioration in
the relations of the Company with either of these banks, our liquidity could be materially
adversely affected.

Our assets are subject to
security interests in favor of our lenders. Our failure to repay the bank loans, if
required, could result in legal action against us, which could require the sale of all of
our assets.

The
repayment of our bank debt is secured by a first priority floating charge on all of our
companys assets, present and future as they may be changing from time to time, and
by a first priority fixed charge on all of the Companys issued and unpaid-for share
capital, its goodwill and its shares of Dimex Solutions Ltd. (previously named BOScom Ltd.)
( Dimex Solutions),  Summit and Odem Electronic  Technologies 1992 Ltd. ("Odem").  In addition,  the Company and its
subsidiaries entered into a series of inter company guarantees in favor of our lenders.

If
we are unable to repay the bank loans when due, our lenders could foreclose on our assets
in order to recover the amounts due. Any such action would require us to curtail or cease
operations.

Our debt obligations may
hinder our growth and put us at a competitive disadvantage.

Our
debt obligations require us to use a substantial portion of our operating cash flow to
repay the principal and interest on our loans. This reduces funds available to grow and
expand our business, limits our ability to pursue business opportunities and makes us more
vulnerable to economic and industry downturns. The existence of debt obligations and
covenants also limits our ability to obtain additional financing on favorable terms.

- 6 -

---

---

Due to restrictions in
our loan agreements, we may not be able to operate our business as we desire.

Our
loan agreements contain a number of conditions and limitations on the way in which we can
operate our business, including limitations on our ability to raise debt, sell or acquire
assets and pay dividends. Our loan agreements also contain various covenants which require
that we maintain certain financial ratios related to shareholders equity and
operating results. These limitations and covenants may force us to pursue less than
optimal business strategies or forgo business arrangements which could have been
financially advantageous to our shareholders and us. Our failure to comply with the
covenants and restrictions contained in our loan agreements could lead to a default under
the terms of these agreements. (See Section 5B. Liquidity and Capital
Resources)

The value of our holdings
in affiliated companies may decline and adversely affect our financial results.

As
of March 31, 2009 the Company held 6.1% of the outstanding shares of Surf Communication
Systems Ltd. (Surf) and 14.92% of New World Brands Inc. (New World
Brands). During 2008 and the first quarter of 2009, an impairment in the amount of
$1.5 million and $193,000 were recorded in respect of these shareholdings, respectively.
The book value of these investments as of March 31, 2009 amounted to $689,112. We may
record additional impairment in case of further deterioration in the business of these
entities.

In
August 2008, we reached an agreement for the sale to New World Brands of up to thirty-five
(35) million shares of New World Brands common stock. During 2008, we sold to New World
Brands a total of 6.6 million shares of New World Brands common stock. This agreement has
expired.

# Risks related to our
business:

We depend on key
personnel for the success of our business.

Our
success depends, to a significant extent, on the continued active participation of our
executive officers and other key personnel. In addition, there is significant competition
for employees with technical expertise in our industry. In order to succeed we would need
to be able to:

| |  | retain
the executive  officers and key technical  personnel who have been involved in the
 development  of         our two divisions;
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| |  | attract
and retain additional  qualified  personnel to provide  technological depth and support
to enhance         existing products and develop new products; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | attract
and retain highly skilled computer operating, marketing and financial personnel.
| | - | ----------------------------------------------------------------------------------------

We
cannot make assurances that we will be successful in attracting, integrating, motivating
and retaining key personnel. If we are unable to retain our key personnel and attract
additional qualified personnel as and when needed, our business may be adversely affected.

We have recently
substantially decreased the number of our employees and due to the reduced staff we may be unable
to meet our revenue objectives.

Starting
from the end of 2008 and through May 2009, our workforce was reduced from 154 employees to
125 employees, a reduction of 29 employees, of which 13 were from Summit. This decrease
was related to the economic slow down, which affected our revenues. With the decreased
staff, we may be unable to meet our revenue targets. If we need to further reduce the
number of employees, our ability to grow, and achieve our business and operation goals may
be hindered.

- 7 -

---

---

Integration of our
acquisitions requires significant financial and management resources and there is no
assurance that the acquisitions may prove successful.

Over
the past years we have pursued the acquisition of businesses, products and technologies
and have completed two major acquisitions, of the U.S. based Summit, in November 2007, and
of the assets of Dimex Systems, in March 2008.

Our
growth increases the complexity of our operations, places significant demands on our
management and our operational, financial and marketing resources and involves a number of
challenges, including:

| |  | managing
geographically dispersed operations;
| | - | ---------------------------------------------

| |  | retaining
and motivating key personnel of the acquired businesses;
| | - | ------------------------------------------------------------------

| |  | assimilating
different corporate cultures;
| | - | ------------------------------------------

| |  | preserving
the business relationships with existing key customers and suppliers;
| | - | --------------------------------------------------------------------------------

| |  | maintaining
uniform standards, controls, procedures and policies; and
| | - | ---------------------------------------------------------------------

| |  | introducing
joint products and service offerings.
| | - | -------------------------------------------------

There
can be no assurance that we will be able to successfully integrate and manage our
acquisitions in order to maintain and grow the combined business and maximize the
potential synergies.

Further,
once integrated, acquisitions may not achieve comparable levels of revenues, profitability
or productivity as our existing business or otherwise perform as expected. The occurrence
of any of these events could harm our business, financial condition or results of
operations.

Our corporate rebranding
initiative may not be successful.

In
February 2009, in order to strengthen the BOS brand-name and as part of our group
integration process, we decided to implement name changes of our wholly owned
subsidiaries. Recently, Lynk USA, Inc., has changed its name to BOS  Supply Chain
Solutions (Lynk) Inc. (Lynk) and Summit Radio Corp. has changed its name to
BOS  Supply Chain Solutions (Summit), Inc. The following subsidiaries are in the
process of the name change as follows:

|Previous Name                          | New Name        
|-------------------------------------- | ----------------
|                                       |                 
|Dimex Solutions Ltd.                   | BOS - Dimex Ltd.
|Odem Electronic Technologies 1992 Ltd. | BOS - Odem Ltd. 

- 8 -

---

---

There
is no assurance that the renaming and rebranding may prove to be successful to the
Companys business. In addition, the renaming and rebranding may cause interruption
in business with customers or suppliers in the short term.

We may be unable to
effectively manage our growth and expansion, and as a result, our business results may be adversely
affected.

Our
goal is to grow significantly over the next few years. The management of our growth, if
any, will require the continued expansion of our operational and financial control
systems, as well as a significant increase in our financial resources and in our delivery
and service capabilities. These factors could place a significant strain on our resources.

Our
inability to meet our delivery commitments in a timely manner (as a result of unexpected
increases in orders, for example) could result in losses of sales, our exposure to
contractual penalties, costs or expenses, as well as damage to our reputation in the
marketplace.

Our
inability to manage growth effectively could have a material adverse effect on our
business, financial condition and results of operations.

If
our efforts to raise capital do not succeed, our efforts to increase our business may be
seriously jeopardized.

A significant part of the
revenues of our supply chain business are from two major customers Israel Aircraft Industries
(IAI) and a strategic Latin American customer (the Strategic
Customer).

Our
business relationship with IAI and the Strategic Customer accounted for 11% and 13% of our
year 2008 revenues, and accounted for 13% and 12% of our first quarter of 2009 revenues
respectively. An interruption in our business relationship with either of these customers
would result in a significant reduction in our revenues, backlog and in a write-off of
inventory, and would have a material adverse effect on our business and results of
operations. Our long term sales agreement with IAI will end by December 2010. In July
2008, we signed a contract for the sale of components to the Strategic Customer. The
contract provides for a framework for orders during an initial five-year term (until
2012). The contract may be extended for additional five-year terms. Pursuant to the
contracts with IAI and the Strategic Customer, we committed to a fixed components sale
price through the respective contract periods. Each of our agreements with IAI and the
Strategic Customer subjects us to the following risks:

| |  | Significant
appreciation in the cost price of electronic components may materially adversely impact
our  financial results.
| | - | ---------------------------------------------------------------------------------------------------------------------------

Our
sales agreements with IAI and the Strategic Customer provide for the supply of electronic
components at a fixed sales price. Absent the flexibility to increase our prices as a
result of increased costs of the components, significant increased costs may adversely
impact our financial results.

| |  | The
relationship with IAI and the Strategic Customer requires us to hold a large inventory,
in order to meet short lead time and delivery requirements. If we are unable to
sell this inventory on a  timely basis, we could incur charges for excess and
obsolete inventory, which would materially  adversely affect our results of
operations.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 9 -

---

---

Under
the agreements with IAI and the Strategic Customer, we are obligated to hold inventory of
products necessary for three months of production. This requires us to incur the costs of
purchasing inventory without having an outstanding purchase order for the products. If we
are unable to sell products that are purchased to hold in inventory, we may incur
difficulties in working capital, write-offs and write-downs as a result of slow-moving
items, technological obsolescence, excess inventories, discontinued products and products
with market prices lower than cost. Such write-offs and write-downs and difficulties in
working capital could adversely affect our operating results and financial condition.

| |  | If
we are unable to provide certain requested components, the entire order which includes
these  components may be cancelled.
| | - | -----------------------------------------------------------------------------------------------------------------------------

Supply
Chain solution programs of electronic components accommodate the preference of customers
to work with a limited number of suppliers that will be able to provide a wide range of
electronic components under one order. In the event we are not able to provide certain of
the components ordered, the customer could elect to terminate the entire order before its
delivery. This could cause us to remain with excess and obsolete inventory and would
adversely affect our results of operations.

The continued growth of
our RFID and Mobile Solutions segment depends on our ability to expand sales abroad.

In
2008, our RFID and Mobile Solutions revenues that were generated from sales outside of
Israel amounted to $2.4 million or 19.4% of the entire RFID and Mobile Solutions revenues.
Continued growth of this segment depends on our ability to further increase our sales
abroad. There can be no assurance that we will be able to maintain and increase our
revenues from these markets.

Certain customers of our
Supply Chain Solutions may cancel purchase orders they placed before the delivery.

Certain
purchase orders of our Supply Chain Solutions provide that they may be canceled by the
customer before delivery. In the event substantial orders are so cancelled, there is no
assurance that we will be able to sell the pre-purchased inventory at a profit, or at all.
This could result in excess and obsolete inventory and could have a material adverse
effect on our results of operations.

The Companys
subsidiary, Summit, engages in a number of business activities governed by Federal
Regulations, which if violated, could subject the Company to civil or criminal fines
and penalties.

The
Companys subsidiary, Summit, engages in a number of business activities governed by
the Federal Acquisition Regulations (FAR), the Defense Federal Acquisition Regulations
(DFAR) and the export control provisions of the International Traffic In Arms Regulations
(ITAR) of the Department of State. The FAR and DFAR regulate business with the U.S.
Department of Defense as well as other U.S. Government agencies regardless of whether a
company serves in the role of a prime contractor (in direct privity of contract with the
governmental agency) or as a subcontractor to a prime contractor, regardless of how many
tiers down the contracting chain. Violation of the FAR or DFAR can result in civil and
criminal fines and other penalties, including suspension or debarment from the ability to
do business with any agency of the Federal Government, whether directly or indirectly.
Much of the Summits business, regardless of whether with the Federal Government,
involves compliance with the ITAR, the export control regulations for the export of
defense articles, technology or defense services. ITAR violations are, in effect, a
violation of the Arms Export Control Act. Fines and penalties can be civil or criminal.
Civil fines are $250,000 per violation or twice the value of the transaction. Criminal
violations include fines of $1,000,000 per violation both for individuals and entities.
Violation of the ITAR can also lead to loss of export privileges for up to four years.

- 10 -

---

---

We have terminated our business
relationship with the US distributor of our BOSâNOVA Suite Solution (one of the
products of RFID and Mobile Solutions segment). Consequently, we may experience an
interruption or decrease in sales, which may have a material adverse effect on our
business.

We
have been marketing our BOSâNOVA Suite Solutions in the United States through one
key distributor. In 2008 and 2007 our sales through this distributor accounted for 2% and
4% of our total sales, respectively, and for approximately 7% and 18% of our gross profit,
respectively. In April 2009 we terminated our business relationship with this distributor
and intend to market and support the BOSâNOVA Suite Solutions in the US directly,
through our New Jersey operation. We cannot assure that the transition will be successful
and we may experience a reduction in our gross profit, which could have a material adverse
effect on our business. In addition, the former distributor has recently commenced a
lawsuit against Dimex Solutions seeking unspecified damages as a result of Dimex
Solutions alleged failure to provide the required level of technical support under
the distribution agreement. The Company intends to contest this lawsuit vigorously.

We are required to make
additional payments towards the acquisition of the assets of Dimex Systems.

Pursuant
to the Dimex Systems Asset Purchase Agreement we are required to pay to the sellers an
additional amount of approximately NIS 10 million (approximately $2.57 million, based on a
3.8887 New Israeli Shekel (NIS) to U.S. dollar currency exchange rate as of
June 1, 2009), in three installments. The first installment of NIS 3.5 million was made in
March 2009 and the remaining amount was payable during the year 2010.

In
March 2009, the Company entered into an amendment to the Dimex Systems Asset Purchase
Agreement that revises the payment schedule of the approximately NIS 10 million payable in
three semi-annual installments through March 2010. The amendment provides for a NIS 3.5
million payment in March 2009, NIS 4 million will be paid in 6 equal monthly installments
each, starting on January 15, 2010, and the remaining approximately NIS 2.5 million shall
be paid in two equal installments in March and April 2010. The amendment further provides,
that if the Company raises funds by way of a debt offering meeting certain conditions, the
last payment of approximately NIS 2.5 million shall be converted into the same type of
convertible debentures issued in the framework of such offering.

If
we are unable to make these payments, we will be in breach of contract and our financial
position, and results of operation could be adversely affected.

We rely on certain key
suppliers.

Most
of our sales rely on products of certain key suppliers, which we represent. 20% of our
first quarter of 2009 Supply Chain Solutions segment purchases were sourced from five key
suppliers and 75% of our first quarter of 2009 Mobile and RFIDSolutions segment
purchases were sourced from five key suppliers.

In
the event that any of our key suppliers becomes unable to fulfill our requirements in a
timely manner or if we cease our business relationship with these suppliers, we may
experience an interruption in delivery until an alternative source of supply can be
obtained.

- 11 -

---

---

Future changes in
industry standards may have an adverse effect on our business.

New
industry standards in the aviation and defense industry could cause a portion of our
Supply Chain Solution segments inventory to become obsolete and unmarketable which
would adversely affect our results of operations.

If revenue levels for any
quarter fall below our expectations, our results of operations will be adversely affected.

Our
revenues in any quarter are substantially dependent on orders received and delivered in
that quarter. We base our decisions regarding our operating expenses on anticipated
revenue trends, and our expenses levels are relatively fixed, or require some time for
adjustment. As a result, revenue levels below our expectations will adversely affect our
results of operations. In the fourth quarter of 2008 we faced a significant reduction in
revenues which declined to $11.5 million from $13.4 million in the third quarter of 2008.
In the first quarter of 2009 we faced an additional reduction in revenues, which declined
to $9.0 million.

The rate of inflation in
Israel may negatively impact our costs if it exceeds the rate of devaluation of the
NIS against the U.S. dollar. Similarly, the U.S. dollar cost of our operations in Israel
will increase to the extent increases in the rate of inflation in Israel are not
offset by a devaluation of the NIS in relation to the U.S. dollar.

A
substantial amount of our revenues is denominated in U.S. dollars or is U.S.
dollar-linked, but we incur a significant portion of our expenses, principally salaries
and related personnel expenses in Israel and rent for our facilities in Israel, in NIS. As
a result, we are exposed to the risk that the rate of inflation in Israel will exceed the
rate of devaluation of the NIS in relation to the U.S. dollar or that the timing of this
devaluation lags behind inflation in Israel. In that event, the U.S. dollar cost of our
operations in Israel will increase and our U.S. dollar-measured results of operations will
be adversely affected.

Similarly,
we are exposed to the risk that the NIS, after adjustment for inflation in Israel, will
appreciate in relation to the U.S. dollar. In that event, the dollar cost of our
operations in Israel will increase and our dollar-measured results of operations will be
adversely affected. During 2006, 2007 and 2008, the inflation adjusted NIS appreciated
against the U.S. dollar, which raised the U.S. dollar cost of our Israeli operations. We
cannot predict whether in the future the NIS will appreciate against the U.S. dollar or
vice versa. Any increase in the rate of inflation in Israel, unless the increase is offset
on a timely basis by a devaluation of the NIS in relation to the U.S. dollar, will
increase labor and other costs, which will increase the U.S. dollar cost of our operations
in Israel and harm our results of operations.

(see "Section 5A. Results of Operation - Impact of Inflation and Currency Fluctuations")

We may be unable to
maintain and continue developing marketing and distribution arrangements and expand our
reach into overseas markets.

Sales
outside Israel accounted for 42% of our total sales in 2008 and for 33% in 2007. If we are
not able to maintain our existing distribution channels and expand to new international
markets, our operating results may be materially adversely affected.

If we are unsuccessful in
developing and introducing new products, we may be unable to expand our business.

The
market for some of our products is characterized by rapidly changing technology and
evolving industry standards. The introduction of products embodying new technology and the
emergence of new industry standards can render existing products obsolete and unmarketable
and can exert price pressures on existing products.

- 12 -

---

---

Our
ability to anticipate changes in technology and industry standards and successfully
develop and introduce new and enhanced products as well as additional applications for
existing products, in each case on a timely basis, will be critical in our ability to grow
and remain competitive. Although these products are related to, and even incorporate our
existing products, there can be no assurance that we will be able to successfully develop
and market any such new products. If we are unable to develop products that are
competitive in technology and price and responsive to customer needs, for technological or
other reasons, our business will be materially adversely affected.

We have significant sales
worldwide and could encounter problems if conditions change in the places where we market
our products.

We
have sold and intend to continue to sell our products in North and South America, Europe,
China and Asia Pacific.

A
number of risks are inherent in engaging in international transactions, including:

| |  | possible
problems in collecting receivables;
| | - | --------------------------------------------

| |  | imposition
of governmental controls, or export license requirements;
| | - | --------------------------------------------------------------------

| |  | political
and economic instability in foreign countries;
| | - | --------------------------------------------------------

| |  | trade
restrictions or changes in tariffs being imposed; and
| | - | -----------------------------------------------------------

| |  | laws
and legal issues concerning foreign countries.
| | - | ---------------------------------------------------

If
we should encounter such difficulties in conducting our international operations, it may
adversely affect our business condition and results of operations.

We may be unable to
successfully defend ourselves against claims brought against us.

We
are defendants in a number of lawsuits filed against us, and from time to time in the
normal course of our business, may receive written demands for payments from prospective
plaintiffs. Legal proceedings can be expensive, lengthy and disruptive to normal business
operations, and can require extensive management attention and resources regardless of
their merit. Moreover, we cannot predict the results of all proceedings and there can be
no assurance that we will be successful in defending ourselves against them. An
unfavorable resolution of a lawsuit or proceeding could materially adversely affect our
business, results of operations and financial condition.

We may be obligated to
indemnify our directors and officers.

The
Company has agreements with its directors and senior officers which provide, subject to
Israeli law, for the Company to indemnify these directors and senior officers for (a)
monetary liability imposed upon them in favor of a third party by a judgment, including a
settlement or an arbitral award confirmed by the court, as a result of an act or omission
of such person in his capacity as a director or officer of the Company, (b) reasonable
litigation expenses, including attorneys fees, incurred by them pursuant to an
investigation or a proceeding commenced against them by a competent authority and that was
terminated without an indictment and without having a monetary charge imposed on them in
exchange for a criminal procedure (as such terms are defined in the Israeli Companies Law
1999  5759 (the Israeli Companies Law)), or that was terminated without
an indictment but with a monetary charge imposed on them in exchange for a criminal
procedure in a crime that does not require proof of criminal intent, as a result of an act
or omission of such person in his capacity as a director or officer of the Company, and
(c) reasonable litigation expenses, including attorneys fees, incurred by such a
director or officer or imposed on him by a court, in a proceeding brought against him by
or on behalf of the Company or by a third party, or in a criminal action in which he was
acquitted, or in a criminal action which does not require criminal intent in which he was
convicted, in each case relating to acts or omissions of such person in his capacity as a
director or officer of the Company. Such indemnification may materially adversely affect
our financial condition.

- 13 -

---

---

The measures we take in
order to protect our intellectual property may not be effective or sufficient.

Our success is dependent upon our proprietary rights and technology. We currently
rely on a combination of trade secret, copyright and trademark law, together with
non-disclosure and invention assignment agreements, to establish and protect the
proprietary rights and technology used in our products. We generally enter into
confidentiality agreements with our employees, consultants, customers and potential
customers and limit the access to and the distribution of our proprietary information.
Despite these precautions, it may be possible for a third party to copy or otherwise
obtain and use our technology without authorization, or to develop similar technology
independently. We do not believe that our products and proprietary rights infringe upon
the proprietary rights of others. However, there can be no assurance that any other party
will not argue otherwise. The cost of responding and adequately protecting ourselves
against any such assertion may be material, whether or not the assertion is valid.
Further, the laws of certain countries in which we sell our products do not protect our
intellectual property rights to the same extent as do the laws of the United States.
Substantial unauthorized use of our products could have a material adverse effect on our
business. We cannot make assurances that our means of protecting our proprietary rights
will be adequate or that our competitors will not independently develop similar
technology. Additionally, there are risks that arise from the use of intranet networks and
the Internet. Although we utilize firewalls and protection software, we cannot be sure
that our proprietary information is secured against penetration. Such penetration, if
occurs, could have an adverse effect on our business.

There can be no assurance
that we will not be classified as a passive foreign investment company (a
PFIC).

Based upon our current and projected
income, assets and activities, we do not believe that at this time BOS is a passive
foreign investment company (a PFIC) for U.S. federal income tax purposes, but
there can be no assurance that we will not be classified as such in the future. Such
classification may have grave tax consequences for U.S. shareholders. One method of
avoiding such tax consequences is by making a qualified electing fund election
for the first taxable year in which the Company is a PFIC. However, such an election is
conditioned upon our furnishing U.S. shareholders annually with certain tax information.
We do not presently prepare or provide such information, and such information may not be
available to U.S. shareholders if we are subsequently determined to be a PFIC. You are
advised to consult with your own tax advisor regarding the particular tax consequences
related to the ownership and disposition of the ordinary shares under your own particular
factual circumstances.

# Risks related to our
ordinary shares:

Our share price has been
and may continue to be volatile, which could result in substantial losses for individual shareholders.

The
market price of our ordinary shares has been and may continue to be highly volatile and
subject to wide fluctuations. From January 2008 through May 31, 2009, the daily closing
price of our ordinary shares in NASDAQ has ranged from $0.22 to $2.05 per share. We
believe that these fluctuations have been in response to a number of factors including the
following, some of which are beyond our control:

| |  | adverse
world economic and capital market conditions;
| | - | -----------------------------------------------------

- 14 -

---

---

| |  | actual
or anticipated variations in our quarterly operating results;
| | - | --------------------------------------------------------------------

| |  | increase
in our bank debts;
| | - | ---------------------------

| |  | the
acquisition of Summit and of the assets of Dimex Systems;
| | - | -------------------------------------------------------------

| |  | additions
or departures of key personnel;
| | - | -----------------------------------------

| |  | changes
in our target markets, especially in the aviation industry; and
| | - | -----------------------------------------------------------------------

| |  | sales
of securities in private placements.
| | - | ------------------------------------------

In
addition, the stock market in general, and stocks of technology companies in particular,
have from time to time experienced extreme price and volume fluctuations. This volatility
is often unrelated or disproportionate to the operating performance of these companies.
These broad market fluctuations may adversely affect the market price of our ordinary
shares, regardless of our actual operating performance.

The Companys shares
may be delisted from the NASDAQ Global Market if it does not meet NASDAQs continued
listing requirements.

In
late 2002 and early 2003 the Company received notice from the NASDAQ Stock Market that its
ordinary shares were subject to delisting from the NASDAQ Global Market for failure to
meet NASDAQs minimum bid price and shareholders equity requirements ($10
million) for continued listing on the Global Market. Following a hearing, during 2003, we
were notified by NASDAQ that we had regained compliance.

On
August 30, 2004, we received notice from the NASDAQ Stock Market that our ordinary shares
were subject to delisting from the NASDAQ Global Market for failure to meet NASDAQs
minimum market value of publicly held shares requirement ($5 million) for continued
listing on the Global Market. On November 4, 2004, we were notified by NASDAQ that we had
regained compliance with this requirement.

On
January 25, 2005, we received notice from the NASDAQ Stock Market that we were not in
compliance with the minimum $10 million shareholders equity requirement for
continued listing on the Global Market. Following that notice, on January 28, 2005, we
received an additional notice indicating that based on further review of our financial
statements as they appeared in our filing on Form 6-K dated January 10, 2005, it was
determined that the shareholders equity was $10,601,000 on a pro forma basis as of
September 30, 2004. Therefore we were in compliance with the stockholders equity
requirement for continued listing on the Global Market and the matter had been closed.

On
June 2, 2005, the Company again received notice from the NASDAQ Stock Market indicating
that based on the results for the period ended March 31, 2005, the shareholders
equity was $9,425,000, and accordingly not in compliance with the minimum $10,000,000
shareholders equity requirement for continued listing on the Global Market. In June
2005, the Company regained compliance with NASDAQs minimum $10,000,000
shareholders equity requirement for continued listing on the Global Market.

The
Companys share has recently traded at a price below the NASDAQs minimum bid
price of $1.00and its market value of publicly held shares is below the minimum
required of $5 million. NASDAQ has suspended these continued listing requirements through
July 20, 2009. There can be no assurance that we will be able to meet and continue to meet
these or other NASDAQ requirements to maintain our NASDAQ Global Market listing, in which
case we will seek to transfer the listing of our ordinary shares to the Over the Counter
Bulletin Board, of which there can be no assurance.

- 15 -

---

---

# Risks related to our
location in Israel:

Political, economic, and
security conditions in Israel affect our operations and may limit our ability to produce and
sell our products or provide our services.

We
are incorporated under the laws of the State of Israel, where we also maintain our
headquarters and our principal research and development and sales and marketing
facilities. Political, economic, security and military conditions in Israel directly
influence us. We could be adversely affected by any major hostilities involving Israel,
the interruption or curtailment of trade between Israel and its trading partners or a
significant downturn in the economic or financial condition of Israel. In January 2006,
Hamas, an Islamic movement responsible for many attacks against Israelis, won the majority
of the seats in the Parliament of the Palestinian Authority. The election of a majority of
Hamas-supported candidates is a major obstacle to relations between Israel and the
Palestinian Authority, as well as to the stability in the Middle East as a whole. In
addition, the future of the peace process with the Palestinians is uncertain
and has deteriorated due to Palestinian violence, with the threat of a large-scale attack
by Palestinians on Israeli civilians and key infrastructure remaining a constant concern.
The past few years of renewed terrorist attacks by the Palestinians has severely affected
the Israeli economy in many ways. In June 2007, there was an escalation in violence in the
Gaza Strip resulting in Hamas effectively controlling the Gaza Strip and a further
escalation in violence has occurred during the first few months of 2008. In July 2006,
Israel became involved in a major military conflict with the Hizbullah organization in
Lebanon, which subjected the north of Israel to missile attacks. In December 2008, Israel
was involved in a military conflict with Hamas, which subjected the South of Israel to
missile attacks. Ongoing violence between Israel and the Palestinians as well as tension
between Israel and the neighboring Syria and Lebanon may have a material adverse effect on
our business, financial condition and results of operations. In addition, several
countries still restrict business with Israel and with companies doing business in Israel.
We could be adversely affected by adverse developments in the peace process or
by restrictive laws or policies directed towards Israel or Israeli businesses.

Generally,
all nonexempt male adult citizens and permanent residents of Israel, are obligated to
perform military reserve duty annually, and are subject to being called to active duty at
any time under emergency circumstances. While we have operated effectively under these
requirements since our incorporation, we cannot predict the full impact of such conditions
on us in the future, particularly if emergency circumstances occur. If many of our
employees are called for active duty, our business may be adversely affected.

Additionally, in recent years Israel
has been going through periods of recession in economic activity, resulting in low growth
rates and growing unemployment. Our operations could be adversely affected if the economic
conditions in Israel deteriorate. Furthermore, Israel is a party to certain trade
agreements with other countries, and material changes to these agreements could have an
adverse effect on our business.

The anti-takeover effects of Israeli laws may delay or deter a change of control of the Company.

Under
the Israeli Companies Law, a merger is generally required to be approved by the
shareholders and Board of Directors of each of the merging companies. Shareholder approval
is not required if the company that will not survive the merger is controlled by the
surviving company. Additionally, the law provides some exceptions to the shareholder
approval requirement in the surviving company. Shares held by a party to the merger and
certain of its affiliates are not counted towards the required approval. If the share
capital of the company that will not be the surviving company is divided into different
classes of shares, the approval of each class is also required. A merger may not be
approved if the surviving company will not be able to satisfy its obligations. At the
request of a creditor, a court may block a merger on this ground. In addition, a merger
can be completed only after all approvals have been submitted to the Israeli Registrar of
Companies, provided that 30 days have elapsed since shareholder approval was received and
50 days have passed from the time that a proposal for approval of the merger was filed
with the Registrar.

- 16 -

---

---

The
Israeli Companies Law provides that an acquisition of shares in a public company must be
made by means of a tender offer, if as a result of the acquisition, the purchaser would
become a holder of 25% or more of the voting power at general meetings, and no other
shareholder owns a 25% stake in the Company. Similarly, the Israeli Companies Law provides
that an acquisition of shares in a public company must be made by means of a tender offer
if, as a result of the acquisition, the purchaser would become a holder of 45% or more of
the voting power at general meetings, unless someone else already holds 45% of the voting
power. An acquisition from a 25% or 45% holder, which results in the purchaser becoming a
25% or 45% holder respectively, does not require a tender offer. An exception to the
tender offer requirement may also apply when the additional voting power is obtained by
means of a private placement approved by the general meeting of shareholders. These rules
also do not apply if the acquisition is made by way of a merger.

The
Israeli Companies Law also provides specific rules and procedures for the acquisition of
shares held by minority shareholders, if the majority shareholder shall hold more than 90%
of the outstanding shares.

These
laws may have the effect of delaying or deterring a change in control of the Company,
thereby limiting the opportunity for shareholders to receive a premium for their shares
and possibly affecting the price that some investors are willing to pay for the
Companys securities.

All of our directors and
most of our officers are non-U.S. residents and enforceability of civil liabilities against
them is uncertain.

All
of our directors and most of our officers reside outside of the United States. Service of
process upon them may be difficult to effect within the United States. Furthermore,
because the majority of our assets are located in Israel, any judgment obtained in the
United States against us or any of our directors and non- U.S. officers may not be
collectible within the United States.

|Item 4: |  | Information on the Company
|------- |  | --------------------------

|4A. | History
and Development of the Company
|--- | --------------------------------------

We were incorporated in Israel in
1990 and are subject to the Israeli Companies Law. Our executive offices and engineering,
development, testing, shipping and service operations are located in Israel and the United
States.

Our telephone number is
972-3-954-1000 and our website address is www.boscorporate.com. Our subsidiaries
websites are: Odem  www.odem.co.il; Odem also maintains a website showcasing our
services in the field of RFID  www.yourfid.com; Dimex Solutions 
www.dimex.co.il and Summit  www.summitradio.com. The information contained on, or
linked from, our websites is not a part of this report.

We operate our business through two
segments:

| |  | Supply
Chain Solutions  conducted through two wholly owned subsidiaries: Odem and Summit.
Our Supply Chain Solutions business offers a wide range of electronic components to
customers in the aviation and aerospace industry that prefer consolidate their component
acquisitions through a supplier that is able to provide a comprehensive solution to their
components-supply needs.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 17 -

---

---

| |  | Mobile
and RFID Solutions  conducted through our wholly owned subsidiary, Dimex Solutions.
Our Mobile and RFID Solutions offerings form a comprehensive turn-key solution, combining
mobile infrastructure of manufacturers that we represent, middleware software and a
software application.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On November 18, 2004, we purchased
63.8% of Odems issued and outstanding shares from Odems shareholders, in
consideration of $2,740,000, comprised of cash in the amount of $1,971,000 and $769,000 by
the issuance of 290,532 of the Companys ordinary shares (subject to
lock-up periods of 2 to 4 years). We purchased an additional 23.9% and 12.3%
from the minority shareholders on September 29, 2005 and November 1, 2005, respectively,
and thus Odem became our wholly-owned subsidiary. In consideration for the 12.3% of
Odems shares purchased in November 2005 the Company paid $554,000 in cash and for
the 23.9% of Odems shares purchased in September 2005 the Company (i) issued 232,603
of the Companys ordinary shares (subject to lock up periods of 2 to 4
years) and paid $716,000 in cash.

In June 2007, the Company entered
into a Development, Credit and Purchase Agreement with OptimizeIT, an Israeli partnership,
pursuant to which the Company purchased the assets of OptimizeIT. The aggregate
consideration for the purchase was $170,000, which was paid by issuance of 8,000 shares of
the Company and by a cash payment of $150,000.

In March 2009, the Company sold the
OptimizeIT product and related intellectual property for a consideration of $70,000 plus
contingent consideration based on future revenues of up to $1,500,000.

On November 21, 2007 the Company
purchased all of the outstanding share capital of Summit, from Summits existing
shareholders. In consideration for Summits shares the Company issued 360,000 of the
Companys shares (subject to lock-up periods of up to 2 years) and (ii)
paid a cash amount of $4,472,000. In addition, Summits selling shareholders are
entitled to receive contingent consideration of up to $500,000, based on performance in
the years 2008 and 2009. As of December 31, 2008, the Company accrued $60,000 on account
of contingent consideration for the year 2008.

In March 2008, Dimex Solutions and
its subsidiary Dimex Hagalil Projects (2008) Ltd. (Dimex Hagalil), purchased
the assets and activities of Dimex Systems, which was an integrator of AIDC (Automatic
Identification and Data Collection) solutions based on RFID and barcode technology. The
consideration for acquiring the business operation of Dimex Systems was NIS 17.6 million
(approximately $4,530,000 based on the June 1, 2009 exchange rate) and for the inventory,
accounts receivable and fixed assets, the consideration was NIS 27 million (approximately
$6,950,000 based on the June 1, 2009 exchange rate). The consideration was comprised of
cash, payable over a 24-month period and of 500,224 BOS shares (equal to approximately
4.4% of the then outstanding shares of BOS). In March 2009, the Company entered into an
amendment to the Dimex Systems Asset Purchase Agreement that revises the payment schedule
of the approximately NIS 10 million payable in three semi-annual installments through
March 2010. The amendment provides for a NIS 3.5 million payment in March 2009, NIS 4
million will be paid in 6 equal monthly installments each, starting on January 15, 2010,
and the remaining approximately NIS 2.5 million shall be paid in two equal installments in
March and April 2010. The amendment further provides, that if the Company raises funds by
way of a debt offering meeting certain conditions, the last payment of approximately NIS
2.5 million shall be converted into the same type of convertible debentures issued in the
framework of such offering.

- 18 -

---

---

In addition, we have an interest in
two companies:

(a)
          Surf, in which as of March 31, 2009 we held 6.1% of the issued and outstanding
          share capital. Established in 1996, Surf is an Israeli privately held company.
          Surf develops a suite of hardware and software products that drives a wide
          variety of applications whose common goal is high-capacity distribution of voice
          and video. In November 2001, the Company invested $1,000,000 as part of a
          private placement in Surf, and converted a convertible loan in the amount of
          $1,042,000 into Preferred Shares in Surf. In March 2003, the Company purchased
          from Catalyst Investments L.P. (Catalyst Investments) most of the
          Surf shares held by Catalyst Investments as a result of which Catalyst
          Investments held 16.6% of the outstanding Company shares, after the issuance. In
          September 2005, the Company invested $300,000 in Surf as part of a private
          placement.

(b)
          New World Brands, in which as of March 31, 2009 we held 14.92% of the issued and
          outstanding share capital. On December 31, 2005, we sold our Communications
          related property and equipment, goodwill, technology, trade name, existing
          distribution channels and related contingent liability to the Office of the
          Chief Scientist to IP Gear Ltd. (IP Gear), a wholly owned subsidiary
          of Qualmax. The consideration paid to the BOS in the transaction was
          approximately 3.2 million Qualmax shares of common stock, plus contingent
          consideration based on the performance of IP Gear. On June 8, 2006, Qualmax
          issued to BOS, on account of the abovementioned commitment, an additional
          250,000 Shares.

The Company also granted a bridge
loan to IP Gear in the amount of $1,000,000.

In May 2006, Qualmax issued to the
Company 244,755 shares, and the principal amount of the loan was reduced to $650,000. In
June 2006, Qualmax issued to BOS an additional 174,825 shares, further reducing the
principal amount of the loan, to $400,000.

On September 18, 2006, Qualmax
announced that it had consummated the transfer of all of its assets and liabilities to New
World in exchange for Series A Convertible Preferred Stock of New World convertible into
common stock with approximately 86% of the voting power of New World. The shares of common
stock of New World are quoted on the Over the Counter Bulletin Board. Immediately prior to
the closing of the transaction, New World sold all of its former business operations.

On January 10, 2007, we announced
that we closed a transaction with Qualmax and its subsidiaries, New World and IPGear,
pursuant to which approximately $1.5 million payable to us by Qualmax and IPGear
(including the outstanding balance of the aforementioned loan) was converted into 5.50652
shares of Series A Convertible Preferred Stock of New World. On April 27, 2007, New World
Brands announced the conversion of all of its outstanding Series A Convertible Preferred
Stock into shares of Common Stock.

Following the consummation of a
merger of Qualmax with and into New World Brands in January 2009, our holdings in Qualmax
were converted into shares of New World Brands.

In April 2007, the Company completed
a rights offering in which it raised gross proceeds of approximately $4.4 million and
issued 1,739,398 ordinary shares.

- 19 -

---

---

On June 21, 2007, Laurus Master Fund
Ltd. converted the entire outstanding principal amount under its Convertible Notes of
approximately $2,223,000 into 878,670 ordinary shares of the Company.

In June 2007, the Company entered
into a definitive private placement agreement with a European private investor for the
issuance of 226,415 Ordinary Shares at a price per share of $2.65.

In December 2007, the Company entered
into a Share Purchase Agreement with Catalyst Fund L.P. (Catalyst Fund) and
three subsidiaries of D.S. Apex Holdings Ltd. (D.S. Apex), under which the
Company issued 833,560 ordinary shares at a price of $2.40 per share (reflecting an
aggregate investment of approximately $2 million), and 541,814 warrants at an exercise
price of $2.76, exercisable for four years from their date of issuance. In June 2008, the
Company entered into a Finder Letter Agreement with T.F.E. Holdings Ltd. under which the
Company issued 110,000 ordinary shares. These shares were issued as fees for services
rendered to the Company in connection with the acquisition of the assets of Dimex Systems.

In July 2008, the Company entered
into a Share Purchase Agreement with three non-U.S. investors, under which the Company
issued 740,740 ordinary shares at a price per share of $1.35 (reflecting an aggregate
investment of $1 million) and 370,370 ordinary shares issuable upon the exercise of
warrants, at an exercise price $1.60 per ordinary share, exercisable for 2 years from
their date of issuance. In August 2008, the Company entered into a Share Purchase
Agreement with a non-U.S. investor, under which the Company issued 816,327 ordinary shares
at a price per share of $1.225 (reflecting an aggregate investment of $1 million) and
408,164 ordinary shares issuable upon the exercise of warrants at an exercise price $1.475
per ordinary share, exercisable for 2 years from their date of issuance.

For more details on the
aforementioned private placements see Section 5B- Liquidity and Capital Resources.

In
February 2009, in order to strengthen the BOS brand-name and as part of our group
integration process, we decided to implement name changes of our wholly owned
subsidiaries. Recently, Lynk USA, Inc., has changed its name to BOS  Supply Chain
Solutions (Lynk) Inc. and Summit Radio Corp. has changed its name to BOS  Supply
Chain Solutions (Summit), Inc. The following subsidiaries are in the process of the name
change as follows:

|Previous Name                          | New Name        
|-------------------------------------- | ----------------
|
|
|
|
|Dimex Solutions Ltd.                   | BOS - Dimex Ltd.
|Odem Electronic Technologies 1992 Ltd. | BOS - Odem Ltd. 

On
February 11, 2009 the Company announced that it requested the Tel Aviv Stock Exchange to
delist its shares from trading in Tel Aviv. The delisting became effective on May 12,
2009. The delisting of the ordinary shares from the TASE does not affect the continued
listing of the ordinary shares on the NASDAQ Global Market under the symbol BOSC. After
the delisting of the Companys ordinary shares from the TASE, the Company is not be
subject to reporting requirements in Israel.

The
Company has recently entered into a loan agreement with several lenders, including
Catalyst Private Equity Partners (Israel) II L.P., certain existing shareholders and
members of our management, including our chief executive officer, for an aggregate loan
amount of approximately $1.288 million. Closing of the transaction is subject to certain
closing conditions. The Company is in negotiations for obtaining additional loans, up to
an aggregate amount of $3.75 million.

For more details on the
aforementioned loan financing see Section 5B- Liquidity and Capital Resources.

- 20 -

---

---

|4B. | Business
Overview
|--- | -----------------

BOSs vision is to become a
worldwide leader in the field of RFID, Mobile and Supply Chain Solutions for enterprise
logistics and organizational processes. Committed to this vision, in 2007 and 2008, BOS
effected a reorganization, which included replacement of its senior management,
consolidation of offices in Israel, and the hiring of highly skilled employees.

BOS continues to execute a
growth strategy to strengthen its product offering and distribution channels worldwide. In
November 2007, we completed the acquisition of Summit, a U.S. based company, situated in
New Jersey. Summit transformed BOS into a diversified supply chain company with sales to
major international aviation and aerospace manufacturers, and gave its RFID and Mobile
Solutions a gateway to the U.S. markets.  Summit brought with it:

| | (i) | a
well established reputation in the Aviation and Aero-Space field, built over           50
years of business;
| | --- | --------------------------------------------------------------------------------------------------------------

| | (ii) | strong
business relationship with major customers in the field;
| | ---- | ---------------------------------------------------------------

| | (iii) | a
proven track-record of profitability; and
| | ----- | -------------------------------------------

| | (iv) | high
synergy with BOS Supply Chain Solutions.
| | ---- | ----------------------------------------------

Continuing this momentum of
synergetic acquisitions, in March 2008 we completed the acquisition of the assets of Dimex
Systems and transformed BOS into the leading Israeli integrator of AIDC (Automatic
Identification and Data Collection) solutions based on Mobile, RFID and Barcode
technology.

Dimex Systems had:

| | (i) | a
well established reputation in the AIDC field;
| | --- | ------------------------------------------------

| | (ii) | proven
professional capabilities of offering unique, innovative solutions; and
| | ---- | ------------------------------------------------------------------------------

| | (iii) | top
tier Israeli customers.
| | ----- | ---------------------------

- 21 -

---

---

BOS product
offerings:

RFID Tags/Readers Mobile Infrastructure Electronic Components Hardware BOServer BOSaNOVA Middleware Supply Chain Logistics Process automation Healthcare Retail Environment SW Applications Turn Key solution BOSolution


BOS manages its business in two
reportable divisions, which consist of the RFID and Mobile Solutions  offered
through Dimex Solutions, and the Supply Chain Solutions segment offered through Summit and
Odem. These segments are complementary with strong synergy.

Through our two business divisions we
offer comprehensive products and solutions consisting of three essential components 
Hardware, MiddleWare and Software applications. As a sales strategy, these components are
also sold on a stand alone basis for the purpose of obtaining new customers, as well as
expanding the relationship with existing customers.

In the Hardware field we offer, among
others, Mobile infrastructure, wireless equipment, RFID tags and readers and supply chain
components.

Our Middleware product offering
consists, among others, of: an RFID Server named BOServer and an emulation server named
BOSaNOVA. Our Software applications aim at supply chain logistics, man process control and
monitoring, healthcare, retails and environment industries.

# Hardware

# RFID Tags and Readers

RFID (Radio Frequency Identification)
refers to the use of an automatic identification method to remotely retrieve data using
devices called RFID tags. An RFID tag is an object such as a pendant, bead, nail, label,
micro wire or fiber, which can be applied to or incorporated into a product, animal, or
person for the purpose of identification using radio waves.

# Mobile Infrastructure

We represent worldwide leading
manufactures of Automatic Identification and Data Collection equipment based on RFID and
barcode technology. Among the manufacturers we represent are Motorola  Symbol
Technologies Inc., Intermec Inc. (mobile terminals), Zebra Technologies Corporation
(barcode printers), Texas Instruments and HID  Sokymat (RFID tags and readers). We
also provide processing services for a variety of raw materials, mainly for ink ribbons,
barcode printers and printing barcode labels.

- 22 -

---

---

# Electronic Components

Our Supply Chain Solutions business
offers a wide range of electronic components to customers in the aviation and aerospace
industry that prefer to work with a limited number of suppliers such as BOS that are able
to provide a comprehensive solution to their components-supply needs. Our Supply Chain
Solutions segment operates through two subsidiaries: Odem which is located in Israel and
Summit which is located in New Jersey, USA. We represent suppliers of electronic
components in four main categories:

1)
          Active Components  semiconductors, transistors, detectors, diodes,
          integrated circuits, hybrid modems, cellular components, communication ICs,
          memories, displays, and LEDS;

2)
          Passive Components  capacitors, thermistors, varistos, oscillators,
          crystals, resistors, C-DC converters, and power supplies;

3)
          Electro-mechanical Components  relays, connectors, circuit breakers,
          filters, transformers, plugs, thermostats, switches, etc.; and

4)
          Discontinued Semiconductors- made by Intel, Fairchild, Harris, Microchip,
          National, Quality SMC, Texas Instruments, Vantis, Motorola, and more.

We provide full access networks
equipment for IT and telecommunications (LAN/WAN), communication servers, multi-protocol
print servers, server adapters, USB products, switches, fiber optics equipment, ADSL and
XDSL routers, modems, VoIP, storage equipment and ATM devices.

In the first quarter of year 2009,
our Supply Chain sales to IAI and to a strategic Latin American customer, accounted for
13%, and 12% of revenues, respectively.An interruption in our business
relationship with either of these customers would result in a significant reduction in our
revenues, backlog and in a write-off of inventory, and would have a material adverse
effect on our business and results of operations.

In 2008 and 2007, 76% and 94% of our
sales, respectively, were attributed to sales of the Supply Chain Solutions segment.

# Middleware RFID Server

RFID refers to the use of an
automatic identification method to remotely retrieve data using devices called RFID tags.
An RFID tag is an object such as a pendant, bead, nail, label, micro wire or fiber, which
can be applied to or incorporated into a product, animal, or person for the purpose of
identification using radio waves.

- 23 -

---

---

Our RFID server, named BOServer, is
the middleware between the Enterprise Application system and the RFID equipments (reader
and tags). This server enables customers to integrate their RFID environment directly with
their Enterprise Resource Planning (ERP) application and receive the
RFID data in either Batch mode or on-line mode, depending on their business needs.

We believe that the future years
shall bring the wide spread use of RFID to tag high volume items such as consumer goods,
drugs, and postal packages and that the technology will be adopted by retailers, military
forces and postal authorities.

# BOSâNOVA

The BOSâNOVA suite solution
enables customers to extend compatibility of IBM System i Servers to other environments by
implementing a variety of technologies such as Twinax to TCP/IP, WEB and Mobile
connectivity.

# Software Application

BOServer platform is a middleware and
application development tool which we developed and also use to develop RFID and Mobile
applications.

This platform is based on Point
Microsoft SharePoint Content Management portals with the following enhancements:

| | a. | Extended
capabilities to perform critical documentation-related tasks.
| | -- | ----------------------------------------------------------------------

| | b. | Streamlined
administration, cutting the time needed for critical tasks from           hours to
minutes.
| | -- | -------------------------------------------------------------------------------------------------------

| | c. | Enhanced
the search abilities.
| | -- | ------------------------------

Our Software applications aim at
supply chain logistics, man process control and monitoring, healthcare, retails and
environment industries.

# Marketing, Distribution
and Sales

We market our solutions primarily to
medium and large sized corporations through a combination of direct sales, sales agents
distributors and integrators.

# RFID and Mobile Solutions

We market our BOServer and
BOSâNOVA solutionsdirectly to customers orthrough distributors and
system integrators. We intend to continue to increase our international sales force with
new distributors, system integrators, sales representatives and direct sales persons who
specialize in the RFID and Mobile solutions. The sales to Bosanova Inc. in the first
quarter of 2009 were insignificant.

- 24 -

---

---

# Supply Chain Solutions

We market our Supply Chain Solutions
in North and South America through our fully owned subsidiaries using the brands Summit,
Summit Aviation, Ruby-Tech Inc. (Ruby-Tech) and Odem. In the rest of world we
market our products mainly through our Israeli subsidiaries. Our sales force is comprised
of direct sales teams and sales representatives.

# Seasonality

Our sales fluctuate seasonally, with
the third quarter sales affected (set back) by summer vacations in Europe and new
years holidays in Israel, and December and January sales are affected (set back) by
the Christmas season.

The following table sets forth our
revenues (in thousands of $) from continuing operations, by major geographic area, for the
periods indicated below:

|                  | 2008 | % | 2007 | %      | 2006 | %
|----------------- | ---- | - | ---- | ------ | ---- | -
|
|
|
|
|America           |      |   |      | 12,671 |      |  
|Far East          |      |   |      | 1,342  |      |  
|Europe            |      |   |      | 7,490  |      |  
|Israel and others |      |   |      | 29,346 |      |  
|                  |      |   |      |        |      |  
|Total Revenues    |      |   |      | 50,849 |      |  
|                  |      |   |      |        |      |  

Sales by divisions (see note 18 to
the Consolidated Financial Statements for the year ended December 31, 2008):

|                       | 2008 | % | 2007 | %      | 2006 | %
|---------------------- | ---- | - | ---- | ------ | ---- | -
|
|
|
|
|Mobile and RFID        |      |   |      | 12,379 |      |  
|Supply Chain Solutions |      |   |      | 38,470 |      |  
|                       |      |   |      |        |      |  
|Total Revenues         |      |   |      | 50,849 |      |  
|                       |      |   |      |        |      |  

# Manufacturing in Israel

Some of the offered products under
our brand Dimex, are designed, integrated and tested at our facilities in Israel. The
manufacturing is partly done by Israeli subcontractors using components and subassemblies
supplied by vendors to our specifications. Certain components and subassemblies used by us
in our existing products are purchased from a single supplier or a limited number of
suppliers. Most of the imported components are purchased in Israel from local
representatives of the manufacturers. Some of them have exclusive representative rights in
Israel. In the event that these suppliers are unable to meet our requirements in a timely
manner, we may experience an interruption in production until an alternative source of
supply can be obtained. We generally maintain an inventory, which we believe adequately
limits the exposure to such an interruption. Our current manufacturing facilities have
sufficient capacity to meet and exceed current demand. The prices of raw materials used in
our industry are volatile and availability may vary due to changing demand in the market.

- 25 -

---

---

In the first quarter of 2009, 20% of
our Supply Chain Solutions segment purchases and 75% of our Mobile and RFID Solutions
segment purchases were sourced from several key suppliers.

# Intellectual Property

We currently rely on a combination of
trade secrets, copyright and trademark law, together with non-disclosure agreements and
technical measures, to establish and protect proprietary rights in our products.

We believe that the improvement of
existing products and solutions, reliance upon trade secrets and proprietary know-how and
the development of new products are generally as important as patent protection in
establishing and maintaining a competitive advantage. We believe that the value of our
products is dependent upon our proprietary software and hardware remaining trade
secrets or subject to copyright protection.

Generally, we enter into
non-disclosure and invention assignment agreements with our employees and subcontractors.
However, there can be no assurance that our proprietary technology will remain a trade
secret, or that others will not develop a similar technology or use such technology in
products competitive with those offered by us.

While our competitive position may be
affected by our inability to protect our proprietary information, we believe that because
of the rapid pace of technological change in the industry, factors such as the technical
expertise and the knowledge and innovative skill of our management and technical
personnel, name recognition, the timeliness and quality of support services provided by us
and our ability to rapidly develop, produce, enhance and market software products may be
more significant in maintaining our competitive position.

As the number of software products in
the industry increases and the functionality of these products further overlaps, we
believe that software programs will increasingly become subject to infringement claims.
The cost of responding to any such assertion may be material, whether or not the assertion
is valid.

# Competition

RFID and Mobile Solutions:

The RFID and Mobile Solutions market
is subject to rapidly changing technology and evolving standards incorporated into mobile
equipment, ERP system, computer networks and hosting computers. As the market is growing
the number of competitors increases. Some of the competitors haves substantially greater
financial, marketing and technological resources as well as name recognition than ours.

In Israel our main competitors in the
RFID and Mobile Solutions market are Dannet Advanced Technologies Ltd., L.X Mobile Systems
Ltd., Micronet Ltd., Nortec AMI Ltd., LogiTag System Ltd. and Galbital RFID Solutions Ltd.
In the global market, our main competitors are Aeroscout, RF Code and Tagsys. We see our
ability to offer our comprehensive solutions which combine software solutions and RFID
peripheral equipment such as readers and tags, as our main competitive advantage in the
competitive field.

- 26 -

---

---

Supply Chain Solutions:

We hold several representation
agreements with major suppliers and manufacturers such as: Sensata Technologies,
HID-Sokymat and Positronic Industries, Inc.

Although most of our representation
agreements are not on an exclusive basis, in most cases there are no local competitors who
distribute components from the same source. However, there may be competition in case of
similar components made by other manufacturers.

Our Israeli competitors in
distribution to the electronic industry include the publicly traded Telsys Ltd., Nisco
Projects Ltd. and STG International Electronics (1981) Ltd., as well as Eastronics Ltd.,
Chayon Group Ltd. and C.M.S. Compucenter Ltd.

In the international  market,  our competitors are mainly Arrow,  Avnet, TTI, PEI, Marine Air,  Airtechnics,  Inc.,
Flame enterprise Inc., Norstan Electronics Inc. and Peerless Electronics Inc.

Our competitors in the Supply Chain Solutions to the aerospace  industry include:  Hansair,  Avial, API, Cooper and
Avio.

# Strategy

The Companys vision is to
becomeaworldwide leader in the field of RFID and Mobile Solutions for
enterprise logistics and organizational processes.

The
key elements of our strategy are as follows:

| |  | Continue
to develop our range of RFID solutions to include generic, platform independent software
in order to diversify and expand our target markets.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Increase
our international sales force by new partnerships with distributors, integrators, sales
representatives and direct sales persons who specialize in RFID solutions.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Increase
partnerships with manufacturers for our Supply Chain Solutions.
| | - | ------------------------------------------------------------------------

| |  | Acquire
of RFID applications to be sold through our existing and future channels.
| | - | ---------------------------------------------------------------------------------

| |  | Leverage
the substantial synergy between BOS subsidiaries worldwide.
| | - | --------------------------------------------------------------------

# Exchange Controls

See Section 10D. Exchange
Controls.

For other government regulations
affecting the Companys business, see Section 5A. Results of Operations 
Grants and Participation.

- 27 -

---

---

|4C. | Organizational
Structure
|--- | ------------------------

The Companys wholly owned
subsidiaries include:

In Israel:

| | (1) | Dimex
Solutions, and its wholly owned subsidiary, Dimex Hagalil, which was
          incorporated in January 2008. Dimex Solutions and Dimex Hagalil are part of our
          RFID and Mobile Solutions Segment;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Odem
is a major solution provider and distributor of RFID and electronics           components
and advanced technologies in the Israeli market. Odem is also a           provider of
RFID peripheral equipment such as RFID readers and tags for the RFID           and Mobile
Solutions segment; and
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Quasar
Telecom (2004) Ltd. (Quasar Telecom), which is inactive.
| | --- | -----------------------------------------------------------------

In the United States:

| | (1) | Ruby-Tech,
a New York corporation is a wholly owned subsidiary of Odem and a           part of both
the RFID and Mobile Solutions and the Supply Chain Solutions           segments.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Lynk
USA Inc., a Delaware Corporation, and its subsidiaries:
| | --- | ------------------------------------------------------------

| | a. | Summit,
part of the Supply Chain Solutions segment, that was purchased in           November
2007. Summit is a supply chain provider, mainly of electronic           components to the
aircraft and defense industry.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Pacific
Information Systems, Inc. (PacInfo), a Delaware corporation           and
PacInfos subsidiary, Dean Tech Technologies Associates, LLC., a Texan
          corporation, both of which are not active.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | BOS
Delaware Inc., a Delaware corporation, a wholly owned subsidiary of Dimex
          Solutions, which ceased operations in 2002.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------

In Europe:

| | Dimex
Solutions had a UK subsidiary, Better On-Line Solutions Ltd., and its subsidiary, Better
On-Line Solutions S.A.S in France. Since 2002, these subsidiaries are no longer active.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Company holds interests in:
| | --------------------------------------------

| | 1.    
            Surf, of which we held 6.1% as of May 31, 2009. (see Section 4A.
History           and Development of the Company).
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | 2.    
            New World Brands, of which we held 14.92% as of March 31, 2009. The
          Companys holdings in New World Brands were received as the consideration
          for the sale of the communication segment. Following the consummation of a
          merger of Qualmax with and into New World Brands in January 2009, our holdings
          in Qualmax were converted into shares of New World Brands.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (see Section 4A. History and Development of the Company).
| | -----------------------------------------------------------

- 28 -

---

---

|4D. | Property,
Plants and Equipment
|--- | ------------------------------

Following the acquisition of Summit
in November 2007 and the assets of Dimex Systems in March 2008, our executive offices and
engineering, development, testing, shipping and service operations are located in Israel
and in United States, as follows

|Location       | Size (square
meters) | End of lease period | Extension Option
|-------------- | -------------------- | ------------------- | ----------------
|
|
|
|
|Israel:        |                      |                     |                 
|Rishon Lezion* | 1,461                | January 2012        | January 31, 2016
|Tel Aviv       | 828                  | September 2009      |                 
|Kibutz Dafna   | 578                  | January 31, 2012    |                 
|USA:          
|New Jersey     | 678                  | January 31, 2010    |                 

*Includes 302 square meters in the
same building rented by Odem.

Our average monthly rental fee in
2009 (up till May), for the year 2008 and for the year 2007 amounted to $14,000, $14,000
and $9,000, respectively.

During the first quarter of 2009 we
closed the Companys offices in Yokneam and relocated the employees from the Yokneam
branch to our offices in Rishon Lezion and Tel Aviv. We plan to concentrate all of our
Israeli operation in one location in Rishon Lezion, by the end of 2009.

|Item 4A: |  | Unresolved Staff Comments
|-------- |  | -------------------------

Not Applicable.

|Item 5: |  | Operating and Financial Review and Prospects
|------- |  | --------------------------------------------

The following managements
discussion and analysis of financial condition and results of operations should be read in
conjunction with our financial statements and notes thereto. Certain matters discussed
below and throughout this annual report are forward-looking statements that are based on
our beliefs and assumptions as well as information currently available to us. Such
forward-looking statements may be identified by the use of the words
anticipate, believe, estimate, expect,
plan and similar expressions. Such statements reflect our current views with
respect to future events and are subject to certain risks and uncertainties. While we
believe such forward-looking statements are based on reasonable assumptions, should one or
more of the underlying assumptions prove incorrect, or these risks or uncertainties
materialize, our actual results may differ materially from those described herein.

The Companys discussion and
analysis of its financial condition and result of operations is based upon the
Companys consolidated financial statements which have been prepared in accordance
with generally accepted accounting principles of the U.S. GAAP.

- 29 -

---

---

# Critical accounting
policies

Our discussion and analysis of our
financial condition and results of operations is based on our consolidated financial
statements which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of our financial statements in conformity
with generally accepted accounting principles in the United States requires our 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 revenues and expenses during the
reporting period. These amounts and disclosures could potentially be materially different
under other assumptions and conditions. These are our managements best estimates
based on experience and historical data, however, actual results could differ materially
from these estimates. Our significant accounting principles are presented within Note 2 to
our consolidated financial statements attached to this annual report. While all the
accounting policies impact the financial statements, certain policies may be viewed to be
critical. Management believes that the following policies are those that are most
important to the portrayal of our financial condition and results of operations and fully
understanding and evaluating our reported results:

| |  | financial
statements in U.S. dollars
| | - | ------------------------------------

| |  | inventories
| | - | -----------

| |  | investment
in other companies
| | - | -----------------------------

| |  | fair
value of financial instruments
| | - | -----------------------------------

| |  | valuation of long-lived assets, intangible assets and goodwill
| | - | --------------------------------------------------------------

| |  | Revenue
recognition
| | - | -------------------

| |  | Income
taxes; and
| | - | -----------------

| |  | Accounting
for share-based compensation
| | - | ---------------------------------------

|a. | Financial
statements in U.S. dollars:
|-- | -------------------------------------

A substantial portion of the
Companys revenues is generated in U.S. dollar (dollars). In addition,
most of the Companys costs are incurred in dollars. The Companys management
believes that the dollar is the primary currency of the economic environment in which the
Company operates. Thus, the functional and reporting currency of the Company is the
dollar.

Accordingly, monetary accounts
maintained in currencies other than the dollar are remeasured into U.S. dollars in
accordance with Statement 52 of the Financial Accounting Standards Board
(FASB) Foreign Currency Translation. All transactions gains and
losses from the remeasurement of monetary balance sheet items are reflected in the
statement of operations as financial income or expenses as appropriate.

The financial statements of Dimex
Solutions, whose functional currency is other than the dollar, have been translated into
U.S. dollars. All balance sheet accounts have been translated using the exchange rates in
effect at the balance sheet date. Statement of operations amounts have been translated
using the average exchange rate for the period. The resulting translation adjustments are
reported as a component of shareholders equity in accumulated other comprehensive
income (loss).

|b. | Inventories:
|-- | ------------

Inventories are valued at the lower
of cost or market value. Cost is determined pursuant to the moving average cost method.

Inventory write-offs are provided to
cover risks arising from slow-moving items or technological obsolescence. As of December
31, 2008 and 2007, inventory is presented net of $1,059,000 and $358,000, respectively,
for technological obsolescence and slow moving items.

|c. | Investment
in other companies:
|-- | ------------------------------

| | 1. | Investment
in New World Brands and Qualmax:
| | -- | -------------------------------------------

| | The
Company accounts for its holdings in New World Brands shares as available for sale in
accordance with Statement of Financial Accounting Standard 115 Accounting for
Certain Investments in Debt and Equity Securities. Unrealized gains and losses, net
of the related tax effect as of December 31, 2008, are included in other comprehensive
income.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
investment in Qualmax, which was traded in the Pink Sheet is presented at cost according
to APB 18 due to almost no trading volume. In accordance with the Companys policy,
FASB Staff Position (FSP) No. SFAS 115-The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments and SAB Topic 5M Other
Than Temporary Impairment Of Certain Investments In Debt And Equity Securities the
Company recognizes an impairment charge when a decline in the fair value of its
marketable securities below the cost basis is judged to be other-than-temporary. The
Company considers various factors in determining whether to recognize an impairment
charge, including the Companys intent and ability to hold the marketable securities
for a period of time sufficient to allow for any anticipated recovery in market value,
the length of time and extent to which the fair value has been less than the cost basis
and the financial condition and near-term prospects of the issuers. If, after
consideration of all available evidence to evaluate the realizable value of its
marketable securities, impairment is determined to be other than- temporary, then an
impairment loss should be recognized equal to the difference between the marketable
securities carrying amount and its fair value.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 30 -

---

---

| | During
2008 and 2007, an impairment loss, due to other than temporary decline in the fair value
of investments in New World Brands and Qualmax, of $744,000 and $5,588,000 has been
recorded and presented in other expenses, net in the consolidated statements of
operations. Following the consummation of a merger of Qualmax with and into New World
Brands in January 2009, our holdings in Qualmax were converted into shares of New World
Brands. As a result, we hold 14.92% of the outstanding shares of New World Brands.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Investment
in Surf:
| | -- | -------------------

| | The
Companys holdings in Surf as of December 31, 2008 are 6.1% of Surfs issued
and outstanding shares. The Companys investment in Surf is accounted for based on
the cost accounting method.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys investment in Surf is reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the investment may not be
recoverable, in accordance with Accounting Principle Board Opinion 18 The Equity
Method of Accounting for Investments in Common Stock (APB 18). In this
respect, during 2008, an impairment of $712,000 has been recorded in other expenses in
the statement of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|d. | Fair
value of financial instruments:
|-- | ------------------------------------

| | In
accordance with SFAS 157, the Company measures its investment in New World Brands at fair
value. Investment in New World Brands is classified within level 1 because it is valued
using quoted market prices in an active market.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys financial assets and liabilities measured at fair value on a recurring
basis, consisted of the following types of instruments as of December 31, 2008:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               | Level 1
|------------------------------ | -------
|
|
|
|
|Investment in New World Brands |        
|                               |        
|Investment in Qualmax          |        
|                               |        
|Investment in Surf             |        
|                               |        
|                               |        
|Total                          |        

- 31 -

---

---

|e. | Valuation
of Long-Lived Assets, Intangible Assets and Goodwill
|-- | --------------------------------------------------------------

| | In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, we perform
tests for impairment of long-lived assets whenever events or circumstances suggest that
long-lived assets may not be recoverable. This analysis differs from our goodwill analysis
in that an impairment is only deemed to have occurred if the sum of the forecasted
undiscounted future cash flows related to the assets are less than the carrying value of
the assets we are testing for impairment. If the forecasted undiscounted cash flows are
less than the carrying value, then we must write down the carrying value to its estimated
fair value based primarily upon forecasted discounted cash flows. Based on the impairment
test performed as of December 31, 2008, no impairment was identified.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
forecasted undiscounted cash flows include estimates and assumptions related to revenue
growth rates and operating margins, future economic and market conditions. Our estimates
of market segment growth and our market segment share and costs are based on historical
data, various internal estimates and certain external sources, and are based on
assumptions that are consistent with the plans and estimates we are using to manage the
underlying business. Our business consists of both established and emerging technologies
and our forecasts for emerging technologies are based upon internal estimates and external
sources rather than upon historical information. If future forecasts are revised, they may
indicate or require future impairment charges. We base our fair value estimates on
assumptions we believe to be reasonable but that are unpredictable and inherently
uncertain. Actual future results may differ from those estimates.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
perform our annual impairment analysis of goodwill as of December 31 of each year, or more
often if there are indicators of impairment present. The provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
require that a two-step impairment test be performed on goodwill at the level of the
reporting units. In the first step, or Step 1, we compare the fair value of each reporting
unit to its carrying value. If the fair value exceeds the carrying value of the net
assets, goodwill is considered not impaired, and we are not required to perform further
testing. If the carrying value of the net assets exceeds the fair value, then we must
perform the second step, or Step 2, of the impairment test in order to determine the
implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair
value, then we would record an impairment loss equal to the difference. To determine the
fair value used in Step 1, we use discounted cash flows. If and when we are required to
perform a Step 2 analysis, determining the fair value of our net assets and our
off-balance sheet intangibles would require us to make judgments that involve the use of
significant estimates and assumptions. During 2008, an impairment in the amount of
$1,873,000 was recorded and was attributable to the supply chain reporting unit. In years
2007 and 2006, no impairment losses have been identified.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
determine the fair value of a reporting unit using the Income Approach, which utilizes a
discounted cash flow model, as we believe that this approach best approximates our fair
value at this time. We have corroborated the fair values using the Market Approach.
Judgments and assumptions related to revenue, gross profit, operating expenses, future
short-term and long-term growth rates, weighted average cost of capital, interest,
capital expenditures, cash flows, and market conditions are inherent in developing the
discounted cash flow model. If these estimates or their related assumptions change in the
future, we may be required to record impairment charges for our goodwill. Additionally,
we evaluated the reasonableness of the estimated fair value of our reporting units by
reconciling to our market capitalization. This reconciliation allowed us to consider
market expectations in corroborating the reasonableness of the fair value of our
reporting units. In addition, we compared our market capitalization, including an
estimated control premium that an investor would be willing to pay for a controlling
interest in us, to the fair value of the Company based on a third-party valuation study.
The determination of a control premium requires the use of judgment and is based
primarily on comparable industry and deal-size transactions, related synergies and other
benefits. Our market capitalization declined during the fourth quarter of 2008, and
subsequently, as a result of market-driven declines in our stock trading price. Our
reconciliation of the gap between our market capitalization and the aggregate fair value
of the Company depends on various factors, some of which are qualitative and involve
management judgment, including relatively stable high backlog coverage and experience in
meeting operating cash flow targets. We will continue to monitor our market
capitalization and expectations of future cash flows and will perform impairment testing
if deemed necessary.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|f. | Revenue
recognition:
|-- | --------------------

| | The
Company sells its products through direct sales, distributors and resellers channels.
| | -----------------------------------------------------------------------------------------

| | The
Company derives its revenues from the sale of products, license fees for its products,
commissions, support and services.
| | -----------------------------------------------------------------------------------------------------------------------------

| | Revenues
from product sales, related to both Supply Chain and RFID and Mobile Solutions segments,
are recognized in accordance with Staff Accounting Bulletin 104 Revenue Recognition
in Financial Statements (SAB 104) when delivery has occurred,
persuasive evidence of an arrangement exists, the vendors fee is fixed or
determinable, no further obligation exists, and collectibility is reasonably assured.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 32 -

---

---

| | Most
of the Companys revenues are generated from sales of its products directly to
end-users and indirectly, mostly through independent distributors. Other than pricing
terms, which may differ due to the volume of purchases between distributors and
end-users, there are no material differences in the terms and arrangements involving
direct and indirect customers. The majority of the Companys products sold through
agreements with independent distributors are non-exchangeable, non refundable,
non-returnable without any rights of price protection or stock rotation. Accordingly, the
Company considers the distributors as end-users.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue
from license fees, related to the RFID and Mobile Solutions Segment, is recognized in
accordance with Statement of Position (SOP) 97-2 Software Revenue
Recognition, when persuasive evidence of an agreement exists, delivery has
occurred, no significant obligations with regard to implementation remain, the fee is
fixed or determinable, and collectibility is probable. The Company generally does not
grant a right of return to its customers. When a right of return exists, the Company
defers revenue until the right of return expires, at which time revenue is recognized
provided that all other revenue recognition criteria have been met.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from maintenance and support are recognized ratably over the period of the support
contract. The fair value of the support is determined based on the price charged when it
is sold separately or renewed.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
regard to software arrangements involving multiple elements such as software product and
maintenance and support, the Company has adopted Statement of Position No. 98-9, Modification
of SOP No. 97-2, Software Revenue Recognition with Respect to Certain Transactions (SOP
No. 98-9). According to SOP No. 98-9, revenues should be allocated to the
different elements in the arrangement under the residual method when Vendor
Specific Objective Evidence (VSOE) of fair value exists for all undelivered
elements and no VSOE exists for the delivered elements. Under the residual method, at the
outset of the arrangement with the customer, the Company defers revenue for the fair
value of its undelivered elements (maintenance and support) and recognizes revenue for
the remainder of the arrangement fee attributable to the elements initially delivered in
the arrangement (software product) when the basic criteria in SOP No. 97-2 have been met.
Any discount in the arrangement is allocated to the delivered element. Maintenance and
support revenue is deferred and recognized on a straight-line basis over the term of the
maintenance and support agreement. The VSOE of fair value of the undelivered elements
(maintenance and support) is determined based on the price charged for the undelivered
element when sold separately.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|g. | Income
taxes:
|-- | -------------

| | The
Company and its subsidiaries account for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes(SFAS
No. 109). This Statement prescribes the use of the liability method whereby
deferred tax assets and liability account balances are determined based on the
differences between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company and its subsidiaries provide a valuation allowance,
if necessary, to reduce deferred tax assets to the amounts that are more likely-than-not
to be realized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 33 -

---

---

| | In
June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN
48), Accounting for Uncertainty in Income TaxesAn interpretation of FASB
Statement No. 109.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Interpretation clarifies the accounting for uncertainties in income taxes recognized in
an enterprises financial statements and prescribes a recognition threshold and
measurement attributes of income tax positions taken or expected to be taken on a tax
return. Under FIN 48, the impact of an uncertain tax position taken or expected to be
taken on an income tax return must be recognized in the financial statements at the
largest amount that is more-likely-than-not to be sustained upon audit by the relevant
taxing authority. An uncertain income tax position will not be recognized in the
financial statements unless it is more likely than not of being sustained. The Company
adopted the provisions of FIN 48 as of January 1, 2007. The impact of adopting FIN 48 was
insignificant to the Companys consolidated financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|h. | Accounting
for share-based compensation:
|-- | ----------------------------------------

| | On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards 123
(revised 2004), Share-Based Payment (SFAS 123(R)) which requires
the measurement and recognition of compensation expense based on estimated fair values
for all share-based payment awards made to employees and directors. SFAS 123(R)
supersedes Accounting Principles Board Opinion 25, Accounting for Stock Issued
to Employees (APB 25), for periods beginning in fiscal 2006. The
Company has applied the provisions of Staff Accounting Bulletin 107 (SAB 107)
in its adoption of SFAS 123(R).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
123(R) requires companies to estimate the fair value of equity-based payment awards on
the date of grant using an option pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as an expense over the requisite
service periods in the Companys consolidated statement of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the Accounting Standard starting from January 1, 2006,
the first day of the Companys fiscal year 2006. Under that transition method,
compensation cost recognized in the year ended December 31, 2006 includes: (a)
compensation cost for all share-based payments granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123, and (b) compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS 123(R). Results for prior periods have not been
restated.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognizes compensation expenses for the value of its awards granted based on the
straight line method over the requisite service period of each of the awards, net of
estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Estimated forfeitures are based on actual historical pre-vesting
forfeitures. The Company considers many factors when estimating forfeitures, including
employee classification and historical experience.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 34 -

---

---

| | The
Company estimates the fair value of stock options granted using the Black-Scholes options
pricing model. The option-pricing model requires a number of assumptions, of which the
most significant are expected stock price volatility and the expected option term.
Expected volatility was calculated based upon actual historical stock price movements
over the most recent periods ending on the date of grant, equal to the expected option
term. The expected option term represents the period that the Companys stock
options are expected to be outstanding and was determined based on the simplified method
permitted by SAB 107 and extended by SAB 110 as the average of the vesting period and the
contractual term. The Company currently uses the simplified method, as adequate
historical experience is not available to provide a reasonable estimate. The Company
adopted SAB 110 effective January 1, 2008 and will continue to apply the simplified
method until enough historical experience is available to provide a reasonable estimate
of the expected term for stock option grants. The risk-free interest rate is based on the
yield from U.S. Treasury zero-coupon bonds with an equivalent term. The Company has
historically not paid dividends and has no foreseeable plans to pay dividends.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company applies SFAS 123 Accounting for stock Based Compensation (SFAS
123) and EITF 96-18, Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Conjunction With, Selling, Goods or Services,
with respect to warrants issued to non-employees. SFAS 123 requires the use of option
valuation models to measure the fair value of the warrants at the date of grant.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|i. | Impact
of recently issued accounting pronouncements:
|-- | ----------------------------------------------------

| | In
December 2007, the FASB issued SFAS 141(R), Business Combinations(SFAS
141(R)). This Statement replaces SFAS No. 141, Business Combinations,
and requires an acquirer to recognize the assets acquired, the liabilities assumed,
including those arising from contractual contingencies, any contingent consideration and
any noncontrolling interest in the acquiree at the acquisition date, measured at their
fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R)
also requires the acquirer in a business combination achieved in stages (sometimes
referred to as a step acquisition) to recognize the identifiable assets and liabilities,
as well as the noncontrolling interest in the acquiree, at the full amounts of their fair
values (or other amounts determined in accordance with SFAS 141(R)). In addition, SFAS
141(R)s requirement to measure the noncontrolling interest in the acquiree at fair
value will result in recognizing the goodwill attributable to the noncontrolling interest
in addition to that attributable to the acquirer. SFAS 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. As such,
the adoption of SFAS 141(R) is not expected to have a material effect on accounting for
the Company current subsidiaries.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the Financial Accounting Standards Board ratified a consensus opinion
reached by the Emerging Issues Task Force (EITF) on EITF Issue 07-1, Accounting
for Collaborative Arrangements (EITF 07-1). The guidance in EITF 07-1
defines collaborative arrangements and establishes presentation and disclosure
requirements for transactions within a collaborative arrangement (both with third parties
and between participants in the arrangement).  The consensus in EITF 07-1 is
effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2008. The consensus requires retrospective application to all
collaborative arrangements existing as of the effective date, unless retrospective
application is impracticable. The impracticability evaluation and exception should be
performed on an arrangement-by-arrangement basis.  The Company is evaluating
the impact EITF 07-1 will have on its financial statements. The Company currently does
not believe that the adoption of EITF 07-1 will have a significant effect on its
financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 35 -

---

---

| | In
December 2007 the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements  an amendment of Accounting Research Bulletin No. 51,
or SFAS 160. SFAS 160 addresses the accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling interest,
changes in a parents ownership interest, and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also
establishes disclosure requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS 160 is
effective for fiscal years beginning after December 15, 2008.  In December 2007, the FASB issued
SFAS 141(R), Business Combinations(SFAS 141(R)). This Statement
replaces SFAS No. 141, Business Combinations, and requires an acquirer to
recognize the assets acquired, the liabilities assumed, including those arising from
contractual contingencies, any contingent consideration and any noncontrolling interest
in the acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in the statement. SFAS 141(R) also requires the
acquirer in a business combination achieved in stages (sometimes referred to as a step
acquisition) to recognize the identifiable assets and liabilities, as well as the
noncontrolling interest in the acquiree, at the full amounts of their fair values (or
other amounts determined in accordancewith SFAS 141(R)). In addition, SFAS 141(R)s
requirement to measure the noncontrolling interest in the acquiree at fair value will
result in recognizing the goodwill attributable to the noncontrolling interest in
addition to that attributable to the acquirer.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
141(R) applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. As such, the adoption of SFAS 141(R) is not expected to have
a material effect on accounting for the Companys current subsidiaries.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2008, the FASB issued FASB Staff Position (FSP) FAS No. 157-2, Effective
Date of FASB Statement No. 157 (FSP FAS 157-2), to delay the effective
date of FASB Statement 157 for one year for certain nonfinancial assets and nonfinancial
liabilities, excluding those that are recognized or disclosed in financial statements at
fair value on a recurring basis (that is, at least annually). For purposes of applying
the FSP FAS 157-2, nonfinancial assets and nonfinancial liabilities include all assets
and liabilities other than those meeting the definition of a financial asset or a
financial liability in FASB Statement 159. FSP FAS 157-2 defers the effective date of
Statement 157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of this FSP FAS 157-2. The Company
does not expect the adoption of FAS 157 for certain nonfinancial assets and nonfinancial
liabilities, excluding those that are recognized or disclosed in the financial statements
at fair value on a recurring basis, to have a material impact on its financial position,
statements of operations or cash flow.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 36 -

---

---

| | In
March 2008, the FASB issued Statement 161 Disclosures about Derivative Instruments
and Hedging Activities (SFAS 161) an amendment to FASB No. 133.  This
statement changes the disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures about (a)
how and why and entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an
entitys financial position, financial performance, and cash flows.  This
statement is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008.  Early application is encouraged.  The
Company does not expect the adoption of SFAS 161 to have a material impact on its
financial position, results of operations or cash flows.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets. FSP 142-3 is effective for fiscal years beginning after December
15, 2008. The Company does not expect the adoption of FSP 142-3 will have a material
impact on the Companys consolidated financial position, results of operations and
cash flows.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. It is effective 60 days following
the SECs approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. The Company statements evaluated the impact of FAS No. 162
on the Companys financial statement and the adoption of the statement did not have
a material effect on the Companys financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2008, the FASB issued EITF No. 07-5 Determining whether an Instrument (or
Embedded Feature) is indexed to an Entitys Own Stock (EITF 07-5).
EITF 07-5 is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early application is
not permitted. Paragraph 11(a) of SFAS No. 133 specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed to the Companys
own stock and (b) classified in stockholders equity in the statement of financial
position would not be considered a derivative financial instrument. EITF 07-5 provides a
new two-step model to be applied in determining whether a financial instrument or an
embedded feature is indexed to an issuers own stock and thus able to qualify for
the SFAS 133 paragraph 11(a) scope exception. The Company believes adopting this
statement will have no impact on the consolidated financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
October 29, 2008, the FASB issued FSP No.132 (R)-a, Employers Disclosures
about Pensions and Other Postretirement Benefits, to require that an employer
disclose the following information about the fair value of plan assets: 1) the level
within the fair value hierarchy in which fair value measurements of plan assets fall; 2)
information about the inputs and valuation techniques used to measure the fair value of
plan assets; and 3) a reconciliation of beginning and ending balances for fair value
measurements of plan assets using significant unobservable inputs.  The FSP
will be effective for fiscal years ending after December 15, 2009, with early application
permitted. Application of the FSP would not be required for earlier periods that are
presented for comparative purposes.  The company is currently evaluating the
potential impact of adopting this FSP on its disclosures in the financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 37 -

---

---

| | In
April 2009, the FASB issued FSP, No. FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments, or the FSP. The FSP is intended to
provide greater clarity to investors about the credit and noncredit component of an
other-than-temporary impairment event and to more effectively communicate when an
other-than-temporary impairment event has occurred. The FSP applies to fixed maturity
securities only and requires separate display of losses related to credit deterioration
and losses related to other market factors. When an entity does not intend to sell the
security and it is more likely than not that an entity will not have to sell the security
before recovery of its cost basis, it must recognize the credit component of an
other-than-temporary impairment in earnings and the remaining portion in other
comprehensive income. Upon adoption of the FSP, an entity will be required to record a
cumulative-effect adjustment as of the beginning of the period of adoption to reclassify
the noncredit component of a previously recognized other-than-temporary impairment from
retained earnings to accumulated other comprehensive income. The FSP will be effective
for us for the quarter ending June 30, 2009. The Company is currently evaluating the
impact of adopting the FSP.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly, or FSP 157-4. FSP 157-4 provides additional
authoritative guidance to assist both issuers and users of financial statements in
determining whether a market is active or inactive, and whether a transaction is
distressed. The FSP will be effective for us for the quarter ending June 30, 2009. The
Company is currently evaluating the impact of adopting the FSP 157-4.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about
Fair Value of Financial Instruments, or FSP 107-1 and APB 28-1. FSP 107-1 and APB 28-1
require disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements. FSP 107-1
and APB 28-1 will be effective for the quarter ending June 30, 2009. The adoption of FSP
107-1 and APB 28-1 will not have an impact on our consolidated financial position and
results of operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Legal contingencies

The Company has been a party to
various legal proceedings in the normal course of its business. The results of legal
proceedings are difficult to predict and an unfavorable resolution of a lawsuit or
proceeding may occur. Management believes that the prospects of these proceedings to
prevail and recover a significant amount, seem remote, and a corresponding provision was
recorded in this respect. For additional information see Section 8A. Consolidated
Statements and Other Financial Information  Legal Proceedings. As additional
information becomes available, management will reassess the potential liability related to
these legal proceedings and may revise its estimate of the probable cost of these
proceedings. Such revisions in the estimates of the probable cost could have a material
adverse effect on the Companys future results of operations and financial position.

- 38 -

---

---

|5A. | Results
of Operations
|--- | ---------------------

Comparison of 2008 and
2007

In November 2007 we purchased 100% of
the outstanding shares of Summit, from Summits existing shareholders. In March 2008,
we purchased the assets and activities of Dimex Systems. As indicated below, these
acquisitions resulted in a significant increase in our 2008 revenues and operating
expenses.

Revenues for 2008 were $50.8 million
compared to $23.8 million in 2007. The increase in revenues is attributed mainly to the
acquisition of Dimex Systems and Summit.

Gross profit for 2008 was $10 million
(gross margin of 20%), compared to $4.7 million (gross margin of 20%) for 2007. The
increase in the gross profit is attributed to increase in revenues.

Research and development expenses for
2008 were $844,000 compared to $636,000 in 2007. The increase is related to an upgrade of
our technological infrastructure and future software products offering, which was effected
through an increase in workforce.

Selling and marketing expenses for
2008 increased to $9.7 million from to $3.8 million in 2007. The increase is attributed
mainly to the acquisition of Dimex Systems and Summit.

General and administrative expenses
for 2008 were $2 million compared to $2 million in the year 2007.

Impairment of goodwill in 2008
amounted to $1.9 million and is attributed to impairment of goodwill in the Supply Chain
Segment due to the current economic slow down, which will effect our future revenues and
cash flows. We did not record an impairment in 2007.

As a result of the above, operating
loss in 2008 amounted to $4.4 million compared to operating loss of $1.7 million in year
2007.

Financial expenses for 2008 were
$636,000 compared to $469,000 in 2007. The increase is related to the acquisitions we
consummated in 2007 and in the first quarter of 2008, which increased our use of loans in
order to finance the working capital needs and partly finance the acquisitions (see
Section 5B. Liquidity and Capital Resources).

Other expenses in year 2008 amounted
to $1.5 million which resulted from: (a) an impairment loss in the amount of $744,000 due
to a decrease in the share price of New World Brands and Qualmax; and (b) an impairment
loss in the amount of $712,000 due to a decrease in the value of our holdings in Surf.

Other expenses in year 2007 amounted
to approximately $6 million which resulted from: (a) an impairment loss in the amount of
$5.6 million due to a decrease in the share price of New World Brands and Qualmax; and (b)
on June 21, 2007, we entered into an agreement with the holder of our convertible note,
pursuant to which the holder converted the entire outstanding principal amount of
approximately $2 million into 878,670 ordinary shares of the Company at a conversion price
of $2.53. As a result of reducing the conversion price we recorded expenses upon
conversion of $611,000 in year 2007.

Tax benefit in 2008 amounted to
$403,000 compared to tax on income of $9,000 in 2007. Tax benefit in year 2008 reflects
the future usage of carry forward losses.

- 39 -

---

---

Loss from continuing operations in
2008 amounted to $6.1 million compared to a loss of $8.5 million in 2007. On a per share
basis, the basic and diluted loss per share from continuing operations in 2008 was $0.51,
compared to $0.98 in 2007.

Loss from discontinued operation in
2008 amounted to $260,000 which is attributed to the discontinuance of the OptimizeIT
product line. In March 2009, the Company sold its OptimizeIT product line and related IP
in consideration for $70,000 plus contingent consideration based on future revenues of up
to $1.5 million.

Basic and diluted net loss per share
in 2008 was $0.53, compared to net loss of $0.97 in 2007.

Comparison of 2007 and
2006

In November 2007, we announced the
acquisition of Summit, a U.S. based company, situated in New Jersey. Summit transformed
BOS into a diversified supply chain company with sales to major international aviation and
aerospace manufacturers, and gave BOS RFID and Mobile Solutions a gateway to the
U.S. markets. These activities had a significant impact on the revenues and operating
expenses of year 2007 as compared to year 2006.

Revenues of 2007 were $23.8 million
compared to $20.9 million in 2006. A decrease in revenues from our BOSâNOVA Suite
Solution products was offset by increases in revenues from new software products and from
our Supply Chain Solutions segment, including from Summit.

Gross profit for 2007 was $4.7
million (gross margin of 20%), compared to $4.7 million (gross margin of 23%) for 2006.
The decrease in the gross margin in 2007 as compared to 2006 is related mainly to two
expenses we incurred in year 2007: (a) an inventory write off in the amount of $258,000
and (b) amortization of intangible assets in the amount of $89,000. Excluding these
expenses, the gross margin of 20% in year 2007 would have been 21% compared to 23% in year
2006.

Research and development expenses for
2007 were $636,000 compared to $486,000 for 2006. The increase related to an upgrade of
our technological infrastructure and future software products offering, which was effected
through workforce adjustment and through the acquisition of new software technology in
connection with the acquisition, of the assets of CYMS and OptimizeIT, that we made during
the second half of year 2007. In-process research and development expenses in year 2007
amounted to $170,000 and are attributable to a one- time amortization of the purchase
price of OptimizeIT.

Selling and marketing expenses for
2007 were $3.8 million compared to $2.0 million in 2006, an increase of $1.8 million.

General and administrative expenses
for 2007 were $2.0 million compared to $3.3 million in the year 2006, a decrease of $1.3
million

The increase in the selling and
marketing expenses and the decrease in general and administrative expenses are due to the
following principal reasons: (a) commencing the second quarter of 2007, the general and
administrative expenses of our subsidiaries are presented under sales and marketing
expenses as compared to 2006, when an amount of $1.4 million was presented under general
and administrative expenses. The change in the classification reflects the reorganization
we made in the organization of BOS during 2007; and (b) consolidation of Summit as of
November 2007 contributed $363,000 to the sales and marketing expenses.

- 40 -

---

---

As a result of the above, operating
loss in year 2007 amounted to $1.9 million compared to operating loss of $1.4
million in year 2006.

Financial expenses for 2007 were
$469,000 compared to $626,000 in 2006. The decrease is related to the conversion of
convertible notes in June 2007.

Other expenses in year 2007 amounted
to $6.2 million which resulted from: (a) an impairment loss in the amount of $5.6 million
due to a decrease in the share price of New World Brands and Qualmax; and (b) on June 21,
2007, we entered into an agreement with the holder of our convertible note, pursuant to
which the holder converted the entire outstanding principal amount of approximately $2.2
million into 878,670 ordinary shares of the Company at a conversion price of $2.53. As a
result of reducing the conversion price we recorded expenses upon conversion of $611,000
in year 2007. Tax on income in 2007 amounted to $9,000 compared to taxes benefit of
$89,000 in 2006.

Loss from continuing operations in
2007 amounted to $8.6 million compared to a loss of $1.6 million in 2006. On a per share
basis, the basic and diluted loss per share from continuing operations in 2007 was $1.00,
compared to $0.24 in 2006.

Income from discontinued operations
is attributed to the operational results of the Communication segment that was sold in
2005. On a per share basis, the basic and diluted earning per share from discontinuing
operations in 2007 was $0.02, compared to loss $0.25 in 2006.

Basic and diluted net loss per share
in 2007 was $0.97, compared to net earnings of $0.01 in 2006.

# Variability of Quarterly
Operating Results

Our revenues and profitability may
vary in any given year, and from quarter to quarter, depending on the number of products
sold. In addition, due to potential competition, uncertain market acceptance and other
factors, we may be required to reduce prices for our products in the future.

Our future results will be affected
by a number of factors including our ability to:

| |  | increase
the number of products sold;
| | - | -------------------------------------

| |  | acquire
effective distribution channels and manage them;
| | - | --------------------------------------------------------

| |  | develop,
introduce and deliver new products on a timely basis,
| | - | --------------------------------------------------------------

| |  | anticipate
accurately customer demand patterns; and
| | - | ---------------------------------------------------

| |  | manage
future inventory levels in line with anticipated demand.
| | - | ---------------------------------------------------------------

These results may also be affected by
currency exchange rate fluctuations and economic conditions in the geographical areas in
which we operate. There can be no assurance that our historical trends will continue, or
that revenues, gross profit and net income in any particular quarter will not be lower
than those of the preceding quarters, including comparable quarters.

- 41 -

---

---

# Impact of Inflation and
Currency Fluctuations

The U.S.  dollar cost of our
operations in Israel is influenced by the  differential  between the rate of inflation in
Israel and any change in the value of the NIS relative to the U.S. dollar.

A devaluation of the NIS in relation to
the U.S. dollar will have the effect of decreasing the costs in NIS and a converse effect
in case of devaluation of the U.S. dollar in relation to the NIS.

A devaluation of the NIS in relation
to the U.S. dollar will have the effect of decreasing the U.S. dollar value of any of our
assets which consist of NIS (unless such asset is linked to the U.S. dollar). Such a
devaluation would also have the effect of reducing the U.S. dollar amount of any of our
liabilities and expenses which are payable in NIS (unless such payables are linked to the
U.S. dollar). Conversely, any increase in the value of the NIS in relation to the U.S.
dollar will have the effect of increasing the U.S. dollar value of our assets which
consist of NIS (unless such asset is linked to the U.S. dollar). Such an increase would
also have the effect of increasing the U.S. dollar amount of any of our liabilities and
expenses which are payable in NIS (unless such payables are linked to the U.S. dollar).

In the years ended December 31, 2008,
2007, 2006, 2005, 2004 the inflation rate in Israel as adjusted for the devaluation of the
Israeli currency in relation to the U.S. dollar was 4.9%,8.6%, 8.1%, (4.5)% and
2.8%, respectively. The closing representative exchange rate of the U.S. dollar at the end
of each such period, as reported by the Bank of Israel, was NIS 3.802,NIS 3.846,
NIS 4.225, NIS 4.44, NIS 4.603 and NIS 4.308, respectively. As a result, the Company
experienced increases in the U.S. dollar costs of operations in Israel in 2008, 2007,
2006, 2004 and decreases in 2005.

# Effective Corporate Tax
Rate

Israeli companies are generally
subject to income tax at the declining corporate rate of 27% in 2008, 26% in 2009 and 25%
in 2010 and thereafter. The Company and its Israeli subsidiaries have accumulated losses
for Israel income tax purposes as of December 31, 2008, in the amount of approximately
$38,964. These losses may be carry forward (linked to the Israeli Consumer Price Index
(CPI)) and offset against taxable income in the future for an indefinite
period. As of December 31, 2008, the U.S. subsidiaries had U.S. Federal and State net
operating loss carryforward of approximately $8.9 million, which can be carried forward
and offset against taxable income for 15 to 20 years.

# Grants and Participation

Under the Law for the Encouragement
of Industrial Research and Development, 1984 (the Research Law), research and
development programs approved by a research committee of the Office of the Chief Scientist
(OCS) of Israels Ministry of Industry, Trade and Labor, are eligible for
grants in exchange for payment to the Government of royalties from the sale of products
developed in accordance with the Program. In order to be eligible, the applicant must be
an Israeli company that proposes to invest in the development of industrial know-how, the
development of new products, the development of new processing or manufacturing procedures
or the development of significant improvements to an existing process or product. A
committee of the OCS reviews the applications, evaluates the feasibility of the proposal,
determines whether or not to approve a grant, and also determines the extent of Chief
Scientist funding (within a range specified by the law) for approved projects. Depending
on the nature of the project, the OCS grants generally amount up to 50% of the approved
research expenses.

- 42 -

---

---

Under the Companys research and
development agreements with the OCS and pursuant to applicable laws, the Company is
required to pay royalties at the rate of 3.5% of sales of products developed with funds
provided by the OCS, up to an amount equal to 100% of the research and development grants
(U.S. dollar-linked) received from the OCS. The obligation to pay these royalties is
contingent upon actual sales of the products. Royalties payable with respect to grants
received under programs approved by the OCS after January 1, 1999, are subject to interest
on the U.S. dollar-linked value of the total grants received at the annual rate of LIBOR
applicable to U.S. dollar deposits at the time the grants are received.

The Research Law requires that the
manufacture of any product developed as a result of research and development funded by the
Israeli Government take place in Israel. If any of the manufacturing is performed outside
of Israel, the Company would ordinarily be required to pay royalties at an increased rate
and to increase the aggregate repayment amount to between 120% and 300% of the grant
amount, depending on the manufacturing volume that is performed outside Israel, except in
special cases that receive the prior approval of the research committee, and subject to
certain payments to be made to the Israeli Government (generally an amount no less that
the aggregate grants plus interest less royalties paid).

The Research Law also provides that
know-how from the research may not be transferred to third parties in Israel without prior
approval of the research committee. This approval, however, is not required for the sale
or export of any products resulting from such research and development. Approval of such
transfer of know-how may be granted in specific circumstances, only if the recipient
abides by the provisions of the Research Law and related regulations, including the
restrictions on the transfer of know-how and the obligation to pay royalties in an amount
that may be increased. The Research Law further provides that the know-how developed under
an approved research and development program may not be transferred to any third parties
outside Israel.

The Research Law imposes reporting
requirements with respect to certain changes in the ownership of a grant recipient. The
law requires the grant recipient and its controlling shareholders and interested parties
to notify the Office of the Chief Scientist of any change in control of the recipient or a
change in the holdings of the significant stockholders of the recipient that results in a
non-Israeli becoming an interested party directly in the recipient and requires the new
interested party to undertake to the Office of the Chief Scientist to comply with the
Research Law. In addition, the rules of the Office of the Chief Scientist may require
prior approval of the Office of the Chief Scientist or additional information or
representations in respect of certain of such events.

The funds available for Office of the
Chief Scientist grants out of the annual budget of the State of Israel have been reduced,
and the Israeli authorities have indicated that the government may further reduce or
abolish Office of the Chief Scientist grants in the future.

Since year 2006, we have not
participated in research and development programs supported by the OCS.

As of December 31, 2008, the Company
has an outstanding contingent obligation to pay royalties in respect of OCS grants, in the
amount of approximately $3.5 million, compared to $3.5 million as of December 31, 2007.

- 43 -

---

---

We are committed to paying royalties
to the Fund for the Encouragement of Exports for its participation, by way of grants, in
our marketing expenses outside of Israel. Royalties payable are 3% of the growth in
exports, from the year we received the grant, up to 100% of the U.S. dollar-linked amount
of the grant received at the date the grants received.

Since 1996, we have not participated
in Fund for the Encouragement of Exports programs.

As of December 31, 2008, the Company has
an outstanding contingent obligation to pay royalties of $84,000 with respect to these
grants, compared to $83,000 on December 31, 2007.

# Conditions in Israel

We are incorporated under the laws of
Israel. Our offices and product development and manufacturing facilities are located in
Israel. As a consequence, we are directly affected by political, economic and military
conditions in Israel. Our operations would be substantially impaired if major hostilities
involving Israel should occur or if trade between Israel and its present trading partners
should be curtailed. See also Section 3D. Risk Factors.

Political and Economic
Conditions

Since the establishment of the State
of Israel in 1948, a number of armed conflicts have taken place between Israel and its
Arab neighbors and a state of hostility, varying from time to time in intensity and
degree, has led to security and economic problems for Israel. A peace agreement between
Israel and Egypt was signed in 1979. However, economic relations have been limited. A
peace agreement between Israel and Jordan was signed in 1994. However, as of the date
hereof, Israel has not entered into any peace agreement with Syria or Lebanon. No
prediction can be made as to whether any other written agreements will be entered into
between Israel and its neighboring countries, whether a final resolution of the
areas problems will be achieved, the nature of any such resolution or whether civil
unrest will resume and to what extent such unrest would have an adverse impact on
Israels economic development or on our operations in the future. There is
substantial uncertainty about how or whether any peace process will develop or what effect
it may have upon us. Since October 2000, there has been a substantial deterioration in the
relationship between Israel and the Palestinians, which has resulted in increased
violence. The future effect of this deterioration and violence on the Israeli economy and
our operations is unclear.

In January 2006, Hamas, an Islamic
movement responsible for many attacks against Israelis, won the majority of the seats in
the Parliament of the Palestinian Authority. The election of a majority of Hamas-supported
candidates is a major obstacle to relations between Israel and the Palestinian Authority,
as well as to the stability in the Middle East as a whole.

In addition, the future of the
peace process with the Palestinians is uncertain and has deteriorated due to
Palestinian violence, with the threat of a large-scale attack by Palestinians on Israeli
civilians and key infrastructure remaining a constant concern. The past few years of
renewed terrorist attacks by the Palestinians has severely affected the Israeli economy in
many ways.

In July 2006, Israel became involved
in a major military conflict with the Hizbullah organization in Lebanon, which subjected
the north of Israel to missile attacks.

- 44 -

---

---

In June 2007, there was an escalation
in violence in the Gaza Strip resulting in Hamas effectively controlling the Gaza Strip
and a further escalation in violence has occurred during the first few months of 2008.
Ongoing violence between Israel and the Palestinians as well as tension between Israel and
the neighboring Syria and Lebanon may have a material adverse effect on our business,
financial conditions and results of operations. In addition, several countries still
restrict business with Israel and with companies doing business in Israel. We could be
adversely affected by adverse developments in the peace process or by
restrictive laws or policies directed towards Israel or Israeli businesses. Some of our
employees are obligated to perform annual reserve duty in the Israel Defense Forces and
may, at any time, be called for active military duty. While we have operated effectively
under those and similar requirements in the past, no assessment can be made of the full
impact of such requirements on us in the future, particularly if emergency circumstances
occur. If many of our employees are called for active duty, our business may be adversely
affected.

In December 2008, Israel was involved
in a military conflict with Hamas, which subjected the South of Israel to missile attacks.

In recent years Israel has been going through
a period of recession in economic activity, resulting in low growth rates and growing
unemployment. Our operations could be adversely affected if the economic conditions in
Israel continue to deteriorate. In 1998, the Israeli currency control regulations were
liberalized dramatically. As a result, Israeli citizens can generally freely purchase and
sell Israeli currency and assets. The Government of Israel has periodically changed its
policies in these areas. There are currently no Israeli currency control restrictions on
remittances of dividends on ordinary shares or proceeds from the sale of ordinary shares;
however, legislation remains in effect pursuant to which currency controls can be imposed
by administrative action at any time.

The costs of our operations in Israel
are generally incurred in NIS. If the inflation rate in Israel exceeds the rate of
devaluation of the NIS against the U.S. dollar in any period, the costs of our Israeli
operations, as measured in U.S. dollars, could increase. Israels economy has, at
various times in the past, experienced high rates of inflation.

|5B. | Liquidity
and Capital Resources
|--- | -------------------------------

As of December 31, 2008 we had $1.6
million in cash, $9.6 million of short term bank loans drawn under a revolving credit
facility, $671 thousands current maturities of long term loans and long terms loans in the
amount of $2.3 million. Our bank credit lines are supplied mainly from two banks, JPMorgan
Chase which, as of December 31, 2008 provided $3.4 million and the remaining amount of
$9.2 million was supplied by Bank Leumi.

As of March 31, 2009 we had $1.1
million in cash, $10.3 million of short term bank loans drawn under a revolving credit
facility, $661,000 current maturities of long term loans and long terms loans in the
amount of $2.9 million. As of March 31, 2009 JPMorgan Chase has provided us credit in the
amount $4.6 million and the remaining amount of $9.3 million was provided by Bank Leumi.

In March 2009, the Company entered
into an amendment to the Dimex Systems Asset Purchase Agreement that revises the payment
schedule of the approximately NIS 10 million payable in three semi-annual installments
through March 2010. The amendment provides for a NIS 3.5 million payment in March 2009,
NIS 4 million will be paid in 6 equal monthly installments each, starting on January 15,
2010, and the remaining approximately NIS 2.5 million shall be paid in two equal
installments in March and April 2010. The amendment further provides that if the Company
raises funds by way of a debt offering meeting certain conditions, the last payment of
approximately NIS 2.5 million shall be converted into the same type of convertible
debentures issued in the framework of such offering.

- 45 -

---

---

The Company has recently entered into
a loan agreement with several lenders, including Catalyst Private Equity Partners (Israel)
II L.P., certain existing shareholders and members of our management, including our chief
executive officer, for an aggregate loan amount of approximately $1.288 million. Closing
of the transaction is subject to certain closing conditions. The Company is in
negotiations for obtaining additional loans, up to an aggregate amount of $3.75 million.

The terms of the loan transaction are
in accordance with the resolutions adopted at the Companys Special General Meeting
held on May 14, 2009, in which the shareholders resolved to approve the issuance of up to
$3.75 million in principal amount of debt convertible into ordinary shares and of
warrants, in one or more private placements, to be consummated by December 31, 2009.

The terms of the convertible loan are
as follows:

The Company shall repay the loan
principal amount and the accrued interest in one payment, three years following the
closing of the transaction, unless converted earlier at the discretion of the lender into
ordinary shares. The loan conversion rate is $0.65 per ordinary share.

Interest shall accrue from the grant
of the loan at the rate equal to 8% per annum, compounded annually.

The warrants issued to the lenders
amount to 100% of the number of ordinary shares into which the loan is convertible. The
warrants are exercisable from 18 months to 36 months from grant, at an exercise price per
ordinary share of $0.55.

The Companys loans from Bank
Leumi are secured by:

| |  | first
ranking fixed charges on the goodwill of the Company and its Israeli subsidiaries, on our
shareholdings in the Israeli subsidiaries and on certain Bank Leumi accounts of Odem; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | floating
 charges on all of the assets of the  Company and its  subsidiaries,  owned now or in the
future;             and
| | - | --------------------------------------------------------------------------------------------------------------------------

| |  | The
Company also guarantees the liabilities of its Israeli subsidiaries to Bank Leumi and
each of its Israeli subsidiaries guarantee the Companys liabilities to Bank Leumi.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On March 23, 2009, the Company
and its Israeli subsidiaries executed revised loan documents governing the
Companys and its Israeli subsidiaries short term revolving credit line
from Bank Leumi. In the revised loan documents, the Company and its Israeli
subsidiaries undertook updated covenants relating to, among other things, financial
ratios of equity and EBIDTA, and continue to provide Bank Leumi with various security
interests and cross guarantees.  The loan terms continue to restrict substantial
asset sales, cash dividends, and certain inter-company and shareholders payments. The
Company anticipates that it will continue to meet the covenants through December 31, 2009.

- 46 -

---

---

The Companys loan from JPMorgan
Chase is secured by:

| |  | first
 ranking fixed charge on all of the assets of Summit and on the  shareholdings  in Summit
of Lynk, a             subsidiary of the Company;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------

| |  | floating
charge on all of the assets of Summit, owned now or in the future; and
| | - | -------------------------------------------------------------------------------

| |  | Lynk
guarantees the liabilities of Summit to JPMorgan Chase.
| | - | ------------------------------------------------------------

We finance our activities by
different means, including equity financings, short and long-term loans, and income from
operating activities.

Net cash provided byoperating
activities from continuing operations in 2008 was $676,000 compared to net cash used inoperating activities of $4.6 million in 2007. The improvement in cash flow from
operating activities is attributed to a decrease in working capital needs which resulted
from the acquisition of Dimex Systems assets which includes account receivable but
not its trade payable. In addition decrease in losses in 2008 compared to 2007 improved
our cash flow from operating activities. During 2008, cash used in investing activities
amounted to $9 million, mainly to pay for the acquisition of Dimex Systems assets.
Cash flow used in investing activities in 2007 in the amount of $4.7 million was mainly to
pay for the acquisition of Summit.

Net cash provided by financing
activities in 2008 amounted to $6 million which relates mainly to (a) $1.8 million
proceeds from share issuance and (b) $4.2 million proceeds from short term bank loans.

Working capital requirements will
vary from time-to-time and will depend on numerous factors, including but not limited to,
the operating results, scope of sales, supplier and customer credit, the level of
resources devoted to research and development, new product introductions, and marketing
and acquisition activities.

We have in-balance sheet financial
instruments and off-balance sheet contingent commitments. Our in-balance sheet financial
instruments consist of our assets and liabilities. Our cash is invested in short-term
(less than 3 months) U.S. dollars and NIS interest bearing deposits with banks. As of
December 31, 2008, our average trade receivables and trade payables aging days
are 104 and 64 days, respectively. The fair value of our financial instruments is similar
to their book value. Our off-balance sheet contingent commitments consist of: (a) royalty
commitments that are directly related to our future revenues, (b) lease commitments of our
premises and vehicles, (c) directors and officers indemnities, in excess of the
proceeds received from liability insurance which we obtain, and (d) legal proceedings.

We believe that our cash resources
are sufficient to meet our operating needs for at least the next 12 months. It is our
intention to seek to raise additional equity and debt financings, to fund additional
product development, establish distribution channels in new markets and for the payment of
our liabilities related to the acquisition of Dimex. There is, however, no assurance that
we shall be able to obtain such financing.

Laurus Convertible Note
Financings

On June 10, 2004, the Company entered
into a Securities Purchase Agreement with Laurus Master Fund Ltd. under which the Company
issued to the Laurus in a private placement (i) a Secured Convertible Term Note of a
$2,000,000 principal amount, was due June 10, 2007 and (ii) a warrant to purchase 130,000
ordinary shares at an exercise price of $4.04 per share. The warrant is exercisable, in
whole or in part, until June 10, 2011.

- 47 -

---

---

Pursuant to its undertaking in the
Registration Rights agreement with Laurus the Company filed with the Securities and
Exchange Commission a registration statement on Form F-3 covering the resale of ordinary
shares that were issued upon conversion of the Note and that shall be issued upon exercise
of the Warrants. The registration statement became effective on March 11, 2005.

On March 23, 2005, after Laurus
elected to convert $308,000 of the principal sum of the convertible note, Laurus was
issued 100,000 ordinary shares of the Company. On July 14, 2005, Laurus completed the
conversion of the balance of the principal, which had not been previously converted or
repaid, and the accrued interest, into an additional 540,293 ordinary shares, for
approximately $1.58 million. On September 29, 2005, the Company entered into a Second
Securities Purchase Agreement with Laurus, under which the Company issued to Laurus in a
private placement (i) a Secured Convertible Term Note of a $1.5 million principal amount,
due September 2008 and the conversion price into ordinary shares at was $3.08 per share.
As a result of the price per share in the rights offering described below (that was
completed on April 16, 2007), the conversion price of the convertible note was reduced to
$2.97 per share, and (ii) a Warrant to purchase 73,052 ordinary shares at an exercise
price of $4.04 per share.

The Warrant is exercisable, in whole
or in part, until September 29, 2012, and payment of the exercise price may be made either
in cash or in a cashless exercise (or in a combination of both methods). The
warrant exercise price is also subject to proportional adjustment in the event of
combinations, subdivisions of the ordinary shares or if dividend is paid on the ordinary
shares in ordinary shares.

Pursuant to its undertaking in the
Registration Rights Agreement with Laurus, the Company filed with the Securities and
Exchange Commission a registration statement on Form F-3 covering the resale of ordinary
shares that are issuable upon conversion of the Note and/or exercise of the Warrants,
and/or issuable in payment of principal and interest on the Note. The registration
statement became effective on February 8, 2006.

On August 17, 2006 the Company
entered into and closed a third financing transaction with Laurus. The financing consisted
of a $1.5 million Secured Convertible Term Note with a term of three years. In addition,
BOS granted to Laurus a Warrant to purchase up to 73,052 ordinary shares, which is
exercisable, in whole or in part, until August 16, 2013 at an exercise price of $4.04 per
share for the first 24,351 ordinary shares acquirable thereunder, and of $5.30 per share
for the additional 48,701 acquirable thereunder.

The conversion rate under the Note
was $3.08 per share for the first $500,000 of principal amount payable thereunder and
$4.08 for any additional amount payable thereunder (subject to adjustment). As a result of
the price per share in the rights offering described below (that was completed on April
16, 2007), the $3.08 conversion rate was reduced to $2.97 and the $4.08 conversion rate
was reduced to $3.78. The Company also entered into a Registration Rights agreement with
Laurus pursuant to which the Company agreed to prepare and file with the Securities and
Exchange Commission a registration statement covering the resale of ordinary shares that
are issuable upon conversion of the Note and/or exercise of the Warrants, and/or issuable
in payment of principal and interest on the Note. The registration statement became
effective on December 5, 2006.

- 48 -

---

---

On June 21, 2007 Laurus Master Fund
Ltd. converted the entire outstanding principal amount under its Convertible Notes of
approximately $2,223,000 into 878,670 ordinary shares of the Company, at a conversion
price of $2.53.

# 2005 Private Placement

On May 24, 2005 the Company entered
into a Share Purchase Agreement, under which the Company issued and sold to certain
Israeli and European investors, in a private placement offering, 953,698 ordinary shares
at a price of $2.30 per share for a consideration of approximately $2,040,000 (net of
issuance expenses amounted to $154,000), and 572,219 warrants to purchase ordinary shares
reflecting a 60% warrant coverage, exercisable for three years from their date of
issuance. The exercise price under the warrants is $2.50 per Ordinary Share during for the
first year from the issuance, and increasing to $2.75 per Ordinary Share and $3.03 per
Ordinary Share, on the first and second anniversaries of the issuance, respectively. The
Company filed with the Securities and Exchange Commission a registration statement
covering the resale of the ordinary shares issued to the investors, which became effective
on February 8, 2006.

Rights Offering

In April 2007 the Company completed a
rights offering in which it raised gross proceeds of approximately $4.4 million by issuing
1,739,398 ordinary shares. In the rights offering, the Company offered its shareholders
rights to purchase its ordinary shares at a subscription price of $2.50 per ordinary
share. The rights were traded for one day on both the Nasdaq Global Market and the
Tel-Aviv Stock Exchange. The offering ended on April 16, 2007.

# 2007 Private Placements

On June 26, 2007, the Company entered
into a definitive private placement agreement with a European private investor for the
issuance of 226,415 ordinary shares at a price per share of $2.65. Pursuant to its
undertaking, under the Registration Rights Agreement with the investor, the Company filed
with the Securities and Exchange Commission a registration statement covering the resale
of the ordinary shares issued to the investor, which became effective on May 20, 2009.

The Company has paid 6% of the
investment amount in cash as placement fees to Cukierman & Co. (see note 19 to the
Consolidated Financial Statements for the year ended December 31, 2008).

In December 2007, the Company entered
into a Share Purchase Agreement with Catalyst Fund and three subsidiaries of D.S. Apex,
under which the Company issued 833,560 ordinary shares at a price of $2.40 per share
(reflecting an aggregate investment of approximately $2 million), and 541,814 warrants at
an exercise price of $2.76, exercisable for four years from their date of issuance.

The Company has paid 3% in cash and
6% in ordinary shares as placement fees to placement entities related to the
aforementioned investors (see note 19 to the Consolidated Financial Statements for the
year ended December 31, 2008). Pursuant to its undertaking under the Registration Rights
Agreement with the investors, the Company filed with the Securities and Exchange
Commission a registration statement covering the resale of the ordinary shares issued to
the investors and issuable upon the exercise of the warrants issued to the investors,
which became effective on May 20, 2009.

- 49 -

---

---

# 2008 Private Placements

In June 2008, the Company entered
into a Finder Letter Agreement with T.F.E. Holdings Ltd. under which the Company issued
110,000 ordinary shares. These shares were issued as fees for services rendered to the
Company in connection with the acquisition of the assets of Dimex Systems.

The Company filed with the Securities
and Exchange Commission a registration statement covering the resale of the ordinary
shares issued to T.F.E. Holdings Ltd., which became effective on May 20, 2009.

In July 2008, the Company entered
into a Share Purchase Agreement with three non-U.S. investors, under which the Company
issued 740,740 ordinary shares at a price per share of $1.35 (reflecting an aggregate
investment of $1 million) and 370,370 ordinary shares issuable upon the exercise of
warrants at an exercise price $1.60 per ordinary share, exercisable for 2 years from their
date of issuance.

The Company has paid 6% of the
investment amount in cash as placement fees to Cukierman & Co. (see note 19 to the
Consolidated Financial Statements for the year ended December 31, 2008). The Company also
entered into a Registration Rights Agreement granting the investor certain incidental
registration rights.

In August 2008, the Company entered
into a Share Purchase Agreement with a non-U.S. investor, under which the Company issued
816,327 ordinary shares at a price per share of $1.225 (reflecting an aggregate investment
of $1 million) and 408,164 ordinary shares issuable upon the exercise of warrants at an
exercise price $1.475 per ordinary share, exercisable for 2 years from their date of
issuance.

The Company has paid 6% of the
investment amount in cash as placement fees to Cukierman & Co. (see note 19 to the
Consolidated Financial Statements for the year ended December 31, 2008). The Company also
entered into a Registration Rights Agreement granting the investor certain incidental
registration rights.

|5C. | Research
and Development
|--- | ------------------------

We believe that our future growth
will depend upon our ability to enhance our existing products and introduce new products
on a timely basis. Since we commenced operations, we have conducted extensive research and
development activities.

Historically our research and
development efforts related to our Communication Solutions, until sold in December 2005.
Our current research and development efforts focus on our RFID and Mobile Solutions for
enterprise logistics and organizational processes and on our software products offering
(see Section 4B. Business Overview for the detailed list of our software
products).

We intend to finance our research and
development activities with our own resources and by raising equity and debt financings.

- 50 -

---

---

|5D. | Trend
Information
|--- | -----------------

We, like other companies, have been
and are subject to the effects of market slowdowns. If general economic conditions fail to
improve, or if they continue to deteriorate, we anticipate that it will adversely affect
our revenues and increase our account receivables and inventory days. Our revenues for the
first quarter of 2009 decreased 21.7% to $9 million from $11.5 million in the fourth
quarter of 2008.

BOSs vision is to become a
worldwide leader in the field of RFID and Mobile Solutions for enterprise logistics and
organizational processes. Committed to this vision, we plan to expand our suite of
solutions and anticipate that the portion of RFID and Mobile revenues will increase
gradually going forward.

Following the economic slowdown we
recorded a goodwill impairment charge of $1.9 million in 2008 related to the Supply Chain
segment. If general economic conditions fail to improve, we may be required to record
additional impairment charges.

The vast majority of our sales are
made in U.S. dollars and significant portion of our expenses is in NIS. The U.S. dollar
cost of our operations in Israel is increased by the extent to which the NIS appreciates
in relation to the U.S. dollar. In 2008, and until May 31, 2009, the U.S. dollar increased
in value against the NIS by approximately 2.9%, which resulted in a corresponding increase
in the U.S. dollar cost of our operating expenses. Further significant devaluation could
have an adverse effect on our results of operation and financial condition. We cannot
predict any future trends in the rate of devaluation or appreciation of the NIS against
the U.S. dollar, and may not be successful in attempting to purchase instruments that
reduce exposure to currency exchange fluctuations. Further significant depreciation could
have an adverse effect on our results of operations and financial condition.

|5E. | Off-Balance
Sheet Arrangements
|--- | ------------------------------

In September 2004 Odem signed a long
term sale agreement for the supply of electronic components (components). The
agreement provides for a fixed sales price of the components during the term of the
agreement through December 2010.

In July 2008, we signed a contract
for the sale of components to the Strategic Customer. The contract provides for a
framework for orders during an initial five-year term (until 2012).The contract
may be extended for additional five-year terms.

Pursuant to the contracts with IAI
and the Strategic Customer, we committed to a fixed components sale price through the
respective contract periods, which is partly covered by manufacturers obligation for fixed
prices for part of the period.

Absent the flexibility to increase
our prices as a result of increased costs of the components, significant increased costs
may adversely impact our financial results. In addition, under the agreements, we are
obligated to hold inventory of products necessary for three months of the customers
production. This requires us to incur the costs of purchasing inventory without having an
outstanding purchase order for the products. If we are unable to sell products that are
purchased to hold in inventory, we may incur write offs and write downs as a result of
slow moving items, technological obsolescence, excess inventories, discontinued products
and products with market prices lower than cost. Such write offs and write downs could
adversely affect our operating results and financial condition.

As of December 31, 2008 we had no
write down of write off or inventory that related to these agreements.

- 51 -

---

---

|5F. | Tabular
Disclosure of Contractual Obligations
|--- | ---------------------------------------------

The following table of our material
contractual obligations as of December 31, 2008, summarizes the aggregate effect that
these obligations are expected to have on our cash flows in the periods indicated:

|                        | Payment due by period
|----------------------- | ---------------------
|
|
|
|
|Long-term loans 1       |                      
|Accrued severance pay 2 |                      
|Operating lease - cars  |                      
|Purchase obligation for |                      
|service and inventory   |                      
|Facilities lease        |                      
|Total                   |                      

|(1) | Does
not include interest. For information on interest rate on long terms loans
               see note 12 to the Consolidated Financial Statements for the year ended
December                31, 2008.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This
amount reflects our accrued severance pay liability. The time for payment
               of the severance cannot be predicted and, as a result, this amount is
presented                in the more than 5 years column.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, the above table does not
include (i) contingent obligations to pay royalties to the Office of the Chief Scientist
and to the Overseas Marketing Fund since the total amount to be paid under the terms of
those agreements is a function of future sales, and (ii) contingent legal claims (see
Section 8A. Consolidated Statements and Other Financial Information  Legal
Proceedings).

- 52 -

---

---

|Item 6: |  | Directors, Senior Management and Employees
|------- |  | ------------------------------------------

|6A. | Directors
and Senior Management
|--- | -------------------------------

Set
forth below is information regarding our directors and senior management.

|Name                   | Age |  | Position                                                    
|---------------------- | --- |  | ------------------------------------------------------------
|
|
|
|
|Mr. Edouard Cukierman1 | 44  |  | Chairman of the Board of Directors                          
|Mr. Shalom Daskal      | 49  |  | Chief Executive Officer                                     
|Mr. Eyal Cohen         | 40  |  | Chief Financial Officer                                     
|Mr. Joel Adler         | 55  |  | Director                                                    
|Mr. Guillaume Binder   | 54  |  | Director                                                    
|Mr. Jacob Neuhof       | 64  |  | Director                                                    
|Mr. Dan Hoz            | 38  |  | Director                                                    
|Mr. Gerard Limat       | 68  |  | Director                                                    
|Mr. Ronen Zavlik       | 48  |  | Director                                                    
|Ms. Nelly Assouline    | 43  |  | External Director                                           
|Mr. David Golan        | 68  |  | External Director                                           
|Mr. Avidan Zelicovsky1 | 39  |  | Head of Supply Chain Solutions Division                     
|Mr. Yuval Viner        | 46  |  | Head of RFID and Mobile Solutions division                  
|Mr. Andrew Levi        | 46  |  | Managing Director BOS - Supply Chain Solutions (Summit) Inc.

---

1
          Mr. Cukierman and Mr. Zelicovsky are first cousins. There are no other family
          relationships among the officers and directors.

- 53 -

---

---

Mr.
          Edouard Cukierman has been a director since May 2003 and Chairman of the
          Company since June 2003. Mr. Cukierman is the founder and CEO of Catalyst Funds
          and serves as Chairman of Cukierman & Co Investment House. Since its
          establishment in 1993 Cukierman & Co., Investment House realized  2.7
          billion of corporate finance transactions. Mr. Cukierman serves as Chairman of
          the Board of Summit, a subsidiary of the Company, is a Board member of Lamina
          Technologies in Switzerland, Mainsoft in Israel and Nessink in France. Prior to
          managing Catalyst in 2000, he was the President and CEO of the Astra
          Technological Investments, a venture capital fund established in 1993, which
was           the first Israeli company which went public in continental Europe. He is
also           the Chairman of the Board of Friends of Sar-El, an Israeli
Defense           Forces volunteer organization and is a board member of the Alliance
          Israelite Universelle en Israel. He serves as an officer in the Israeli
          Defense Forces Spokesman Unit, and part of the Hostage & Crisis Negotiation
          Team (Reserves). Mr. Cukierman holds an MBA from INSEAD, Fontainebleau, France
          and a B.Sc from the Technion  Israel Institute of Technology.

Mr.
          Shalom Daskal has been serving as the Chief Executive Officer of the
Company           since November 2008 and has over 28 years of executive experience in
global High           Tech companies. Prior to joining the Company, Mr. Daskal served as
an active           chairman of several High Tech companies based in Israel. During the
years           2005-2006, Mr. Daskal was the Chief Executive Officer of Shellcase Ltd.,
which           was acquired by Tessera Technologies Inc. (Nasdaq: TSRA). Prior to
joining           Shellcase, between 2002-2004, he was the Chief Executive Officer of
Power Paper           Ltd., and during 1999-2002 he was the Chief Operation Officer of
the           International Division of Crystal Systems Solutions Ltd. (later renamed
          BluePhoenix Solutions). Between 1996-1998, Mr. Daskal was the CEO of Emultek
          Ltd. Mr. Daskal began his career in the computer center of the Israeli Defense
          Forces (Mamram), and earned a Bachelors degree in computer science from
          the Israeli Defense Forces computers academy.

Mr.
          Eyal Cohen was appointed as the Companys Chief Financial Officer in
          January 2007. From 2004 through 2006, Mr. Cohen served as the Companys
          controller, and prior to that held the position of Chief Financial Officer at
          Cellact Ltd. From 1998 to 2001, Mr. Cohen was the controller of e-SIM Ltd.
          (NASDAQ:ESIMF) and in the years 1995-1997 held an audit manager position in
          PricewaterhouseCoopers. Mr. Cohen holds a B.A. in Accounting and Business
          Administration from the College of Management in Tel-Aviv and is a certified
          public accountant in Israel and in the United States, in the state of Maine.

- 54 -

---

---

Mr.
          Joel Adler has been a director since June 2005. Mr. Adler is a partner in
          Mishcon de Reya a leading law firm in London. He specializes in mergers &          acquisitions
and corporate finance work, in particular international corporate           transactions.
Mr. Adler advises a number of major Israel based companies on           their business
activities in the UK and Europe and on IPO of foreign companies           on the London
Stock Exchange (AIM). Mr. Adler joined Mishcon de Reya as a           partner in 2006,
from the London law firm of Speechly Bircham, where he was a           partner from 1999.
Previously, Mr. Adler was head of the corporate department of           Rakisons (now
part of U.S. law firm Steptoe & Johnson). He gained his           experience with
other leading law firms in London Herbert Oppenheimer Nathan           & Vandyck (now
Denton Wilde Sapte) and DJ Freeman. He is a member of the           Israeli Bar and
worked for the well-known Israeli law firm Caspi & Co. for           two years. Mr.
Adler holds a Law degree from Bar Ilan University in Israel, and           an LLM from
London University. He was born and educated in Vienna.

Mr.
          Ronen Zavlik has been a director since May 2003. He is a partner in the CPA
          firm of Grinberg-Zavlik, which he founded in 1987. His firm provides a wide
          range of audit, tax consultancy and CFO services to a wide variety of
companies.           Mr. Zavlik provides internal auditing services to a number of large
companies           whose shares are traded on the Tel-Aviv Stock Exchange, including Maariv
          Holdings Ltd., Extra Plastic Ltd., Rapid Vision Ltd., and Optima Management and
          Investments 66 Ltd. Mr. Zavlik holds a B.A. in Accountancy and Business
          Management from the College of Management in Tel-Aviv. Mr. Zavlik is a licensed
          CPA in Israel and a member of the Institute of Certified Public Accountants in
          Israel.

Mr.
          Dan Hoz, has been a director of the Company since August 2007. Mr. Hoz
          serves as the Chief Executive Officer of Valor Computerized System Ltd., a
          provider of vertically integrated manufacturing productivity solutions to the
          PCB industry since 2002, following 5 years as the Companys Chief
Financial           Officer. Mr. Hoz also serves on the board of directors of Frontline
PCB           Solutions, a joint venture company between Valor and Orbotech. Previously,
Mr.           Hoz was the Vice President of Operations and Finance of CAM Division
          (Frontline), in Orbotech-Valor. Mr. Hoz is also a former Senior Auditor in the
          High Tech group of Deloitte Touche Tohmatsu. Mr. Hoz holds a B.A. in Accounting
          and Economics and an MBA (major in Finance) from Ben Gurion University of the
          Negev, and is a certified CPA.

Mr.
          Gérard Limathas been a director of the Company since April 2008.
          Since 1968, Mr. Limat has held various managerial positions with the Dassault
          group, which operates in the civil aviation and the military sectors. Mr. Limat
          is also the founder and Chief Executive Officer of Dasnair, a business plane
          charter company. In addition, Mr. Limat serves as a director in           Générale
Immobilière Dassualt and in Cendres &          Métaux SA, a company
that produces semi-finished and finished products           for the dental, jewellery and
heavy industries. Mr. Limat is a certified public           accountant.

Mr.
          Guillaume Binder has been a director of the Company since July 2008. Mr.
          Binder is a licensed lawyer in France and holds a Masters in Law from Paris
          University, a certificate of specalization in Corporate and Tax Law and a
degree           of superior accounting study (DECS). Mr. Binder serves as a director in
several           seed and startup companies, including First Care products and Neuronix.

Mr.
          Jacob Neuhofhas been a director of the Company since September 2009. Mr.
          Neuhof founded Odem Electronic Technologies 1992 Ltd. in May 2002 and
          managed the company for 16 years. Between 2005-2007, Mr. Neuhof served as the
          Chairman of the Board of Odem Electronic Technologies 1992 Ltd.  Odem was
          purchased by the Company in 2004-2005 and is its wholly owned subsidiary.
           In the past, Mr. Neuhof served as Country Manager for Texas Instruments
in           Israel for a period of ten years and as a design engineer at General Signal
          Corp. Mr. Neuhof holds an Electrical Engineering degree from McGill
          University, Canada and an MBA with a specialization in Marketing from the
          University of Bridgeport, Connecticut.

- 55 -

---

---

Ms.
          Nelly Assouline has been an external director of the Company since November
          2008. Ms. Assouline has been holding various positions in Dexia since 1989,
most           recently in Paris. Between the years 2001-2007 she has served as Deputy
General           Manager and Chief Financial Officer of Dexia Israel. She has set up and
served           as a board member of Dexia Israel Issuance Ltd. and of Dexia Operational
          Financing Ltd. Between the years 1989 and 2001 she was the senior executive
          funding director  Financial Markets in the Dexia Funding Department. Ms.
          Assouline holds a Post Graduate degree in Mathematics and Finance from the
          Dauphine University and an International Executive MBA from the Kellog
          University of Management (Northwestern and Tel-Aviv University).

Mr.
          David Golan has been an external director of the
Company since February 2009. Mr. Golan provides private investment banking, consulting and
brokerage services. He currently serves as a director in several companies, including the
Investec Bank since 1992, Clal Tourism Ltd., Cimatron Ltd. and Zoko Enterprises Ltd. In
the years 1998-2000 he served as President of the Zeevi Investments group. Between
1997-1998, Mr. Golan served as President of Clal Trading Ltd. and between 1992-1997 he
served as Vice President Clal Trading Ltd. Between the years 1988-1992 Mr. Golan served as
managing director of Gal Industries Ltd. Mr. Golan holds a bachelors degree in Economics
and Statistics from the Hebrew University, an MBA from New York University and took part
in a senior management course in IMD Lausaunne.

Mr.
          Avidan Zelicovsky is the Head of Supply Chain Solutions Division. Mr.
          Zelicovsky first joined the Companys subsidiary Odem Electronic
          Technologies 1992 Ltd. in 1996. Mr. Zelicovsky holds a B.A. in Business
          Administration from the Tel Aviv College of Management and an LL.M. from the
          Ben-Gurion University.

Mr.
          Yuval Vineris the Head of RFID and Mobile Solutions division. Mr. Viner
          joined Dimex Systems (1988) Ltd. in 1993 and was appointed as Dimex
          Systems CEO in 2000. Mr. Viner joined the Company as part of the
          acquisition of Dimex Systems assets. Mr. Viner is a graduate of the Practical
          Engineering Academy of Tel Aviv.

Mr.
          Andrew Levi was appointed President of Summit Radio Corp. in the year 1984.
          Mr. Levi joined BOS as part of the Summit acquisition and currently serves as
          Managing Director BOS  Supply Chain Solutions (Summit) Inc. Mr. Levi
holds           a Bachelor of Science from the Syracuse University in New York.

|6B. | Board
and Executive Compensation
|--- | --------------------------------

On
February 18, 2003 the shareholders approved compensation for all directors who are not
employees or consultants, including directors appointed in the future, at the same rate
the external directors of the Company are paid. However, on August 5, 2004 the
shareholders approved an exception  that Edouard Cukierman, Chairman of the Board,
will receive remuneration (retroactively from the date of his nomination in May 2003) as a
Board member, under the same terms as all other directors, despite his being (indirectly)
a controlling shareholder and senior executive of Cukierman & Co. (a service provider
to the Company). On November 7, 2007 the shareholders approved an Active Chairman
Agreement with Mr. Edouard Cukierman. Pursuant to this Agreement, in consideration for Mr.
Cukiermans services as the Companys Active Chairman in the years 2007-2010, he
is granted 400,000 options to purchase the Companys ordinary shares in four equal
annual tranches (pro-rated for any part of the Calendar year). These options shall be in
lieu of any compensation, fees or options otherwise payable by the Company to Cukierman as
a director. (see Section 7B. Related Party Transactions).

- 56 -

---

---

The
current compensation rates for our directors, excluding the external directors, are an
annual fee of approximately $5,734 and a meeting participation fee of approximately $297.
These rates reflect a following a voluntary waiver by each of the non-external directors
of 15% of their fees for the year 2009. The rates for of our external directors are an
annual fee of approximately $8,270 and a participation fee in meetings of approximately
$415. Additionally, the Companys directors are granted options (see Section
6E. Share Ownership). The Company does not have any contracts with any of its non
employee/consultant directors, that would provide for benefits upon termination of
service.

The
following tables present the total compensation paid to or accrued on behalf of all of our
directors and officers as a group for the year ended December 31, 2008:

|                                                         | Salaries, Directors' fees,
Service fees, Commissions
and Bonus1 | Pension, Retirement
and Similar benefits
|-------------------------------------------------------- | --------------------------------------------------------------- | ----------------------------------------
|
|
|
|
|All  directors and officers as a group (then 20 persons) |                                                                 |                                         

1  Figure also includes (a)
consulting and other fees paid to Cukierman & Co., of which Mr. Edouard Cukierman, the
Companys Chairman, is (indirectly) a controlling shareholder and (b) Stock based
compensation in the amount of $532,000.

Such
remuneration does not include amounts expended by the Company for expenses, including
business association dues and expenses reimbursed to said officers, and other fringe
benefits commonly reimbursed or paid by companies in the location in which the particular
executive officer of the Company is located, as the case may be.

Starting
from November 2008, Mr. Shalom Daskal provides CEO services to the Company. (For more
information, see Section 7B.  Related Party Transactions).

|6C. | Board
Practices
|--- | ---------------

Our
Board of Directors is currently comprised of nine directors, including two external
directors. The directors are elected at the annual shareholders meeting, by a simple
majority, to serve until the next annual meeting of our shareholders and until their
respective successors are elected and qualified, with the exception of the external
directors who, by rule of the Israeli Companies Law, serve for three years. Our Articles
of Association provide that the number of directors in the Company (including external
directors) shall be determined from time to time by the annual general meeting of
shareholders, provided that it shall not be less than four nor more than eleven. Our
Articles of Association provide that the directors may appoint additional directors
(whether to fill a vacancy or to expand the Board) so long as the number of directors so
appointed does not exceed the number of directors authorized by shareholders at the annual
general meeting, and such appointees shall serve until the next annual general meeting.

- 57 -

---

---

The
Company has determined that Messrs. Adler, Zavlik, Hoz, Binder, Limat and Golan and Ms.
Assouline, who constitute a majority of the Board of Directors, are independent directors
under the applicable Nasdaq Stock Market requirements.

Under
the Israeli Companies Law and the regulations promulgated pursuant thereto, Israeli
companies whose shares have been offered to the public in, or that are publicly traded
outside of Israel are required to appoint at least two natural persons as external
directors. No person may be appointed as an external director if the person, or a
relative, partner or employer of the person, or any entity under the persons
control, has or had, on or within the two years preceding the date of the persons
appointment to serve as an external director, any affiliation with the company to whose
board the external director is proposed to be appointed or with any entity controlling or
controlled by such company or by the entity controlling such company. The term affiliation
includes an employment relationship, a business or professional relationship maintained on
a regular basis, control and service as an office holder (which term includes a director).

In
addition, no person may serve as an external director if the persons position or
other business activities create, or may create, a conflict of interest with the
persons responsibilities as an external director or interfere with the persons
ability to serve as an external director or if the person is an employee of the Israel
Securities Authority or of an Israeli stock exchange. If at the time of election of an
external director, all other directors are of the same gender, the external director to be
elected must be of the other gender. The external directors must have professional
qualifications to serve as a director, and at least one of the external directors must be
a financial expert.

External
directors are elected for a term of three years and may be re-elected for one additional
three-year term. Each committee of a companys Board of Directors that has the
authority to exercise powers of the Board of Directors is required to include at least one
external director and its audit committee must include all external directors.

External
directors are elected at the general meeting of shareholders by a simple majority,
provided that the majority includes at least one-third of the shareholders who are not
controlling shareholders, who are present and voting, or that the non-controlling
shareholders who vote against the election hold one percent or less of the voting power of
the company.

Under
the Israeli Companies Law an external director cannot be dismissed from office unless: (i)
the Board of Directors determines that the external director no longer meets the statutory
requirements for holding the office, or that the external director is in breach of the
external directors fiduciary duties and the shareholders vote, by the same majority
required for the appointment, to remove the external director after the external director
has been given the opportunity to present his or her position; (ii) a court determines,
upon a request of a director or a shareholder, that the external director no longer meets
the statutory requirements of an external director or that the external director is in
breach of his or her fiduciary duties to the company; or (iii) a court determines, upon a
request of the company or a director, shareholder or creditor of the company, that the
external director is unable to fulfill his or her duty or has been convicted of specified
crimes.

- 58 -

---

---

Our
Articles of Association provide that a director may appoint, by written notice to us, any
individual to serve as an alternate director, up to a maximum period of one month, if the
alternate is not then a member of the Board. Any alternate director shall have all of the
rights and obligations of the director appointing him or her and shall be subject to all
of the provisions of the Articles of Association and the Israeli Companies Law. Unless the
time period or scope of any such appointment is limited by the appointing director, such
appointment is effective for all purposes for a period of one month, but in any event will
expire upon the expiration of the appointing directors term, removal of the
alternate at an annual general meeting, the bankruptcy of the alternate, the conviction of
the alternate for an offense under Section 232 of the Israeli Companies Law, the legal
incapacitation of the alternate, the removal of the alternate by court order or the
resignation of the alternate. Currently, no alternate directors have been appointed. A
director may appoint an alternate to serve in his place as a member of a committee of the
Board of Directors, even if the alternate currently serves as a director, as long as he
does not already serve as a member of that committee.

Officers
serve at the discretion of the Board or until their successors are appointed.

According
to the provisions of our Articles of Association and the Israeli Companies Law, the Board
of Directors convenes in accordance with the Companys requirements, and at least
once every three months. In practice, the Board of Directors convenes more often.
Furthermore, our Articles of Association provide that the Board of Directors may also pass
resolutions without actually convening, provided that all the directors entitled to
participate in the discussion and vote on a matter that is brought for resolution agree
not to convene for discussion of the matter. Resolutions passed without convening, shall
be passed by an ordinary majority (just as in the case of convened meetings) and shall
have the same effect as resolutions passed at a duly convened meeting.

In
accordance with the requirements of the Nasdaq Stock Market, commencing on July 31, 2005,
nominees for directors will be recommended for selection by a majority of the independent
directors.

Audit Committee:

The
Israeli Companies Law requires public companies to appoint an audit committee comprised of
at least three directors, including all of the external directors, and further stipulates
that the chairman of the Board of Directors, any director employed by or providing other
services to a company and a controlling shareholder or any relative of a controlling
shareholder may not be members of the audit committee. The responsibilities of the audit
committee include identifying flaws in the management of a companys business, making
recommendations to the Board of Directors as to how to correct them and deciding whether
to approve actions or transactions which by law require audit committee approval. An audit
committee may not approve an action or transaction with a controlling shareholder or with
an office holder unless at the time of approval two external directors are serving as
members of the audit committee and at least one participated in the meeting at which the
action or transaction was approved.

In
order to comply with the Sarbanes-Oxley Act of 2002, the Board of Directors has expanded
the role of the Companys Audit Committee to provide assistance to the Board of
Directors in fulfilling its legal and fiduciary obligations with respect to matters
involving the accounting, auditing, financial reporting and internal control functions of
the Company. In carrying out these duties, the Audit Committee must meet at least once in
each fiscal quarter with management at which time, among other things, it reviews, and
either approves or disapproves, the financial statements of the Company for the
immediately preceding fiscal quarter and conveys its conclusions in this regard to the
Board of Directors. The Audit Committee also monitors generally the services provided by
the Companys external auditors to ensure their independence, and reviews, and either
approves or disapproves, all audit and non-audit services provided by them. The
Companys external and internal auditors must also report regularly to the Audit
Committee at its meetings, and the Audit Committee discusses with the Companys
external auditors the quality, not just the acceptability, of the accounting principles,
the reasonableness of significant judgments and the clarity of disclosures in the
Companys financial statements, as and when it deems it appropriate to do so.

- 59 -

---

---

Under
the Sarbanes-Oxley Act of 2002, the Audit Committee is also responsible for the
appointment, compensation, retention and oversight of the work of the Companys
external auditors. However, under Israeli law, the appointment of external auditors
requires the approval of the shareholders of the Company. Accordingly, the appointment of
the external auditors is approved and recommended to the shareholders by the Audit
Committee and ratified by the shareholders. Furthermore, pursuant to the Companys
Articles of Association, the Board of Directors is the organ that has the authority to
determine the compensation of the external auditors, however, the Board of Directors
delegated its authority to the audit committee, so that a second discussion by the Board
of Directors shall not be necessary.

The
Company has determined that the members of the audit committee meet the applicable Nasdaq
Stock Market and SEC independence standards.

In
2003 the Company adopted an Audit Committee Charter, which sets forth the responsibilities
of the committee.

Remuneration Committee:

The
role of the Remuneration Committee is to provide assistance and make recommendations to
the Board of Directors regarding matters related to the compensation of employees of the
Company. The Remuneration Committee of the Company meets on an ad hoc basis. Under the
Israeli Companies Law, generally the Remuneration Committee may only make recommendations
to the Board of Directors concerning the grant of options (and in some cases, such grants
may need approval of the audit committee, the Board of Directors and the shareholders as
well).

Commencing
July 31, 2005, in accordance with Nasdaq rules, the compensation of the Companys
Chief Executive Officer and other executive officers is recommended to the Board of
Directors by a majority of the independent directors on the Companys Board of
Directors.

|6D. | Employees
|--- | ---------

As
of December 31, 2007, we employed 93 employees. As of May 31, 2009, we employed 125
employees, of which 100 are employed in Israel and the rest are employed in the United
States. Of these 125 employees: 13 employees are in general and administrative positions,
70 employees in marketing and sales, 8 employees in research and development, and 34
employees in manufacturing and related activities. We believe that our relations with our
employees are satisfactory. We have not experienced a collective labor dispute or a
strike.

Israeli
labor laws are applicable to all of our employees in Israel. The laws principally concern
the length of the work day, minimum daily wages for professional workers, contributions to
a pension fund, insurance for work-related accidents, allotment of vacation and sickness
days, procedures for dismissing employees, determination of severance pay and other
conditions of employment.

- 60 -

---

---

All
Israeli employers are required to provide a certain escalation of wages in relation to the
increase in the Israeli Consumer Price Index. The specific formula of such escalation
varies according to agreements reached between the Government of Israel, the
Manufacturers Association and the Histadrut, the general labor union in Israel. All
of our Israeli employees are covered by pension insurance policies. Israeli employees and
employers are required to pay predetermined sums to the Israel National Insurance
Institute which amounts also include, since January 1, 1995, payments for national health
insurance.

In
December 2008 and in May 2009, we have effected a progressive reduction in the salaries of
the employees of the Company and its subsidiaries of up to 15%, depending on the level of
salary. In connection with such reduction, in May 2009, the Company granted its employees
a total of 538,753 options to purchase ordinary shares of the Company with exercise price
of $0.00 per ordinary share. The options vest on a quarterly basis starting from January
2009 over a period of four quarters, in four equal parts. The exercise period of the
options is 5 years from January 1, 2009.

In
addition, in May 2009, the Companys employees were granted a total of 545,166
options to purchase the Companys ordinary shares, as a prospective incentive. The
exercise price of these options is $1.00 per ordinary share. These options vest on a
yearly basis starting from January 2009 over a period of four years, in four equal parts.
The exercise period of the options is 5 years from January 1, 2009.

|6E. | Share
Ownership
|--- | ---------------

As of May 31, 2009, out of our
directors and officers, then consisting of 14 persons, shares held by our officers and
directors are as follows:

|Name                         | Position                                                     | Shares  | Options
|---------------------------- | ------------------------------------------------------------ | ------- | -------
|
|
|
|
|Mr. Edouard Cukierman1       | Chairman of the Board of Directors                           | 40,690  | 641,376
|Mr. Joel Adler2              | Director                                                     | 140,925 | 29,000 
|Mr. Jacob Neuhof             | Director                                                     | 275,567 | 21,500 
|Mr. Shalom Daskal            | Chief Executive Officer                                      | *       | 594,832
|Mr. Avidan Zelicovsky        | Head of Supply Chain Solutions, Division                     | 73,000  | 558,108
|Mr. Yuval Viner              | Head of RFID and Mobile Solutions Division                   | 42,981  | 206,209
|Mr. Andrew Levy              | Managing Director BOS - Supply Chain Solutions (Summit) Inc. | 180,000 | 66,666 
|Other directors and officers |                                                              |         | 156,590

---

| | 1 | Mr.
Edouard Cukierman held 21,666 ordinary shares directly, 6,424 ordinary
               shares through a wholly owned company, E.D.I European Development and
               Investments Ltd and an additional 12,600 ordinary shares through Cukierman
&               Co. Investment House & Co. that is indirectly controlled by Mr.
Cukierman.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2 | Brada
Investments Limited is discretionary trust of which Mr. Joel Adler, a
               director of the Company, is one of the beneficiaries. Brada Investments
Limited                holds 140,925 ordinary shares. Mr. Joel Adler holds 29,000
options, which he                received as a director.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | Less
than 1%. For additional information see "Section 7B.  Related Party Transactions".
| | - | ---------------------------------------------------------------------------------------

- 61 -

---

---

On
February 18, 2003 the Companys shareholders approved the grant of 7,500 options to
any future first-time director, who is not an employee or paid consultant of the Company.
The terms and conditions of the grant, as approved by the shareholders, are as follows:
the exercise price shall be $1.84; the options will vest over a three year period from the
date of grant (one-third vesting every year) and be exercisable within five years from the
date of grant. Due to share fluctuation, at the recommendation of the Board of Directors,
the shareholders resolved on August 5, 2004, that future issuances to new directors will
have an exercise price equal to the average closing price of the shares on the Nasdaq
Global Market on the 20 trading days preceding their appointment.

The
shareholders approved on August 5, 2004, that Edouard Cukierman, Chairman of the Board,
will be granted 7,500 options under the same terms as all other directors, despite his
being (indirectly) a controlling shareholder and senior executive of Cukierman & Co.
(a service provider to the Company), and therefore not eligible for options according to
the current shareholder resolution.

The
shareholders also approved on June 29, 2005, to grant all directors of the Company
(including external directors), who are not employees or consultants of the Company (or
who have been granted options similar to all directors despite their employment and/or
services), an additional 7,500 options to purchase ordinary shares of the Company on the
third anniversary of their service as directors, under the same terms approved by the
shareholders on February 18, 2003 and as amended on August 5, 2004. Following this
decision Edouard Cukierman was granted 7,500 options at an exercise price of $2.695.

On
May 18, 2006 and in November 2007 the shareholders approved to grant Mr. Edouard
Cukierman, the Chairman of the Board of Directors, a total of 21,666 ordinary shares (for
no consideration), and 633,876 options to purchase ordinary shares of the Company,
pursuant to the Companys 2003 Israeli Share Option Plan. (see Section 7B.
Related Party Transactions)

On
May 14, 2009 the shareholders approved the grant to each of the directors of the Company
(excluding the external directors and Mr. Edouard Cukierman) 14,000 options to purchase
the Companys ordinary shares in accordance with the Companys 2003 Israeli
Share Option Plan. The terms and conditions of the grant, as approved by the shareholders,
are as follows: the exercise price shall be $1.00; the options will vest over a four year
period from May 14, 2009, in four equal parts and be exercisable within five years from
the date of grant.

- 62 -

---

---

# Share Option Plans

The
purpose of the Share Option Plans is to enable us to attract and retain qualified persons
as employees, officers, directors, consultants and advisors and to motivate such persons
by providing them with an equity participation in the company. The Section 102 Plan is
designed to afford qualified optionees certain tax benefits under the Israel Income Tax
Ordinance. The Share Option Plans will expire 10 years after their adoption, unless
terminated earlier by the Board of Directors.

The
Share Option Plans are administered by the Board of Directors, which has broad discretion,
subject to certain limitations, to determine the persons entitled to receive options.

Under
the Share Option Plans, the terms and conditions under which options are granted and the
number of shares subject thereto shall be determined by the Board of Directors. The Board
of Directors also has discretion to determine the nature of the consideration to be paid
upon the exercise of an option under the Share Option Plans. Such consideration generally
may consist of cash, or, at the discretion of the Board of Directors, cash and a recourse
promissory note.

The
ordinary shares acquired upon exercise of an option are subject to certain restrictions on
transfer, sale or hypothecation. Options are exercisable and restrictions on disposition
of shares lapse pursuant to the terms of the individual agreements under which such
options were granted or shares issued.

Due
to a tax reform in Israel, after January 1, 2003 the Company may not grant options
pursuant to an old Section 102 Plan. Therefore, the Company may not grant any
more options pursuant to the 2000 and 1995 Plans described below. Previous grants under
these Plans remain unaffected. In any event, after the adoption of the 2003 Plan (see
below), the Board of Directors resolved that no further grants shall be made from the
previously adopted plans.

2003
Plan

In
May 2003 the Companys shareholders approved the adoption of the 2003 Israeli Stock
Option Plan, pursuant to which 625,000 ordinary shares were reserved for purchase by the
employees, directors, consultants and service providers of the Company and its
subsidiaries. Subsequently, the shareholders approved increases of the shares reserved for
issuance under the Plan, initially to 1 million, and thereafter to 1.5 million, to 2.6
million and in May 14, 2009 to 4.15 million. The Board of Directors has resolved that no
further grants shall be made from the previous plans. The Company has elected the benefits
available under the capital gains alternative. Pursuant to the election made
by the Company, capital gains derived by optionees arising from the sale of shares derived
from the exercise of options granted to them under Section 102, will be subject to a flat
capital gains tax rate of 25% (instead of the gains being taxed as salary income at the
employees marginal tax rate). However, as a result of this election, the Company
will no longer be allowed to claim as an expense for tax purposes the amounts credited to
such employees as a benefit when the related capital gains tax is payable by them, as the
Company was previously entitled to do. The Company may change its election from time to
time, as permitted by the Tax Ordinance. There are various conditions that must be met in
order to qualify for these benefits, including registration of the options in the name of
a trustee (the Trustee) for each of the employees who is granted options. Each
option, and any ordinary shares acquired upon the exercise of the option, must be held by
the Trustee for a period commencing on the date of grant and ending no earlier than 24
months after the date of grant.

- 63 -

---

---

As
of May 31, 2009 we had 3,166,955 options outstanding under this plan (of which 1,250,339
are vested) with the exercise prices as set forth below:

|Exercise Price Per Share $ | Outstanding
|-------------------------- | -----------
|
|
|
|
|Less than $0.01            |            
|$                          | 0.50       
|$                          | 0.61       
|$                          | 0.697      
|$                          | 1.00       
|$                          | 1.01       
|$                          | 1.044      
|$                          | 1.466      
|$                          | 1.499      
|$                          | 1.68       
|$                          | 1.713      
|$                          | 2.00       
|$                          | 2.28       
|$                          | 2.385      
|$                          | 2.52       
|$                          | 2.57       
|$                          | 2.68       
|$                          | 2.695      
|$                          | 3.00       
|                           |            
|Total                      |            
|                           |            

2001
Plan

In
March 2002, the Companys shareholders approved the adoption of the 2001 Stock Option
Plan, pursuant to which 250,000 ordinary shares were reserved for purchase by the
Companys employees, directors, consultants or service providers, as determined by
the Board of Directors or its authorized sub-committee. As of May 31, 2009, we had 1,160
options outstanding under this plan, at an exercise price of $6.8 per share. All of the
outstanding options had vested as of May 31, 2008.

2000
Plan

In
April 2001, the Companys shareholders approved our 2000 Employees Incentive Share
Option Plan, pursuant to which 112,500 ordinary shares were reserved for purchase. The
plan is subject to Section 102 of the Israeli Income Tax Ordinance. As of May 31, 2009, we
had 1,250 options outstanding under this plan at an exercise price of $28.00 per share.
All of the outstanding options had vested as of April 30, 2008.

1995
Plans

In
December 1995, the Companys shareholders approved our 1995 Employee Incentive Share
Option Plans.

The
Share Option Plans provide for the grant of options to purchase up to an aggregate of
50,000 ordinary shares. As of May 31, 2009, we had 450 options outstanding under this plan
at an exercise price of $18.00. All of the outstanding options had vested as of May 31,
2008.

- 64 -

---

---

|Item 7: |  | Major Shareholders and Related Party Transactions
|------- |  | -------------------------------------------------

|7A. | Major
Shareholders
|--- | ------------------

We are not directly or indirectly
owned or controlled by another corporation or by any foreign government.

The following table sets forth, as of
May 2009, information to the best of the Companys knowledge, as to each person known
to the Company to be the beneficial owner of more than five percent (5%) of the
Companys outstanding ordinary shares. Except where indicated, to the best of the
Companys knowledge based on information provided by the owners, the beneficial
owners of the Ordinary Shares listed below have sole investment and voting power with
respect to those shares. Applicable percentage ownership in the following table is based
on 13,027,514 shares outstanding as of May 31, 2009.

The voting rights of our major
shareholders do not differ from the voting rights of other holders of our ordinary shares.

|                                   | Shares Beneficially Owned
|---------------------------------- | -------------------------
|
|
|
|
|Catalyst Fund, LP (1)              |                          
|3 Daniel Frisch Street, Tel-Aviv   |                          
|64731, Israel                      |                          
|                                   |                          
|D.S. Apex Holdings Ltd. (2)        |                          
|Discount  Tower,  23 Yehuda Halevi |                          
|St., Tel Aviv, Israel              |                          
|                                   |                          
|SITA S.A. (3)                      |                          
|27, RTE DE GY  1252 Meinier,       |                          
|Geneva, Switzerland                |                          
|                                   |                          
|Bellite Pty Limited (4)            |                          
|7 Beresford Road, Rose Bay 2029,   |                          
|NSW, Australia                     |                          

| | (1) | Catalyst
Fund refers collectively to Catalyst Fund L.P., Catalyst                Fund II
L.P. and Catalyst Fund III, L.P., all of which are limited partnerships
               organized and existing under the laws of the State of Israel, and which
share                the same general partner, Catalyst Investments. Mr. Edouard
Cukierman may be                deemed to have sole voting and dispositive power with
respect to the shares held                by Catalyst Fund. Mr. Cukierman disclaims
beneficial ownership in such shares,                except to the extent of his
proportionate interest in them as an indirect                shareholder in the general
partner of Catalyst Fund. Includes 464,160 ordinary                shares held by
Catalyst Investment L.P. the general partner of Catalyst Fund.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 65 -

---

---

| | (2) | Refers
to the holdings of D.S. Apex Holdings Ltd. and its subsidiaries. Includes
               500,307 ordinary shares DS Apex Holdings Ltd. holds for its nostro
accounts.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Mr.
Gérard Limat, a member of our board of Directors is the Chairman of
               SITA SA and may be deemed to have sole voting and dispositive power with
respect                to the shares held by SITA SA.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Mr.
Les Szekely may be deemed to have sole voting and dispositive power with
               respect to the shares offered for resale by Bellite Pty Limited.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

The changes in holdings of the major
shareholders over the last three years, are detailed to the best of our knowledge in the
table below:

|Holdings as of:         | December 31, 2006 | December 31, 2007 | December 31, 2008 | May 31, 2009
|----------------------- | ----------------- | ----------------- | ----------------- | ------------
|
|
|
|
|Catalyst Fund, LP       |                   |                   |                   | 1,292,275   
|                        |                   |                  
|D.S. Apex Holdings Ltd. |                   |                   |                   |             
|                        |                   |                  
|SITA                    |                   |                   |                   |             
|                        |                   |                   |                   |             
|Bellite Pty Limited     |                   |                   |                   | -           

1 Includes 464,160 ordinary shares held by Catalyst Investment L.P. the general partner of Catalyst
Fund.

The  shareholders'  holdings
 reflect their voting rights.  The Company's major  shareholders do not have different
voting rights than other shareholders, with respect to their shares.

As of May 31, 2009,  there were 50
record holders of ordinary  shares,  of which 13 were  registered with addresses in the
United States,  representing  approximately 53% of the outstanding  ordinary shares.
 However, the number of record  holders  in the  United  States  is not  representative
 of the  number  of  beneficial  holders  nor is it representative  of where such
beneficial  holders are resident since many of the ordinary shares are held of record by
brokers and other nominees.

|7B. | Related
Party Transactions
|--- | --------------------------

Grant of Shares and Options and to Mr. Cukierman

The shareholders  approved on August
5, 2004, that Edouard Cukierman,  Chairman of the Board, will be granted 7,500 options at
an  exercise  price of $1.84 under the same terms as all other first time  directors.
 The  shareholders also  approved,  on June 29, 2005, to grant all directors of the
Company,  an additional  7,500 options to purchase ordinary  shares of the Company on the
third  anniversary  of their service as directors.  Following  this decision Edouard
Cukierman was granted 7,500 options at an exercise price of $2.695 (see "Section 6E.
Share Ownership").

- 66 -

---

---

On May 18, 2006 the  shareholders
 approved a grant to Mr.  Edouard  Cukierman  of 21,666  ordinary  shares (for no
consideration),  and 233,876  options to purchase  ordinary  shares of the Company,
 pursuant to the Company's 2003 Israeli  Share Option Plan, at an exercise  price of
$2.68.  The options'  exercise  price was equal to the average closing  price  of the
 Company's  shares  on the  Nasdaq  Global  Market  on the 20  trading  days  preceding
 the shareholders'  meeting date at which the grant was  approved  (the "Grant  Date").
 The options vest in three equal parts on the first, second and third anniversary of the
Grant Date, and expire from May 2010 through May 2012.

On November 7, 2007 the shareholders
 approved an Active Chairman  Agreement with Mr. Edouard  Cukierman.  Pursuant to this
Agreement,  in  consideration  for Mr.  Cukierman's  services as the Company's Active
Chairman in the years 2007-2010,  he shall be granted  400,000  options  in four equal
 annual  tranches  (pro-rated  for any part of the Calendar  year).  The  options  shall
be in lieu of any  compensation,  fees or  options  otherwise  payable by the Company to
Mr. Cukierman as a director.

The options shall vest on a
quarterly  basis.  The exercise price of the options is $2.385,  which was equal to the
weighted  average of the closing  prices of the  Company's  ordinary  shares on the
Nasdaq Global Market during the thirty-day  period  preceding the  shareholders
 approval.  Unexercised  options shall expire after five years from their respective
grant date.

Pursuant to the  Agreement,  if the
Service is terminated by the Company for no Cause (as defined in the Agreement) then: (i)
any unvested  options shall be  immediately  vested in full as of the date of the
 termination;  (ii) the Company shall grant Mr. Cukierman such number of options
amounting,  together with options previously  granted,  to 400,000  options,  and such
 additional  options  shall be  vested  upon  grant;  and (iii)  the  options  shall be
exercisable for a period of twenty four (24) months from termination.

If the Service is terminated by Mr.
 Cukierman in  circumstances  not involving  Cause, his vested options shall be
exercisable for six (6) months from the date of said termination.

In 2003,  the  Company's  audit
 committee  and Board  approved  the  engagement  of  Cukierman  & Co., to provide
non-exclusive  investment-banking  services and business development services to the
Company,  effective April 15, 2003.  Cukierman & Co. is a company  indirectly  controlled
by Mr.  Edouard  Cukierman.  Since  June 26,  2003, he serves as Chairman of the
 Company's  Board,  and he is also a co-manager  of the  Catalyst  Fund,  the  Company's
largest shareholder.  For its services,  Cukierman & Co. is paid a monthly sum of $10,000
plus VAT, in addition to a success fee of 4%-6% for a consummated  private  placements.
 According to its terms,  the Company may terminate the  agreement at any time,  by
giving one month prior written  notice.  The  agreement  provided that the success fees
for securing M&A transactions  shall be discussed and drafted as an Addendum to the
Service  Agreement.  Such an Addendum was approved on August 22,  2004, and it provides
for a success fee of 3.5% of the proceeds  exchanged in such a transaction.

For  payments  the Company  paid and
accrued  pursuant  to the  Service  Agreement  in year 2008 see Note 19 to the
Consolidated Financial Statements for the year ended December 31, 2008).

- 67 -

---

---

Management Agreement with Shalom Daskal and N-D-P Consulting Ltd.

Starting  from  November  2008,  Mr.
 Shalom  Daskal  provides the Company  with CEO services  through a management agreement
by and among the Company,  Shalom Daskal and N-D-P  Consulting  Ltd. In addition,  Mr.
Daskal is entitled to 400,000 options to purchase the Company's  ordinary shares,  in
connection with his service as a director in the Company's  subsidiaries.  The terms of
the options are as follows: (1) options to purchase 150,000 ordinary shares, which  have
an  exercise  price  of NIS  0.01 per  Ordinary  Share  and  vest  and  become
 exercisable  in 3 equal semi-annual  installments  of 50,000 options each,  with the
first  installment  vesting upon the lapse of 6 months from November 19, 2008. (2)
Options to purchase up to 250,000 ordinary  shares,  which have an exercise price equal
to NIS 4.00. These options vest and become  exercisable in 10 equal quarterly
 installments of 25,000 options each, with the first installment vesting in March 30,
2009 and thereafter upon the lapse of every 4 months.

In May 2009, Mr. Daskal was granted
an additional  194,832 options to purchase the Company's  ordinary shares.  The terms of
the options are as follows:  (a) 62,832  options to purchase  ordinary  shares,  with an
exercise price of $0.00 per ordinary  share.  The options vest on a quarterly  basis
starting from January 2009 over a period of four quarters,  in four equal parts.  The
exercise period of these options is 5 years from the  commencement of vesting; (b)
 132,000  options to purchase  ordinary  shares,  with an exercise  price of $1.00 per
 ordinary  share.  These options vest on a yearly basis  starting  from January 2009 over
a period of four years,  in four equal parts.  The exercise period of these options is 5
years from the commencement of the vesting.

December 2007 Private Placement

In December 2007, the Company
entered into a Share Purchase  Agreement with two of its shareholders,  Catalyst Fund and
three  subsidiaries  of D.S. Apex,  under which the Company issued 833,560  ordinary
shares at a price of $2.40 per share  (reflecting an aggregate  investment of
 approximately $2 million).  In addition,  the Company issued to the  investors an
 aggregate of 541,814  warrants at an exercise  price of $2.76,  exercisable  for four
years from their date of issuance.

The Company also entered into a
 Registration  Rights  Agreement  pursuant to which the Company  shall  prepare and file
with the  Securities  and Exchange  Commission a  registration  statement  covering the
resale of the ordinary shares  issued to the  investors.  The Company filed with the
 Securities  and Exchange  Commission a  registration statement  covering the resale of
the ordinary  shares and the ordinary  shares  underlying the warrants  issued to
Catalyst Fund and D.S. Apex, which became effective on May 20, 2009.

Private Placement Fees

The  Company has paid  Cukierman  &Co.
 placement  fees equal to 6% of the  investment  amount in cash or ordinary shares with
respect to the June 2007 Private  Placement,  December  2007 Private  Placement,  the
July 2008 Private Placement and the August 2008 Private  Placement.  In addition,  the
Company paid 3% placement fees in cash to D.S. Apex with respect to the December 2007
Private  Placement  (see note 19 to the  Consolidated  Financial  Statements for the year
ended December 31, 2008).

Indemnity Undertakings by the
Company to its Directors and Officers

On February 18, 2003, the Company's
 shareholders  approved  indemnity  undertakings  to its directors and officers
(including  future  directors  and  officers as may be  appointed  from time to time),
 in excess of any  insurance proceeds,  not to exceed,  in the aggregate over the years,
 a total amount of $2,500,000.  On May 18, 2006, at the recommendation  of the audit
 committee and the Board of Directors,  the  shareholders  approved  amendments to the
indemnity undertakings, in light of changes to the Israeli Companies Law.

- 68 -

---

---

|7C. | Interests
of Experts and Counsel
|--- | --------------------------------

Not applicable.

|Item 8: |  | Financial Information
|------- |  | ---------------------

|8A. | Consolidated
Statements and Other Financial Information
|--- | -------------------------------------------------------

Consolidated Financial Statements

See "Item 18. Financial Statements".

Sales Outside of Israel

The total amount of revenues of the Company and its subsidiaries from export out of Israel has been as follows:

|Year | Export revenues | % of all revenues
|---- | --------------- | -----------------
|
|
|
|
|2008 |                 |                  
|     |                 |                  
|2007 |                 |                  
|     |                 |                  
|2006 |                 |                  

Sales  outside of Israel in the year 2008 and 2007 do not  include  sales of Summit,  in the amount of  $16,928,000
and $1,684,000 respectively.

Legal Proceedings

In January 2008, a former  employee
of Dimex  Solutions,  filed a claim against the Company and Dimex  Solutions in the Labor
Court in Tel Aviv,  requiring  severance  payments  for the amount of NIS 306,000  and
 compensation  for delay in payment  of said  severance  payments  as of the time of the
filing of the  lawsuit of  approximately  NIS 207,000.  An attempt to reach a settlement
 failed and the proceedings are pending a preliminary  hearing.  At this stage,  we are
unable to assess the  claim's  chance of  success.  The  Company's  financial  statements
 include a provision in this respect.

In April 2009, Odem filed a claim
with the Magistrate's  Court of Tel-Aviv,  against Nir Tal Computers Systems Ltd. ("Nir
Tal"),  for an amount of NIS 784,657  alleging that Nir Tal breached its  undertakings to
distribute Ultra PC computers,  under an  agreement  between the parties.  On May 17,
2009,  Nir Tal filed a statement of defense and a counter-claim  in the amount of NIS
816,115,  stating that Odem is the one that has breached the agreement  between the
parties,  by supplying Nir Tal with  defective  Ultra PCs. On June 18, 2009,  Odem filed
a statement of defense against the counter  claim.  The court has referred the
 proceeding to mediation.  At this stage,  we are unable to assess the outcome and
 consequences of this  counter-claim.  The Company's  financial  statements do not
include a provision in this respect.

In June 2008, a former  employee of
the Company filed a claim  against the Company with respect to the  termination of his
employment.  The former employee demands from the Company payments totaling
 approximately NIS 208,000.  The Company  assesses  the  prospect  of  claimant  as
remote.  The  Company's  financial  statements  do not include a provision in this
respect.

- 69 -

---

---

In April 2009, Dimex Solutions,  was
served with a claim seeking  unspecified  damages,  filed by 10Zig Technology Inc.
 (formerly  BOSaNOVA  Inc.)  ("10Zig"),  in the U.S.  District  Court for the District of
Arizona.  The claim alleges  that Dimex has breached  the  distribution  agreement
 entered  into by the parties in January  2003,  by failing to provide the required
 second level  technical  support.  In May 2009,  10Zig filed a request to include the
 Company's  subsidiary  Summit as an additional  defendant,  and to add  allegations
 related to the misuse by Dimex of customer  information.  Dimex and Summit filed an
Answer on June 12, 2009 denying 10Zig's allegations and presenting  various
 counterclaims.  At this stage,  we are unable to assess the outcome and  consequences of
this counterclaim. The Company's financial statements do not include a provision in this
respect.

Dividend Policy

The Company does not currently have
a dividend  policy.  The  declaration  and payment of any cash dividends in the future
will be determined  by the Board of Directors in light of the  conditions  existing at
that time.  This will include  our  earnings  and  financial  condition.  We may only pay
 cash  dividends  in any  fiscal  year,  out of "profits",  as defined under Israeli law.
As we cannot currently distribute  dividends,  no provision has been made for this
additional tax in our Financial Statements.

|8B. | Significant
Changes
|--- | -------------------

Not applicable.

|Item 9: |  | The Offer and Listing
|------- |  | ---------------------

|9A. | Offer
and Listing Details
|--- | -------------------------

Since April 1996,  our ordinary
 shares were traded,  and our warrants,  until they expired on April 2, 2000,  were
traded in the  over-the-counter  market in the United  States,  and quoted on what is now
called the NASDAQ Capital Market under the symbol "BOSC" and "BOSCW,"  respectively.  In
September  2000,  our shares started to be traded on what is now called the NASDAQ Global
 Market.  In January 2002, our shares began trading also on the Tel-Aviv Stock Exchange
 (the  "TASE"),  under  the  symbol  "BOSC",  pursuant  to the  dual-listing  regulations
 of the  Israeli Securities  Authority.  On May 12,  2009,  we  delisted  our  ordinary
 shares from trade on The  delisting  of the ordinary  shares from the TASE does not
affect the  continued  listing of the ordinary  shares on the NASDAQ Global Market under
the symbol  BOSC.  After the  delisting  of the  Company's  ordinary  shares from the
TASE,  we are no longer subject to reporting requirements in Israel.

In April 2007 we concluded a rights
offering in which we raised gross proceeds of approximately  $4.4 million.  The rights
were traded for one day, April 12, 2007, on both the Nasdaq Global Market and the
Tel-Aviv Stock Exchange.

Exemption from Nasdaq Marketplace
Rules

Nasdaq  Marketplace Rule 4350(a)(1)
 allows foreign private issuers an exemption from certain Nasdaq  requirements, if the
foreign private issuer follows home country practice.

- 70 -

---

---

Under the Israeli  Companies Law,
there is no  requirement to send  shareholders  of a public company a copy of the
Company's annual financial  statements.  The Company's  annual  financial  statements are
available  through to the Company's  public  filings.  In reliance on this home country
 practice,  the Company does not distribute it annual financial statements to its
shareholder by mail.

In addition,  under the Israeli
 Companies  Law the Company was not required to seek  shareholder  approval for its 2007
 rights  offering.  The  Company  has  relied on this home  country  practice  for an
 exemption  from  Nasdaq Marketplace Rule 4350(i)(1).

Prices set forth below are high and
low reported  closing prices for our ordinary  shares as reported by NASDAQ for the
periods  indicated.  All share prices have been  retroactively  adjusted to reflect the
1:4 reverse stock split effected on May 29, 2003.

|Period |  | NASDAQ
|------ |  | ------
|
|
|
|
|2004   |  |       
|2005   |  |       
|2006   |  |       
|       |  |       
|2007   |  |       
|       |  |       
|       |  |       
|       |  |       
|       |  |       
|       |  |       
|       |  |       
|2008   |  |       
|       |  |       
|       |  |       
|       |  |       
|       |  |       
|       |  |       
|       |  |       
|2009   |  |       
|       |  |       
|       |  |       
|       |  |       
|       |  |       
|       |  |       

|9B. | Plan
of Distribution
|--- | --------------------

Not applicable.

- 71 -

---

---

|9C. | Markets
|--- | -------

Our securities are traded on the
NASDAQ Stock Exchange (symbol BOSC).

|9D. | Selling
Shareholders
|--- | --------------------

Not applicable.

|9E. | Dilution
|--- | --------

Not applicable.

|9F. | Expenses
of Issue
|--- | -----------------

Not applicable.

|Item 10: |  | Additional Information
|-------- |  | ----------------------

|10A. | Share
Capital
|---- | -------------

Not applicable.

|10B. | Memorandum
and Articles of Association
|---- | --------------------------------------

In March 2002 the Company adopted new
Articles of Association, in view of the Israeli Companies Law. Since then, certain
articles of the Article of Association have been amended.

Set forth below is a summary of
certain provisions of our Memorandum and Articles of Association. This summary is not
complete and should be read together with our Memorandum and Articles of Association,
previously filed.

|1. | Objects
of the Company:
|-- | -----------------------

The Companys objects and
purposes are outlined in the Memorandum of Association. These objects include: the
development of sophisticated interfaces for IBM mainframe computers; the export of hi-tech
products to Europe and the USA; and research, development and manufacture of products in
the sphere of communication networks. The Companys Articles of
Association (Article 2) allow it to engage in any legal business.

|2. | Provisions
related to the directors of the Company:
|-- | ---------------------------------------------------

The Board of Directors may issue
shares and other securities, which are convertible or exercisable into shares, up to the
limit of the Companys authorized share capital.

(a)
          Approval of Certain Transactions under the Israeli Companies Law:

We are subject to the provisions of
the Israeli Companies Law, which became effective on February 1, 2000.

The Israeli Companies Law codifies
the fiduciary duties that an Office Holder has to the Company. An Office
Holder is defined in the Israeli Companies Law as any Director, General Manager or
any other Manager directly subordinate to the General Manager and any other person with
similar responsibilities.

- 72 -

---

---

An Office Holders fiduciary
duties consist of a Duty of Loyalty and a Duty of Care.

The Duty of Loyalty includes: the avoidance
of any conflict of interest between the Office Holders position in the company and
his personal affairs; the avoidance of any competition with the company; the avoidance of
any exploitation of any business opportunity of the Company in order to receive personal
advantage for himself or others; and a duty to reveal to the Company any documents or
information relating to the Companys affairs that the Office Holder has received due
to his position.

The Duty of Care requires an Office
Holder to act at a level of care that a reasonable Office Holder in the same position
would employ under the same circumstances. This includes the duty to utilize reasonable
means to obtain (1) information regarding the appropriateness of a given action brought
for his approval or performed by him by virtue of his position and (2) all other
information of importance pertaining to the foregoing actions.

Under the IsraeliCompanies
Law, all arrangements with regard to the compensation of Office Holders who are not
Directors require the approval of the Board of Directors. Arrangements regarding the
compensation of Directors require Audit Committee, Board and Shareholder approval.

The Companies Law requires that an
Office Holder of a company promptly disclose to the companys Board of Directors any
personal interest that he or she may have, and all related material information known to
him in connection with any existing or proposed transaction by the company. This
disclosure must be made by the Office Holder, whether orally or in writing, no later than
the first meeting of the Companys Board of Directors, which discusses the particular
transaction. An Office Holder is deemed to have a personal interest if he,
certain members of his family, or a corporation in which he or any one of those family
members is a 5% or greater shareholder or exercises or has the right to exercise control,
has an interest in a transaction with the company. An Extraordinary
Transaction is defined as a transaction  other than in the ordinary course of
business, not on market terms, or that is likely to have a material impact on the
companys profitability, assets or liabilities.

In the case of a transaction that is
not an Extraordinary Transaction, after the office holder complies with the above
disclosure requirements, only board approval is required. The transaction must not be
adverse to the companys interests. In the case of an Extraordinary Transaction, the
companys Audit Committee and the Board of Directors, and, under certain
circumstances, the shareholders of the company must approve the transaction, in addition
to any approval stipulated by the Articles of Association. An Office Holder who has a
personal interest in a matter that is considered at a meeting of the Board of Directors or
the Audit Committee may not be present at this meeting or vote on this matter, unless a
majority of the members of the Board of Directors or Audit Committee, respectively, have a
personal interest in the matter, in which case they may all be present and vote, after
which the matter must be approved by the shareholders of the Company.

(b)
          Borrowing powers exercisable by the Directors are not specifically outlined in
          the Companys Articles of Association, however, according to Article 15:
          Any power of the Company which has not been vested in another organ
          pursuant to the Israeli Companies Law or the articles may be exercised by the
          Board of Directors.

- 73 -

---

---

(c)
          The Companys Articles of Association do not contain provisions regarding
          the retirement of directors under an age limit requirement, nor do they contain
          a provision requiring a Director to hold any Company shares in order to qualify
          as a Director.

3.  With regard to the rights, preferences and restrictions
          attaching to the shares, the Companys Articles of Association provide the
          following:

(a)
          Dividends, Rights to Share in the Companys Profits and Rights to Share in
          any Surplus upon Liquidation All holders of paid-up ordinary shares of the
          Company have an equal right to participate in the distribution of (i) dividends,
          whether by cash or by bonus shares; (ii) Company assets; and (iii) the
          Companys surplus assets upon winding up, all pro rata to the nominal value
          of the shares held by them (Articles 4.2.2, 4.2.3 and 7.3).

The Board of Directors is the organ
authorized to decide upon the distribution of dividends and bonus shares (Article 26). The
shareholders who are entitled to a dividend are the shareholders on the date of the
resolution for the dividend or on a later date if another date is specified in the
resolution on the dividends distribution. If the Board of Directors does not
otherwise determine, any dividend may be paid by way of a cheque or payment order that
shall be sent by mail in accordance with the registered address of the shareholder or
person entitled thereto, or in the case of registered joint shareholders to the
shareholder whose name appears first in the shareholders register in relation to the
joint shareholding. Every such cheque shall be drawn up to the order of the person to whom
it is being sent. The receipt of a person who on the date of the dividends
declaration is listed in the shareholders register as the holder of any share or, in
the case of joint shareholders, of one of the joint shareholders shall serve as
confirmation of all the payments made in connection with such share. For the purpose of
implementing any resolution pursuant to the provisions of this paragraph, the Board of
Directors may settle, as it deems fit, any difficulty arising in relation to the
distribution of the dividend and/or bonus shares, including determine the value for the
purpose of the said distribution of certain assets and resolve that payments in cash shall
be made to members in reliance upon the value thus determined, determine regulations in
relation to fractions of shares or in relation to non-payment of amounts less than NIS
200.

(b) Voting Rights

All holders of paid-up ordinary
shares of the Company have an equal right to participate in and vote at the Companys
general meetings, whether ordinary or special, and each of the shares in the Company shall
entitle its holder, present at the meeting and participating in the vote, himself, by
proxy or through a voting instrument, to one vote (Article 4.2.1). Such voting rights may
be affected in the future by the grant of any special voting rights to the holders of a
class of shares with preferential rights. Shareholders may vote either in person or
through a proxy or voting instrument, unless the Board of Directors prohibited voting
through a voting instrument on a certain matter and stated so in the notice of the meeting
(Articles 14.1 and 14.6). A resolution at the general meeting shall be passed by an
ordinary majority unless another majority is specified in the Israeli Companies Law or the
Companys Articles of Association (Article 14.3).

- 74 -

---

---

(c)
          Election of Directors.

The Companys directors are
elected by the shareholders at a shareholders meeting. The ordinary shares do not
have cumulative voting rights in the election of directors. The holders of ordinary shares
conferring more than 50% of the voting power present by person or by proxy at the
shareholders meeting, have the power to elect the directors. The directors elected
shall hold office until the next annual meeting, or sooner if they cease to hold office
pursuant to the provisions of the Companys Articles. In addition, the Board of
Directors may appoint a director (to fill a vacancy or otherwise) between shareholder
meetings, and such appointment shall be valid until the next annual meeting or until such
appointee ceases to hold office pursuant to the provisions of the Companys Articles.
In compliance with the Israeli Companies Law, the Company has two external directors. The
external directors are also appointed by the shareholders and their term of office is
three years. Directors of the Company stand for reelection at every annual meeting
(Article 16.2) and not at staggered intervals, with the exception of the External
directors who are appointed for a period of 3 years under the Israeli Companies Law.

(d) Redemption

The Company may, subject to any
applicable law, issue redeemable securities on such terms as determined by the Board of
Directors, provided that the general meeting of shareholders approves the Board of
Directors recommendation and the terms determined (Article 27).

(e) Capital Calls by the
Company

The Board of Directors may only make
calls for payment upon shareholders in respect of monies not yet paid for shares held by
them (Article 7.2).

(f) Discrimination

No provision in the Companys
Articles of Association discriminates against an existing or prospective holder of
securities, as a result of such shareholder owning a substantial amount of shares.

4.     Modification of Rights
of Holders of Stock

The general meeting of shareholders
may resolve to create new shares of an existing class or of a new class with special
rights and/or restrictions (Article 9.1).

So long as not otherwise provided in
the shares issue terms and subject to the provisions of any law, the rights attached
to a particular class of shares may be altered, after a resolution is passed by the
Company and with the approval of a resolution passed at a general meeting of the holders
of the shares of such class or the written agreement of all the class holders. The
provisions of the Companys Articles of Association regarding general meetings shall
apply, mutatis mutandis, to a general meeting of the holders of a particular class of
shares (Article 10.1). The rights vested in the holders of shares of a particular class
that were issued with special rights shall not be deemed to have been altered by the
creation or issue of further shares ranking equally with them, unless otherwise provided
in such shares issue terms (Article 10.2).

The above mentioned conditions are
not more onerous than is required by law.

- 75 -

---

---

5.     Annual General
Meetings and Extraordinary General Meetings

General meetings shall be convened at
least once a year at such place and time as determined by the Board of Directors but no
later than 15 months from the last general meeting. Such general meetings shall be called
annual meetings. The Companys other meetings shall be called
special meetings (Article 12.1). The annual meetings agenda shall
include a discussion of the Board of Directors reports and the financial statements
as required at law. The annual meeting shall appoint an auditor, appoint the directors
pursuant to these articles and discuss all the other matters which must be discussed at
the Companys annual general meeting, pursuant to these articles or the Law, as well
as any other matter determined by the Board of Directors (Article 12.2). The Board of
Directors may convene a special meeting pursuant to its resolution and it must convene a
general meeting if it receives a written requisition from any one of the following
(hereinafter referred to as requisition) (i) two directors or one quarter of
the directors holding office; and/or (ii) one or more shareholders holding at least 5% of
the issued capital and at least 1% of the voting rights in the Company; and/or (iii) one
or more shareholders holding at least 5% of the voting rights in the Company (Article
12.3). A requisition must detail the objects for which the meeting must be convened and
shall be signed by the persons requisitioning it and sent to the Companys registered
office. The requisition may be made up of a number of documents in an identical form of
wording, each of which shall be signed by one or more of the persons requisitioning the
meeting (Article 12.4). Where the Board of Directors is required to convene a special
meeting, it shall do so within 21 days of the requisition being submitted to it, for a
date that shall be specified in the invitation and subject to the law (Article 12.5).

Notice to the Companys members
regarding the convening of a general meeting shall be sent to all the shareholders listed
in the Companys shareholders register at least 21 days prior to the meeting
and shall be published in other ways insofar as required by the law. The notice shall
include the agenda, proposed resolutions and arrangements with regard to a written vote.
The accidental omission to give notice of a meeting to any member, or the non-receipt of
notice sent to such member, shall not invalidate the proceedings at such meeting (Article
12.6).

The shareholders entitled to
participate in and vote at the general meeting are the shareholders on the date specified
by the Board of Directors in the resolution to convene the meeting, and subject to the law
(Article 14.1).

No discussions may be commenced at
the general meeting unless a quorum is present at the time of the discussions
commencement. A quorum is the presence of at least two shareholders holding at least 33?%
of the voting rights (including presence through a proxy or a voting instrument), within
half an hour of the time fixed for the meetings commencement (Article 13.1). If no
quorum is present at a general meeting within half an hour of the time fixed for the
commencement thereof, the meeting shall be adjourned for one week, to the same day, time
and place, or to a later time if stated in the invitation to the meeting or in the notice
of the meeting (hereinafter referred to as the adjourned meeting) (Article
13.2). The quorum for the commencement of the adjourned meeting shall be any number of
participants.

The Articles of Association provide
that all shareholder resolutions shall be passed by an ordinary (simple) majority of the
votes cast, unless another majority is specified in the Israeli Companies Law or in the
Articles (Article 14.3).

- 76 -

---

---

6.     Limitations on the
rights to own securities

There are no limitations on the
rights to own the Companys securities, including the rights of non-residents or
foreign shareholders to do so.

7.     Change of Control

Under the Israeli Companies Law, a
merger is generally required to be approved by the shareholders and Board of Directors of
each of the merging companies. Shareholder approval isnt required if the company
that will not survive is controlled by the surviving company. Additionally, the law
provides some exceptions to the shareholder approval requirement in the surviving company.
If the share capital of the company that will not be the surviving company is divided into
different classes of shares, the approval of each class is also required, unless
determined otherwise by the court. A majority of votes approving the merger shall suffice,
unless the company (like ours) was incorporated in Israel prior to the Israeli Companies
Law, in which case a majority of 75% of the voting power is needed in order to approve the
merger. Additionally, unless the court determines differently, a merger will not be
approved if it is objected to by a majority of the shareholders present at the meeting,
after excluding the shares held by the other party to the merger, by any person who holds
25% or more of the other party to the merger and by the relatives of and corporations
controlled by these persons. Upon the request of a creditor of either party to the
proposed merger, the court may delay or prevent the merger if it concludes that there
exists a reasonable concern that, as a result of the merger, the surviving company will be
unable to satisfy the obligations of any of the parties of the merger. Also, a merger can
be completed only after all approvals have been submitted to the Israeli Registrar of
Companies and provided that 30 days have elapsed since shareholder approval was received
and 50 days have elapsed from the time that a proposal for approval of the merger was
filed with the Registrar.

The Israeli Companies Law also
provides that an acquisition of shares in a public company must be made by means of a
tender offer if, as a result of the acquisition, the purchaser would become a holder of
25% or more of the voting power at general meetings. This rule does not apply if there is
already another holder of 25% or more of the voting power at general meetings. Similarly,
the Israeli Companies Law provides that an acquisition of shares in a public company must
be made by means of a tender offer if, as a result of the acquisition, the purchaser would
become a holder of more than 45% of the voting power of the company. This rule does not
apply if someone else already holds 45% of the voting power of the company. An acquisition
from a 25% or 45% holder, which turns the purchaser into a 25% or 45% holder respectively,
does not require a tender offer. An exception to the tender offer requirement may also
apply when the additional voting power is obtained by means of a private placement
approved by the general meeting of shareholders. These tender offer requirements do not
apply to companies whose shares are listed for trading outside of Israel if, under local
law or the rules of the stock exchange on which their shares are traded, there is a
limitation on the percentage of control which may be acquired or the purchaser is required
to make a tender offer to the public.

Under the Israeli Companies Law, a
person may not acquire shares in a public company if, after the acquisition, he will hold
more than 90% of the shares or more than 90% of any class of shares of that company,
unless a tender offer is made to purchase all of the shares or all of the shares of the
particular class. The Israeli Companies Law also provides that as long as a shareholder in
a public company holds more than 90% of the companys shares or of a class of shares,
that shareholder shall be precluded from purchasing any additional shares (an exemption
exists where the shareholder held prior to and following February 2000, over 90% of any
class of shares, in which case he may purchase additional shares by a tender offer that
was accepted by a majority of the offerees). If a tender offer is accepted and less than
5% of the shares of the company are not tendered, all of the shares will transfer to the
ownership of the purchaser. If 5% or more of the shares of the company are not tendered,
the purchaser may not purchase shares in a manner which will grant him more than 90% of
the shares of the company.

- 77 -

---

---

8.     Disclosing Share
Ownership

The Company has no bylaw provisions
governing the ownership threshold, above which shareholder ownership must be disclosed.

|10C. | Material
Contracts
|---- | ------------------

All material contracts have been
described in detail throughout this form, wherever applicable.

|10D. | Exchange
Controls
|---- | -----------------

All exchange control restrictions
previously imposed by the State of Israel have been removed, although there are still
reporting requirements for foreign currency transactions. Legislation remains in effect,
however, pursuant to which currency controls can be imposed by administrative action at
any time.

At this time, due to the removal of
the restrictions, non-residents of Israel who purchase our ordinary shares will be able to
convert any proceeds from the sale of these ordinary shares, as well as dividend and
liquidation distributions, if any, into non-Israeli currency. There are no limitations on
the Companys ability to import and export capital.

|10E. | Taxation
|---- | --------

The following is a summary of the
material Israeli tax consequences, Israeli foreign exchange regulations and certain
Israeli government programs affecting the Company.

To the extent that the discussion is
based on new tax or other legislation that has not been subject to judicial or
administrative interpretation, there can be no assurance that the views expressed in the
discussion will be accepted by the tax or other authorities in question. The discussion is
not intended, and should not be construed, as legal or professional tax advice and is not
exhaustive of all possible tax considerations.

ISRAELI TAX CONSIDERATIONS

The following is a description of
material tax consequences regarding the ownership and disposition of our ordinary shares
under Israeli tax laws to which our shareholders may be subject. The information below
does not apply to specific persons or cover specific situations. Therefore, you are
advised to consult your own tax advisor as to particular tax consequences unique to you
related to an investment in our ordinary shares including the effects of applicable
Israeli or foreign or other tax laws and possible changes in the tax laws.

To the extent that the discussion is
based on legislation yet to be judicially or administratively interpreted, we cannot
assure you that the views we express herein will accord with any such interpretation in
the future.

- 78 -

---

---

# Tax Consequences
Regarding Disposition of Our Ordinary Shares

In general, Israel imposes capital
gains tax on the sale of capital assets, including shares of Israeli companies by both
Israeli residents and non-Israeli resident shareholders, unless a specific exemption is
available or unless a tax treaty between Israel and the shareholders country of
residence provide otherwise. Shareholders that are not Israeli residents are generally
exempt from Israeli capital gains tax on any gain derived from the sale of our ordinary
shares, provided that such gains did not derive from a permanent establishment of such
shareholders in Israel. However, non-Israeli corporations will not be entitled to the
foregoing exemption if an Israeli resident (a) has a controlling interest of 25% or more
in such non-Israeli corporation; or (b) is the beneficiary of or is entitled to 25% or
more of the revenues or profits of such non-Israeli corporation, whether directly or
indirectly and if the shares were purchased upon or after the registration of the shares
on the stock exchange.

In certain instances where our
non-Israeli shareholders may be liable to Israeli tax on the sale of our ordinary shares,
the payment of the consideration may be subject to Israeli withholding tax.

In addition, the sale, exchange or
disposition of our ordinary shares by shareholders who are U.S. residents (within the
meaning of the U.S.-Israel Tax Treaty) holding the ordinary shares as a capital asset will
be also exempt from Israeli capital gains tax under the U.S.-Israel Tax Treaty, unless,
either (i) the shareholders hold, directly or indirectly, shares representing 10% or more
of our voting shares during any part of the 12-month period preceding such sale, exchange
or disposition; or (ii) the capital gains arising from such sale, exchange or disposition
are attributable to a permanent establishment of the shareholders located in Israel. In
such case, the shareholders would be subject to Israeli capital gain tax, to the extent
applicable, as mentioned above. However, under the U.S.-Israel Tax Treaty, the U.S.
resident would be permitted to claim a credit for such taxes against the U.S. federal
income tax imposed on the sale, exchange or disposition, subject to the limitation in the
U.S. law applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to
U.S. state or local taxes.

Israeli individual shareholders
selling our ordinary shares are subject to 20% tax rate on any real capital gain accrued
after January 1, 2003. However, if the individual shareholder is a Controlling
Shareholder (i.e., a person who holds, directly or indirectly, alone or together
with other, 10% or more of one of the Israeli resident companys means of control at
the time of sale or at any time during the preceding 12 months period) such gain will be
taxed at the rate of 25%. Israeli corporate shareholders (which were not subject to the
provisions of the Inflationary Adjustments Law, prior to the publishing of amendment no.
147 to the Income Tax Ordinance, in 2005), selling our ordinary shares are subject to a
25% tax rate on any real capital gain. Israeli corporate shareholders which were subject
in 2005 to the provisions of the Inflationary Adjustments Law, selling our ordinary shares
are subject to the regular corporate tax rates on any capital gain only if such securities
were held by such a corporation prior to December 31, 2005.

# Taxes Applicable to
Dividends distributed

Non-residents of Israel are generally
subject to Israeli income tax on the receipt of dividends paid on our ordinary shares at
the rate of 20%, which tax will be withheld at source, unless a different rate is provided
in a treaty between Israel and the shareholders country of residence. However, if
the individual shareholder is a Controlling Shareholder such dividend will be
taxed at the rate of 25%.

Under the U.S.-Israel Tax Treaty, the
maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary
shares who is a U.S. resident (within the meaning of the U.S.-Israel Tax Treaty) is 25%.
Furthermore, the maximum rate of withholding tax on dividends, that are paid to a U.S.
corporation holding 10% or more of our outstanding voting capital during the part of the
tax year that precedes the date of the payment of the dividend and during the whole of its
prior tax year, is 12.5%. This reduced rate will not apply if more than 25% of our gross
income consists of interest or dividends, other than dividends or interest received from a
subsidiary corporation 50% or more of the outstanding shares of the voting shares of which
are owned by the company. In order to obtain such a reduced tax rate, it is necessary to
submit an application to the tax assessing officer. Israeli resident individuals are
generally subject to Israeli income tax on the receipt of dividends paid on our ordinary
shares, other than bonus shares (share dividends) or stock dividends, at the rate of 20%.
However, if the individual shareholder is a Controlling Shareholder such
dividend will be taxed at the rate of 25%. Dividends
paid on our ordinary shares to Israeli companies are exempt from such tax, except for
dividends distributed from income derived outside of Israel, which are subject to the 25%
tax rate.

- 79 -

---

---

An Israeli resident company whose
shares are listed in a stock exchange is obligated to withhold tax, upon the distribution
of a dividend. The following withholding tax rates will apply: (i) Israeli resident
corporation  0%, (ii) Israeli resident individual  20% (iii) non-Israeli
resident  20%, subject to a reduced tax rate under an applicable double tax treaty.

General Corporate Tax
Structure

Israeli companies are generally
subject to income tax on their taxable income at the rate of 31% for the year 2006, 29%
for 2007, 27% for 2008, 26% for 2009 and 25% for year 2010 and thereafter, and are subject
to capital gains tax at a rate of 25% for capital gains (other than gains deriving from
the sale of listed securities) derived after January 1, 2003.

Tax Benefits and Grants
for Research and Development

Israeli tax law allows, under certain
conditions, a tax deduction in the year incurred for expenditures (including capital
expenditures) in scientific research and development projects, if the expenditures are
approved by the relevant Israeli government ministry, determined by the field of research,
the research and development is for the promotion of the enterprise and is carried out by
or on behalf of the company seeking such deduction.

In case the tax deduction, in the
year research and development expenditures are incurred, is not approved by the relevant
Israeli government ministry, the Company will be entitled for the tax deduction over a
period of three years.

Special Provisions
Relating to Taxation Under Inflationary Conditions

In February 2008, the Israeli
legislator adopted an amendment to the Income Tax (Inflationary Adjustments) Law, 1985,
which limits the scope of the law starting in 2008 and thereafter. Starting in 2008, the
results for tax purposes are measured in nominal values, excluding certain adjustments for
changes in the Consumer Price Index carried out in the period up to December 31, 2007. The
amended law includes, inter alia, the elimination of the inflationary additions and
deductions and the additional deduction for depreciation starting in 2008.

- 80 -

---

---

U.S.
          TAXATION

Subject to the limitations described
herein, the following is a discussion of the material U.S. federal income tax consequences
of the purchase, ownership and disposition of our ordinary shares to a U.S. holder. A U.S.
holder is a beneficial owner of our ordinary shares who is:

   an individual who is a
citizen or resident of the United States for U.S. federal income tax purposes;

   a corporation (or other
entity taxable as a corporation for U.S. federal income tax purposes) created or organized
under the laws of the United States or any political subdivision thereof or the District
of Columbia;

   an estate,  the income of which is
includible in gross income for U.S.  federal  income tax purposes  regardless of its
source; or

   a trust (i) if a U.S. court
is able to exercise primary supervision over its administration and one or more U.S.
persons have the authority to control all of its substantial decisions or (ii) that has in
effect a valid election under applicable U.S. Treasury Regulations to be treated as a U.S.
person.

A non-U.S. holder is a beneficial
owner of our ordinary shares that is not a U.S. holder. Unless otherwise specifically
indicated, this discussion does not consider the U.S. federal income tax consequences to a
person that is a non-U.S. holder of our ordinary shares and considers only U.S. holders
that will own the ordinary shares as capital assets (generally for investment).

If a partnership (or any other entity treated as a partnership for U.S. federal income tax
purposes) holds our ordinary shares, the tax treatment of the partnership and a partner in
such partnership will generally depend on the status of the partner and the activities of
the partnership. Such a partner or partnership should consult its tax advisor as to its
tax consequences.

This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended
(the Code), current and proposed Treasury Regulations promulgated under the
Code and administrative and judicial interpretations of the Code, all as currently in
effect and all of which are subject to change, possibly with retroactive effect. This
discussion does not address all aspects of U.S. federal income taxation that may be
relevant to any particular U.S. holder based on the U.S. holders particular
circumstances. In particular, this discussion does not address the U.S. federal income tax
consequences to U.S. holders who are broker-dealers or who own, directly, indirectly or
constructively, 10% or more (by voting power) of our company, real estate investment
trusts, regulated investment companies, grantor trusts, U.S. holders holding the ordinary
shares as part of a hedging, straddle or conversion transaction, U.S. holders whose
functional currency is not the U.S. dollar, insurance companies, tax-exempt organizations,
financial institutions, persons that receive ordinary shares as compensation for the
performance of services, certain former citizens or long-term residents of the United
States and persons subject to the alternative minimum tax, who may be subject to special
rules not discussed below. Additionally, this discussion does not address the possible
application of U.S. federal estate or gift taxes or any aspect of state, local or non-U.S.
tax laws.

- 81 -

---

---

Each holder of our ordinary shares is
advised to consult his or her tax advisor with respect to the specific U.S. federal,
state, local and foreign income tax consequences to him or her of purchasing, holding or
disposing of our ordinary shares.

U.S. Holders of Ordinary
Shares

Taxation of distributions on
ordinary shares

Subject to the discussion below under
Tax consequences if we are a passive foreign investment company, a
distribution paid by us with respect to our ordinary shares, including the amount of any
non-US taxes withheld, to a U.S. holder will be treated as dividend income to the extent
that the distribution does not exceed our current and accumulated earnings and profits, as
determined for U.S. federal income tax purposes. Dividends that are received with respect
to ordinary shares by U.S. holders that are individuals, estates or trusts generally will
be taxed at the rate applicable to long-term capital gains (currently a maximum rate of
15% for the taxable years beginning on or before December 31, 2010), provided that such
dividends meet the requirements of qualified dividend income. Dividends that
fail to meet such requirements, and dividends received by corporate U.S. holders, are
taxed at ordinary income rates. No dividend received by a U.S. holder will be a qualified
dividend (1) if the U.S. holder held the ordinary share with respect to which the dividend
was paid for less than 61 days during the 121-day period beginning on the date that is 60
days before the ex-dividend date with respect to such dividend, excluding for this
purpose, under the rules of Code section 246(c), any period during which the U.S. holder
has an option to sell, is under a contractual obligation to sell, has made and not closed
a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to
buy, or has otherwise diminished its risk of loss by holding other positions with respect
to, such ordinary share (or substantially identical securities); or (2) to the extent that
the U.S. holder is under an obligation (pursuant to a short sale or otherwise) to make
related payments with respect to positions in property substantially similar or related to
the ordinary share with respect to which the dividend is paid. If we were to be a
passive foreign investment company (as such term is defined in the Code) for
any taxable year, dividends paid on our ordinary shares in such year or in the following
taxable year would not be qualified dividends. In addition, a non-corporate U.S. holder
will be able to take a qualified dividend into account in determining its deductible
investment interest (which is generally limited to its net investment income) only if it
elects to do so; in such case the dividend will be taxed at ordinary income rates.

The amount of any distribution which
exceeds the amount treated as a dividend will be treated first as a non-taxable return of
capital, reducing the U.S. holders tax basis in its ordinary shares to the extent
thereof, and then as capital gain from the deemed disposition of the ordinary shares.
Corporate holders will not be allowed a deduction for dividends received in respect of the
ordinary shares.

Dividends paid by us in NIS will be
included in the gross income of U.S. holders at the U.S. dollar amount of the dividend
(including any non-U.S. taxes withheld therefrom), based upon the spot rate of exchange in
effect on the date the distribution is included in income. U.S. holders will have a tax
basis in the NIS for U.S. federal income tax purposes equal to that dollar value. Any
subsequent gain or loss in respect of the NIS arising from exchange rate fluctuations will
generally be taxable as U.S. source ordinary income or loss.

- 82 -

---

---

Subject to the limitations set forth
in the Code and the Treasury Regulations thereunder, U.S. holders may elect to claim as a
foreign tax credit against their U.S. federal income tax liability the non-U.S. income tax
withheld from dividends received in respect of the ordinary shares. The limitations on
claiming a foreign tax credit include, among others, computation rules under which foreign
tax credits allowable with respect to specific classes of income cannot exceed the U.S.
federal income taxes otherwise payable with respect to each such class of income. In this
regard, dividends paid by us generally will be foreign source passive income
for U.S. foreign tax credit purposes. U.S. holders that do not elect to claim a foreign
tax credit may instead claim a deduction for the non-U.S. income tax withheld if they
itemize deductions. The rules relating to foreign tax credits are complex, and you should
consult your tax advisor to determine whether and to what extent you would be entitled to
this credit. A U.S. holder will be denied a foreign tax credit for non-U.S. income taxes
withheld from a dividend received on the ordinary shares (i) if the U.S. holder has not
held the ordinary shares for at least 16 days of the 31-day period beginning on the date
which is 15 days before the ex-dividend date with respect to such dividend or (ii) to the
extent the U.S. holder is under an obligation to make related payments with respect to
positions in substantially similar or related property. Any days during which a U.S.
holder has substantially diminished its risk of loss on the ordinary shares are not
counted toward meeting the required 16-day holding period. Distributions of current or
accumulated earnings and profits generally will be foreign source passive income for U.S.
foreign tax credit purposes.

Taxation of the disposition of
ordinary shares

Subject to the discussion below under
Tax consequences if we are a passive foreign investment company, upon the
sale, exchange or other disposition of our ordinary shares, a U.S. holder will recognize
capital gain or loss in an amount equal to the difference between the amount realized on
the disposition and the U.S. holders tax basis in the ordinary shares. The gain or
loss recognized on the disposition of the ordinary shares will be long-term capital gain
or loss if the U.S. holder held the ordinary shares for more than one year at the time of
the disposition (long-term capital gains are currently taxable at a maximum rate of 15%
for taxable years beginning on or before December 31, 2010). Capital gain from the sale,
exchange or other disposition of ordinary shares held for one year or less is short-term
capital gain. Gain or loss recognized by a U.S. holder on a sale, exchange or other
disposition of ordinary shares generally will be treated as U.S. source income or loss for
U.S. foreign tax credit purposes.

A U.S. holder that uses the cash
method of accounting calculates the U.S. dollar value of the proceeds received on the sale
as of the date that the sale settles. However, a U.S. holder that uses the accrual method
of accounting is required to calculate the value of the proceeds of the sale as of the
trade date and may therefore realize foreign currency gain or loss. A U.S. holder may
avoid realizing foreign currency gain or loss by electing to use the settlement date to
determine the proceeds of sale for purposes of calculating the foreign currency gain or
loss. In addition, a U.S. holder that receives foreign currency upon disposition of
ordinary shares and converts the foreign currency into U.S. dollars after the settlement
date or trade date (whichever date the U.S. holder is required to use to calculate the
value of the proceeds of sale) will have foreign exchange gain or loss based on any
appreciation or depreciation in the value of the foreign currency against the U.S. dollar,
which will generally be U.S. source ordinary income of loss.

# Tax consequences if we
are a passive foreign investment company

We will be a passive foreign
investment company, or PFIC, for a taxable year if either (1) 75% or more of our gross
income in a taxable year is passive income or (2) 50% or more of the value, determined on
the basis of a quarterly average, of our assets in the taxable year produce, or are held
for the production of, passive income. If we own (directly or indirectly) at least 25% by
value of the stock of another corporation, we will be treated for purposes of the
foregoing tests as owning our proportionate share of the other corporations assets
and as directly earning our proportionate share of the other corporations income.
Passive income for this purpose generally includes dividends, interest, royalties, rents
and gains from commodities and securities transactions.

- 83 -

---

---

We believe that we were not a PFIC
for our 2008 taxable year. Our status in the current and future taxable years will depend
on our assets and income in those years. We have no reason to believe that our assets or
income will change in a manner that would cause us to be classified as a PFIC. However,
since the determination of whether we are a PFIC is based upon such factual matters as the
valuation of our assets (which may depend upon our market capitalization, which is subject
to fluctuation) and, in certain cases, the assets of companies held by us, there can be no
assurance that we will not become a PFIC. If we were a PFIC, and you are a U.S. holder,
you generally would be subject to imputed interest charges and other disadvantageous tax
treatment with respect to any gain from the sale or exchange of, and certain distributions
with respect to, your ordinary shares (including the denial of the taxation of such
distributions and gains at the lower rates applicable to long-term capital gains as
discussed above under Taxation of distributions on ordinary shares and
Taxation of the disposition of ordinary shares).

If we were a PFIC, you could make
certain elections that may alleviate certain tax consequences referred to above, and one
of these elections may be made retroactively if certain conditions are satisfied. It is
expected that the conditions necessary for making certain of such elections will apply in
the case of our ordinary shares. Neither the Company nor its advisors have the duty to or
will undertake to inform U.S. Shareholders of changes in circumstances that would cause
the Company to become a PFIC. The Company does not currently intend to take the action
necessary for a U.S. Shareholder to make a qualified electing fund election in
the event the Company is determined to be a PFIC.

U.S.
          holders are urged to consult their tax advisors regarding the application of the
          PFIC rules, including eligibility for and the manner and advisability of making
          certain elections with respect to our PFIC status.

# Information reporting
and backup withholding

A U.S. holder generally is subject to
information reporting and may be subject to backup withholding at a rate of 28% with
respect to dividend payments made with respect to, and proceeds from the disposition of,
the ordinary shares. Backup withholding will not apply with respect to payments made to
exempt recipients, including corporations, or if a U.S. holder provides a correct taxpayer
identification number, certifies that such holder is not subject to backup withholding or
otherwise establishes an exemption. Backup withholding is not an additional tax. It may be
claimed as a credit against the U.S. federal income tax liability of a U.S. holder or the
U.S. holder may be eligible for a refund of any excess amounts withheld under the backup
withholding rules provided, in either case, that the required information is furnished to
the Internal Revenue Service.

Non-U.S. Holders of
Ordinary Shares

Except as provided below, a non-U.S. holder
of ordinary shares will not be subject to U.S. federal income or withholding, in the case
of U.S. Federal income taxes, tax on the receipt of dividends on, and the proceeds from
the disposition of, an ordinary share, unless that item is effectively connected with the
conduct by the non-U.S. holder of a trade or business in the United States and, in the
case of a resident of a country which has an income tax treaty with the United States,
that item is attributable to a permanent establishment in the United States or, in the
case of an individual, a fixed place of business in the United States. In addition, gain
recognized by an individual non-U.S. holder on the disposition of the ordinary shares will
be subject to tax in the United States if such non-U.S. holder is present in the United
States for 183 days or more in the taxable year of the sale and other conditions are met.

- 84 -

---

---

Non-U.S.           holders are
generally not subject to information reporting or backup withholding           with
respect to the payment of dividends on, or proceeds from the disposition           of,
ordinary shares, provided that the non-U.S. holder provides its taxpayer
          identification number, certifies to its foreign status or otherwise establishes
          an exemption.

|10F. | Dividends
and Paying Agents
|---- | ---------------------------

Not applicable.

|10G. | Statement
by Experts
|---- | --------------------

Not applicable.

|10H. | Documents
on Display
|---- | --------------------

The documents concerning the Company
that are referred to in the form may be inspected at the Companys office in Israel.

|10I. | Subsidiary
Information
|---- | ----------------------

For information relating to the
Companys subsidiaries, see Item 4C. Organizational Structure as well as
the Companys Consolidated Financial Statements (Items 8 and 18 of this form).

|Item 11: |  | Quantitative and Qualitative Disclosure about Market Risk
|-------- |  | ---------------------------------------------------------

Market risk represents the risk of
changes in the value of our financial instruments caused by fluctuations in interest
rates, foreign exchange rates and equity prices. We do not engage in trading market-risk
instruments or purchase hedging or other than trading instruments that are
likely to expose us to market risk, whether interest rate, commodity price or equity price
risk. We have not purchased options or entered into swaps or forward or futures contracts
and do not use derivative financial instruments for speculative trading purposes. Foreign
currency exchange rate risk:

The results of operation and
financial position of Dimex Solutions, whose functional currency is NIS, have been
translated into U.S. dollars at the applicable exchange rate for inclusion in our
consolidated financial statements, exposing us to currency translation risk.

In addition, we are exposed to
currency transaction risk because some of our expenses are incurred in a different
currency from the currency in which our revenues are received. Our most significant
currency exposures are to the New Israeli Shekel and Euro. In periods when the U.S. dollar
strengthens against these other currencies, our reported results of operations may
adversely affected. Although from time to time we purchase forward exchange contracts to
reduce currency transaction risk, these purchases will not eliminate translation risk or
all currency risk.

# Credit Risk Management

The company sells its products and
purchases products from vendors on credit terms.

The trade receivables of the Company
are derived from sales to customers located primarily in Israel, the United States and
Europe. The Company generally does not require collateral; however, in certain
circumstances, the Company may require letters of credit, other collateral, additional
guarantees or advanced payments.

- 85 -

---

---

Provisions are made for doubtful
debts on a specific basis and, in managements opinion, appropriately reflect the
loss inherent in collection of the debts. Management bases this provision on its
assessment of the risk of the debt.

The table below presents the account
receivables balance by geographical market as of December 31, 2008 and December 31, 2007:

|                  | December 31
|----------------- | -----------
|
|
|
|
|America           |            
|Europe            |            
|Far East          |            
|Israel and others |            
|                  |            
|                  |            
|                  |            
|                  |            

Interest Rate Risk

The  Company's  exposure  to market
risk for changes in interest  rates,  is due to its  investment  of its surplus funds and
loans that carry variable interest.

The Company has a conservative
investment policy. According to this policy the Company invests in bank deposits.

A  material  change in  interest  we
 receive  on our bank  deposits  or pay on our loans may have an effect on the Company's
financial results and cash flow.

Bank Risk

The Company manages its loans in two
banks: (i) Bank Leumi which provides credit to the Company and its Israeli subsidiaries
and (ii) JPMorgan which provides credit to Summit. In case of adverse changes in the
financial position of either of these banks or deterioration in the relations of the
Company with either of these banks, our liquidity could be materially adversely affected.

|Item 12: |  | Description of Securities Other than Equity Securities
|-------- |  | ------------------------------------------------------

Not applicable.

PART II

|Item 13: |  | Defaults, Dividend Arrearages and Delinquencies
|-------- |  | -----------------------------------------------

Not applicable.

- 86 -

---

---

|Item 14: |  | Material Modifications to the Rights of Security Holders and Use of Proceeds
|-------- |  | ----------------------------------------------------------------------------

Not applicable.

|Item 15: |  | Controls and Procedures
|-------- |  | -----------------------

(a) Disclosure controls and
procedures.

The Company's  principal  executive
officer and its principal  financial officer evaluated the effectiveness of the Company's
 disclosure  controls and  procedures  (as defined in Rule  13a-15(e)  and  15d-15(e)  of
the  Securities Exchange Act of 1934,  as amended) as of the end of the period  covered
by this report.  Based on that  evaluation, such principal executive officer and
principal  financial officer concluded that the Company's  disclosure controls and
 procedures  were  effective as of the end of the period  covered by this report.  This
Annual  Report does not include an attestation  report of our registered public
 accounting firm regarding  internal control over financial reporting.  Management's
 report was not subject to attestation by our registered  public  accounting firm
pursuant to temporary  rules of the Securities and Exchange  Commission that permit us to
provide only  management's  report in this Annual Report.

(b)  Management's Annual Report on
Internal Control Over Financial Reporting.

Our management,  under the
supervision of our Chief Executive Officer and Chief Financial  Officer,  is responsible
for establishing and maintaining  adequate  internal control over financial  reporting as
defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act. Our internal  control
system was designed to provide  reasonable  assurance regarding the  reliability of
financial  reporting and the preparation  and fair  presentation of our  consolidated
financial statements for external purposes in accordance with generally accepted
accounting  principles.  Our Chief Executive  Officer and Chief Financial  Officer
 assessed the  effectiveness of our internal control over financial reporting as of
December 31,  2008.  In making this  assessment,  they used the  criteria  established
 in Internal Control-Integrated  Framework  issued by the  Committee of  Sponsoring
 Organizations  of the  Treadway  Commission (COSO).  Based on this assessment,  our
Chief Executive Officer and Chief Financial Officer have concluded that, as of December
 31, 2008,  our  internal  control over  financial  reporting  is  effective  based on
those  criteria. Notwithstanding  the  foregoing,  all  internal  control  systems,  no
 matter  how well  designed,  have  inherent limitations.  Therefore,  even those systems
determined to be effective may not prevent or detect misstatements and can provide only
 reasonable  assurance with respect to financial  statement  preparation and
 presentation.  Also, projections of any evaluation of  effectiveness  to future periods
are subject to the risk that controls may become inadequate  because of changes in
conditions,  or that the degree of compliance with the policies or procedures may
deteriorate.

This Annual  Report does not include
an  attestation  report of the Company's  registered  public  accounting  firm regarding
 internal  control over financial  reporting.  Management's  report was not subject to
attestation by the Company's  registered  public  accounting  firm  pursuant to temporary
 rules of the SEC that permit the Company to provide only management's report in this
Annual Report.

(c)  Change in Internal Control over
Financial Reporting.

There were no changes in the
Company's  internal controls over financial  reporting that occurred during the fiscal
year ended December 31, 2008, that have  materially  affected or are reasonably  likely
to materially  affect these controls.

- 87 -

---

---

(d)  Other.

The Company  believes that a control
 system,  no matter how well designed and operated,  can not provide  absolute assurance
 that the  objectives of the control  system are met, and no evaluation of controls can
provide  absolute assurance that all control issues and instances of fraud, if any, with
the Company have been determined.

|Item 16: |  | [Reserved]
|-------- |  | ----------

|Item 16A: |  | Audit Committee Financial Expert
|--------- |  | --------------------------------

The Company's  Board of Directors
has determined  that Ms. Nelly  Assouline,  Mr. David Golan and Mr. Ronen Zavlik, all
members of the audit  committee,  are "audit  committee  financial  experts",  as defined
by the applicable SEC regulations.  The  experience of each is listed under Item 6A. All
are  "independent"  under the applicable SEC and Nasdaq regulations.

|Item 16B: |  | Code of Ethics
|--------- |  | --------------

The Company has adopted a Code of
Ethics applicable to its executive  officers,  directors and all other employees. A copy
of the code is posted on our  website  and may also be  obtained,  without  charge,  upon
a written  request addressed to the Company's investor relations department.

|Item 16C: |  | Principal Accountant Fees and Services
|--------- |  | --------------------------------------

The  Company's  principal
 accountants  for the years 2007 and 2008 were Kost Forer Gabbay & Kasierer,  a member of
Ernst & Young Global.

The table  below  summarizes  the
 audit  and other  fees paid and  accrued  by the  Company  and its  consolidated
subsidiaries to Kost Forer Gabbay & Kasierer and Arik Eshel, during each of 2007 and 2008:

|             | Year Ended December 31, 2008 | Year Ended December 31, 2007
|------------ | ---------------------------- | ----------------------------
|
|
|
|
|Audit Fees   |                              |                             
|Tax Fees (1) |                              |                             
|             |                              |                             
|Total        |                              |                             
|             |                              |                             

|(1) | Tax
fees are fees for professional services rendered by the                Companys
auditors with respect to tax advice related to acquisitions and                tax
compliance with the Israeli law for encouragement of investment, and
               issuance of annual tax reports.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Audit Committees
pre-approval policies and procedures:

The Audit Committee is responsible
for the oversight of the independent auditors work, including the approval of
services provided by the independent auditor. These services may include audit,
audit-related, tax or other services, as described above. On an annual basis the audit
committee pre-approves audit and non-audit services to be provided to the Company by its
auditors, listing the particular services or categories of services, and sets forth a
specific budget for such services. Additional services not covered by the annual
pre-approval may be approved by the Audit Committee on a case-by-case basis as the need
for such services arises. Furthermore, the Audit Committee has authorized the Committee
Chairman to pre-approve engagements of the Companys auditors so long as the fee for
each such engagement does not exceed $5,000 and so long as the engagement is notified to
the Committee at its next subsequent meeting. Any services pre-approved by the Audit
Committee (or by the Chairman) must be permitted by applicable law. Once services have
been pre-approved, the audit committee receives a report on a periodic basis regarding the
extent of the services actually provided and the fees paid.

- 88 -

---

---

|Item 16D: |  | Exemptions from the Listing Standards for Audit Committees
|--------- |  | ----------------------------------------------------------

Not applicable to
Registrant

|Item 16E: |  | Purchases of Equity Securities by the Issuer and Affiliated Purchasers
|--------- |  | ----------------------------------------------------------------------

The Company (or anyone acting on its
behalf) did not purchase any of the Companys securities in 2008.

|Item 16F: |  | Change in Registrants Certifying Accountant
|--------- |  | --------------------------------------------

Not applicable.

|Item 16G: |  | Corporate Governance
|--------- |  | --------------------

Not applicable.

# PART III

|Item 17: |  | Financial Statements
|-------- |  | --------------------

Not applicable.

|Item 18: |  | Financial Statements
|-------- |  | --------------------

The following financial statements
are filed as part of this Annual Report:

|                                                          | Page       
|--------------------------------------------------------- | -----------
|
|
|
|
|Reports of Independent Registered Public Accounting Firms | F-2 - F-3  
|Consolidated Balance Sheets                               | F-4 - F-5  
|Consolidated Statements of Operations                     | F-6        
|Statement of Changes in Shareholders' Equity              | F-7        
|Consolidated Statements of Cash Flows                     | F-8 - F-10 
|Notes to Consolidated Financial Statements                | F-11 - F-54

The audited financial statements
filed as part of this Form 20-F are identical to the audited financial statements that
were furnished under Form 6-K on March 31, 2009.

- 89 -

---

---

|Item 19: |  | Exhibits
|-------- |  | --------

The following exhibits are filed as
part of this Annual Report:

|1.1 |  | Memorandum
of Association, as amended (incorporated by reference to Exhibit 1.1 of the Companys
Annual Report on Form 20-F filed with the SEC on June 28, 2006).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|1.2 |  | Articles
of Association, as amended (incorporated by reference to Exhibit 1.2 of the Companys
Annual Report on Form 20-F filed with the SEC on June 28, 2006).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.1 |  | Form
of Indemnification Agreement between the Company and its officers and directors, as
amended (incorporated by reference to Exhibit 4.1 of the Companys Annual Report on
Form 20-F filed with the SEC on June 28, 2006).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Services
 Agreement,  dated as of April 15, 2003,  between  Cukierman & Co.  Investment  House
Ltd., Dimex          Solutions  Ltd. and the  Registrant  (incorporated  by reference to
the  Company's  Annual Report on Form          20-F filed on June 17, 2004).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | M&A Addendum
to the Service  Agreement,  as of August 22, 2004,  between  Cukierman & Co. Investment
House          Ltd.,  Dimex Solutions Ltd. and the Registrant  (incorporated by reference
to the Company's Annual Report          on Form 20-F filed on June 27, 2005).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | The
Registrant's  Israeli 2003 Share Option Plan (incorporated by reference to the Company's
 Registration          Statement on Form S-8 No. 333-11650).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|4.5 |  | Share
Purchase Agreement dated as of the October 30, 2007 by and between Donald Levi and Andrew
Levi and the Registrant (incorporated by reference to the Companys Annual Report on
Form 20-F filed on June 30, 2008).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.6 |  | Securities
Purchase Agreement, dated as of the December 10, 2007, by and between certain investors
and the Registrant; Registration Rights Agreement dated as of the December 10, 2007 by
and between certain investors and the Registrant; and Form of Warrant dated as of
December 31, 2007 issued by the Registrant to certain investors (incorporated by
reference to the Companys Annual Report on Form 20-F filed on June 30, 2008).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.7 |  | Asset
Purchase Agreement dated as of the January 29, 2008 by and between Dimex Systems (1988)
Ltd., Dimex Hagalil Ltd., and the Registrant (incorporated by reference to the Companys
Annual Report on Form 20-F filed on June 30, 2008).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.8 |  | Amendment
 No. 1 to Asset  Purchase  Agreement by and among the  Company,  Dimex  Systems  (1988)
Ltd. and          Dimex  Hagalil Ltd.,  dated March 23, 2009  (incorporated  by reference
to the Company's  Amendment no. 2          to Registration Statement on Form F-3 no.
333-152020).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.9 |  | Finder
Fee Letter by and between the Company and T.F.E.  Holdings Ltd.,  dated June 3, 2008
 (incorporated          by reference to the Company's Registration Statement on Form F-3
no. 333-152020).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.10 |  | Share
 Purchase  Agreement  and  Registration  Rights  Agreement  dated as of July 16, 2008 by
and between          certain  investors  and  the  Registrant.  Form of  Warrant  dated
 as of July  16,  2008  issued  by the          Registrant  to  certain  investors
 (incorporated  by  reference  to the  Company's  Amendment  no.  1 to
         Registration Statement on Form F-3 no. 333-152020).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.11 |  | Share
Purchase  Agreement and  Registration  Rights  Agreement  dated as of August 25, 2008 by
and between          certain  investors  and the  Registrant.  Form of  Warrant  dated as
of  August  25,  2008  issued by the          Registrant  to  certain  investors
 (incorporated  by  reference  to the  Company's  Amendment  no. 1 to
         Registration Statement on Form F-3 no. 333-152020).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.12 |  | Bank
Leumi Le-Israel Agreements: Summary of Economic Terms, Form of Request to Allocate a
Credit in Israeli Currency (unlinked), and Form of Request to Allocate a Credit Framework
in Debitory Account (unlinked) (incorporated by reference to the Companys Annual
Report on Form 20-F filed on June 30, 2008).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.13 |  | Forms
of Advised  Line of Credit Note,  Continuing  Security  Agreement  and  Continuing
 Guarantee by and          between BOS - Supply Chain Solutions  (Summit),  Inc.
(formerly known as Summit Radio Corp.) and JPMorgan          Chase Bank.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 90 -

---

---

|4.14 |  | Credit
Line agreements by and between Bank Leumi Le-Israel and each of Odem Electronic
 Technologies  1992          Ltd. and Dimex Solutions Ltd.; Covenant Letters and
Subordination  Letters  (incorporated by reference to          the Company's Amendment
no. 2 to Registration Statement on Form F-3 no. 333-152020).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.15 |  | Framework
Agreement between BOS - Supply Chain Solutions (Summit), Inc. (formerly known as Summit
Radio Corp.) and a          Strategic Customer. (Confidential treatment has been
requested with respect to portions of this          exhibit, which have been redacted,
and the redacted portions have been filed separately with the          Securities and
Exchange Commission.)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.16 |  | Form
of Loan Agreement and Registration Rights Agreement by and between certain lenders and
the Registrant. Form of Warrant issued by the Registrant to certain lenders.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8.1 |  | List
of subsidiaries (incorporated by reference to Item 4C of this Annual Report on Form 20-F).
|--- |  | -----------------------------------------------------------------------------------------------

|11 |  | Statement
of Computation of Earnings Per Share
|-- |  | ----------------------------------------------

|12.1 |  | Certification
by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------

|12.2 |  | Certification
by Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------

|13.1 |  | Certification
by Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or Rule
15d-14(b) of the Securities Exchange Act of 1934.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|23.1 |  | Consent
of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.
|---- |  | --------------------------------------------------------------------------

|23.2 |  | Consent
of Arik Eshel, CPA & Assoc., PC
|---- |  | ---------------------------------------

- 91 -

---

---

# Signatures

The Registrant hereby certifies that
it meets all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.

|B.O.S. Better Online Solutions Ltd.                                 
|--------------------------------------------------------------------
|/s/ Shalom Daskal
Shalom DaskalChief Executive Officer

Date: June 30, 2009

- 92 -

---

---

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008
IN U.S. DOLLARS

INDEX

|                                                          | Page           
|--------------------------------------------------------- | ---------------
|
|
|
|
|Reports of Independent Registered Public Accounting Firms | F - 2 - F - 3  
|                                                         
|Consolidated Balance Sheets                               | F - 4 - F - 5  
|                                                         
|Consolidated Statements of Operations                     | F - 6          
|                                                         
|Statements of Changes in Shareholders' Equity             | F - 7          
|                                                         
|Consolidated Statements of Cash Flows                     | F - 8 - F - 10 
|                                                         
|Notes to Consolidated Financial Statements                | F - 11 - F - 54



---

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
B.O.S. BETTER ONLINE SOLUTIONS LTD.

We
have audited the accompanying consolidated balance sheets of B.O.S Better Online Solutions
Ltd. (the Company) and subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of operations, changes in shareholders equity and
cash flows for each of the three years in the period ended December 31, 2008. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audit.
We did not audit the financial statements of Lynk USA Inc., a wholly-owned U.S.
subsidiary, which statements reflect total assets constituting 9% and 14% in 2008 and
2007, respectively and total revenues constituting 33% and 7% in 2008 and 2007,
respectively of the related consolidated totals. These statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for Lynk USA Inc., is based solely on the report of the other
auditors.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the Companys
internal control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly
we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management and evaluating the
overall financial statement presentation. We believe that our audit and the report of the
other auditors provide a reasonable basis for our opinion.

In
our opinion, based on our audit and the report of other auditors, the financial statements
referred to above present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiaries at December 31, 2008 and 2007, and the
consolidated results of their operations and their cash flows for each of the three years
in the period ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|March 29, 2009   | A Member of Ernst & Young Global

F - 2

---

---

ARIK ESHEL, CPA &
ASSOC., PC
Certified Public
Accountants and Consultants

# Report of Independent
Registered Public Accounting Firm

To the Board of Directors
andStockholders of Lynk, USA Inc.

We have audited the accompanying
consolidated balance sheets of Lynk, USA Inc. (the Company) and its
subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of
income, stockholders equity (deficit), and cash flows for each of the years in the
two-year period ended December 31, 2008. The Companys management is responsible for
these financial statements. Our responsibility is to express an opinion on these financial
statements based on our audits.

As of December 31, 2008 and for the
year then ended, we conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). As of December 31, 2007 and for the
year then ended, we conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of Lynk USA, Inc. and its subsidiaries as of December 31, 2008 and
2007, and the results of its operations and its cash flows for each of the years in the
two-year period ended December 31, 2008 in conformity with accounting principles generally
accepted in the United States of America.

ARIK ESHEL, CPA &
ASSOC., PC

New York, NY

March 29, 2009

F - 3

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|CONSOLIDATED BALANCE SHEETS
|---------------------------
|                           
|U.S. dollars in thousands  

|                                                                             | December 31,
|---------------------------------------------------------------------------- | ------------
|
|
|
|
|ASSETS                                                                       |             
|                                                                             |             
|CURRENT ASSETS:                                                              |             
|Cash and cash equivalents                                                    |             
|Trade receivables (net of allowance for doubtful accounts of $65 and $122 at |             
|December 31, 2008 and 2007, respectively)                                    |             
|Other accounts receivable and prepaid expenses (Note 3)                      |             
|Inventories (Note 5)                                                         |             
|                                                                             |             
|                                                                             |             
|Total current assets                                                         |             
|                                                                             |             
|                                                                             |             
|LONG-TERM ASSETS:                                                            |             
|Severance pay fund                                                           |             
|Investment in other companies (Note 6)                                       |             
|Deferred tax                                                                 |             
|                                                                             |             
|                                                                             |             
|Total long-term assets                                                       |             
|                                                                             |             
|                                                                             |             
|PROPERTY, PLANT AND EQUIPMENT, NET (Note 7)                                  |             
|                                                                             |             
|                                                                             |             
|OTHER INTANGIBLE ASSETS, NET (Note 8)                                        |             
|                                                                             |             
|                                                                             |             
|GOODWILL (Note 9)                                                            |             
|                                                                             |             
|                                                                             |             
|                                                                             |             
|                                                                             |             

F - 4

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|CONSOLIDATED BALANCE SHEETS
|---------------------------
|                           
|U.S. dollars in thousands  

|                                                                        | December 31,
|----------------------------------------------------------------------- | ------------
|
|
|
|
|CURRENT LIABILITIES:                                                    |             
|Short-term bank loans and current maturities (Note 10)                  |             
|Trade payables                                                          |             
|Employees and payroll accruals                                          |             
|Deferred revenues                                                       |             
|Accrued expenses and other liabilities (Note 11)                        |             
|                                                                        |             
|                                                                        |             
|Total current liabilities                                               |             
|                                                                        |             
|                                                                        |             
|LONG-TERM LIABILITIES:                                                  |             
|Long-term bank loans, net of current maturities (Note 12)               |             
|Deferred taxes                                                          |             
|Accrued severance pay                                                   |             
|Other long-term liabilities                                             |             
|                                                                        |             
|                                                                        |             
|Total long-term liabilities                                             |             
|                                                                        |             
|                                                                        |             
|COMMITMENTS AND CONTINGENT LIABILITIES (Note 13)                        |             
|                                                                        |             
|SHAREHOLDERS' EQUITY (Note 15):                                         |             
|Share capital                                                           |             
|Ordinary shares of NIS 4.00 par value: Authorized: 35,000,000 shares at |             
|December 31, 2008 and 2007; Issued and outstanding: 13,027,514 and      |             
|10,857,554 shares at December 31, 2008 and 2007, respectively;          |             
|Additional paid-in capital                                              |             
|Accumulated other comprehensive income (loss)                           |             
|Accumulated deficit                                                     |             
|                                                                        |             
|                                                                        |             
|Total shareholders' equity                                              |             
|                                                                        |             
|                                                                        |             
|Total liabilities and shareholder's equity                              |             
|                                                                        |             

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

F - 5

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|CONSOLIDATED STATEMENTS OF OPERATIONS           
|------------------------------------------------
|                                                
|U.S. dollars in thousands, except per share data

|                                                                  | Year ended December 31,
|----------------------------------------------------------------- | -----------------------
|
|
|
|
|Revenues                                                          |                        
|Cost of revenues                                                  |                        
|                                                                  |                        
|                                                                  |                        
|Gross profit                                                      |                        
|                                                                  |                        
|                                                                  |                        
|Operating costs and expenses:                                     |                        
|Research and development                                          |                        
|Sales and marketing                                               |                        
|General and administrative                                        |                        
|Impairment of goodwill                                            |                        
|                                                                  |                        
|                                                                  |                        
|Total operating costs and expenses                                |                        
|                                                                  |                        
|                                                                  |                        
|Operating loss                                                    |                        
|Financial expenses, net (Note 17a)                                |                        
|Other expenses, net (Note 2g,)                                    |                        
|                                                                  |                        
|                                                                  |                        
|Loss before taxes on income                                       |                        
|Taxes on income (tax benefit) (Note 16)                           |                        
|                                                                  |                        
|                                                                  |                        
|Loss from continuing operations                                   |                        
|Income (loss) from discontinued operations (Note 1c)              |                        
|                                                                  |                        
|                                                                  |                        
|Net income (loss)                                                 |                        
|                                                                  |                        
|                                                                  |                        
|Basic and diluted net loss per share from continuing operations   |                        
|(Note 17b)                                                        |                        
|                                                                  |                        
|                                                                  |                        
|Basic and diluted net earnings (loss) per share from discontinued |                        
|operations (Note 17b)                                             |                        
|                                                                  |                        
|                                                                  |                        
|Basic and diluted net earnings (loss) per share (Note 17b)        |                        
|                                                                  |                        

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

F - 6

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
|---------------------------------------------
|                                             
|U.S. dollars in thousands, except share data 

|                                                                         | Ordinary

shares | Share

capital | Additional
paid in
capital | Deferred
share-based
compensation | Accumulated other
comprehensive
income | Accumulated

deficit | Total
comprehensive
loss | Total
shareholders'
equity
|------------------------------------------------------------------------ | ---------------- | -------------- | -------------------------- | --------------------------------- | -------------------------------------- | -------------------- | ------------------------ | --------------------------
|
|
|
|
|Balance at January 1, 2006                                               |                  |                |                            | 6,589,385                         |                                        |                      | 6,432                    |                           
|Reversal of deferred share-based compensation                            |                  |                |                            | -                                 |                                        |                      | -                        |                           
|Issuance of Ordinary shares for options exercised                        |                  |                |                            | 68,747                            |                                        |                      | 61                       |                           
|Share-based compensation expense                                         |                  |                |                            | 21,666                            |                                        |                      | 20                       |                           
|Share-based compensation related to warrants issued to service providers |                  |                |                            | 65,000                            |                                        |                      | 58                       |                           
|Warrants related to a convertible note issued to lenders                 |                  |                |                            | -                                 |                                        |                      | -                        |                           
|Other comprehensive income:                                              |                  |               
|Net income                                                               |                  |                |                            | -                                 |                                        |                      | -                        |                           
|Loss on available-for-sale marketable securities                         |                  |                |                            | -                                 |                                        |                      | -                        |                           
|                                                                         |                  |                |                            |                                   |                                        |                      |                          |                           
|Total comprehensive loss                                                 |                  |                |                            |                                   |                                        |                      |                          |                           
|                                                                         |                  |                |                            |                                   |                                        |                      |                          |                           
|Balance at January 1, 2007                                               |                  |                |                            | 6,744,798                         |                                        |                      | 6,571                    |                           
|Issuance of Ordinary shares for options exercised                        |                  |                |                            | 23,498                            |                                        |                      | 23                       |                           
|Issuance of shares related to the private placement net                  |                  |                |                            | 1,471,176                         |                                        |                      | 1,483                    |                           
|Issuance of shares related to rights offering, net                       |                  |                |                            | 1,739,412                         |                                        |                      | 1,720                    |                           
|Issuance of shares related to conversion of convertible note             |                  |                |                            | 878,670                           |                                        |                      | 831                      |                           
|Share-based compensation expense                                         |                  |                |                            | -                                 |                                        |                      | -                        |                           
|Warrants related to a convertible note issued to lenders                 |                  |                |                            | -                                 |                                        |                      | -                        |                           
|Other comprehensive income:                                              |                  |               
|Net loss                                                                 |                  |                |                            | -                                 |                                        |                      | -                        |                           
|                                                                         |                  |                |                            |                                   |                                        |                      |                          |                           
|Total comprehensive loss                                                 |                  |                |                            |                                   |                                        |                      |                          |                           
|                                                                         |                  |                |                            |                                   |                                        |                      |                          |                           
|Balance at December 31, 2007                                             |                  |                |                            | 10,857,554                        |                                        | $                    | 10,628                   |                           
|Issuance of Ordinary shares for options exercised                        |                  |                |                            | 2,669                             |                                        |                      | 3                        |                           
|Issuance of shares related to the private placement, net                 |                  |                |                            | 1,557,067                         |                                        |                      | 1,843                    |                           
|Issuance of shares related to acquisition of Dimex, net                  |                  |                |                            | 610,224                           |                                        |                      | 685                      |                           
|Share-based compensation expense                                         |                  |                |                            | -                                 |                                        |                      | -                        |                           
|Other comprehensive income:                                              |                  |               
|Foreign currency translation adjustments                                 |                  |                |                            | -                                 |                                        |                      | -                        |                           
|Net loss                                                                 |                  |                |                            | -                                 |                                        |                      | -                        |                           
|                                                                         |                  |                |                            |                                   |                                        |                      |                          |                           
|Total comprehensive loss                                                 |                  |                |                            | -                                 |                                        |                      | -                        |                           
|                                                                         |                  |                |                            |                                   |                                        |                      |                          |                           
|Balance at December 31, 2008                                             |                  |                |                            | 13,027,514                        |                                        | $                    | 13,159                   |                           
|                                                                         |                  |                |                            |                                   |                                        |                      |                          |                           

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

F - 7

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|CONSOLIDATED STATEMENTS OF CASH FLOWS
|-------------------------------------
|                                     
|U.S. dollars in thousands            

|                                                                         | Year ended December 31,
|------------------------------------------------------------------------ | -----------------------
|
|
|
|
|Cash flows from operating activities:                                    |                        
|Net income (loss)                                                        |                        
|Adjustments to reconcile net income (loss) to net cash used in operating |                        
|activities:                                                              |                        
|Loss (income) from discontinued operations                               |                        
|Depreciation and amortization                                            |                        
|Impairment of Goodwill                                                   |                        
|Capital gain from sale of investment in company                          |                        
|Impairment of investments in companies                                   |                        
|Severance pay, net                                                       |                        
|Share-based compensation related to warrants issued to service           |                        
|providers                                                                |                        
|Capital loss from sale of property and equipment                         |                        
|Share-based compensation related to employees                            |                        
|Financial expenses in connection with long-term convertible note         |                        
|Decrease (increase) in trade receivables                                 |                        
|Decrease in deferred taxes, net                                          |                        
|Decrease (increase) in other accounts receivable and prepaid expenses    |                        
|Decrease  (increase) in inventories                                      |                        
|Increase (decrease) in trade payables                                    |                        
|Increase (decrease) in employees and payroll accruals, deferred          |                        
|revenues, accrued expenses and other liabilities                         |                        
|                                                                         |                        
|                                                                         |                        
|Net cash provided by (used in) operating activities from continuing      |                        
|operations                                                               |                        
|Net cash used in operating activities from discontinued operations       |                        
|                                                                         |                        
|                                                                         |                        
|Net cash provided by (used in) operating activities                      |                        
|                                                                         |                        
|                                                                         |                        
|Cash flows from investing activities:                                    |                        
|Purchase of property and equipment                                       |                        
|Proceeds from sale of property and equipment                             |                        
|Proceeds from sale of investment in company                              |                        
|Proceeds from redemption of marketable securities                        |                        
|Investment in other companies                                            |                        
|Acquisitions, net of cash acquired (a,b,c,d)                             |                        
|                                                                         |                        
|                                                                         |                        
|Net cash provided by (used in) investing activities from continuing      |                        
|operations                                                               |                        
|Net cash used in investing activities from discontinued operations       |                        
|                                                                         |                        
|                                                                         |                        
|Net cash provided by (used in) investing activities                      |                        
|                                                                         |                        
|                                                                         |                        
|Cash flows from financing activities:                                    |                        
|Proceeds from shares issuance, net                                       |                        
|Proceeds from long term bank loans                                       |                        
|Proceeds from short and long term bank loans, net                        |                        
|Proceeds (payments) from long-term convertible note and warrants, net of |                        
|issuance expenses                                                        |                        
|Payment of long-term convertible note                                    |                        
|Proceeds from exercise of options                                        |                        
|                                                                         |                        
|                                                                         |                        
|Net cash provided by financing activities                                |                        
|                                                                         |                        
|                                                                         |                        
|Increase (decrease) in cash and cash equivalents                         |                        
|Increase in cash and cash equivalents from discontinued operations       |                        
|Cash and cash equivalents at the beginning of the year                   |                        
|                                                                         |                        
|                                                                         |                        
|Cash and cash equivalents at the end of the year                         |                        
|                                                                         |                        

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

F - 8

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|CONSOLIDATED STATEMENTS OF CASH FLOWS
|-------------------------------------
|                                     
|U.S. dollars in thousands            

|                                                              | Year ended December 31,
|------------------------------------------------------------- | -----------------------
|
|
|
|
|Supplemental disclosure of cash flow activities:              |                        
|                                                              |                        
|(i) Net cash paid during the year for:                        |                        
|Interest                                                      |                        
|                                                              |                        
|Income tax                                                    |                        
|                                                              |                        
|                                                              |                        
|(ii) Non-cash activities:                                     |                        
|                                                              |                        
|Conversion of convertible note into shares                    |                        
|                                                              |                        
|Sale of the communication segment in consideration for shares |                        
|in Qualmax                                                    |                        
|                                                              |                        
|Conversion of Qualmax's debt into New World Brand's shares    |                        
|                                                              |                        
|                                                              |                        
|Sale of the communication segment:                            |                        
|                                                              |                        
|Consideration, net                                            |                        
|Disposal of tangible and intangible assets                    |                        
|                                                              |                        
|Capital gain                                                  |                        
|                                                              |                        

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

F - 9

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|CONSOLIDATED STATEMENTS OF CASH FLOWS
|-------------------------------------
|                                     
|U.S. dollars in thousands            

|                                                            | Year ended December 31,
|----------------------------------------------------------- | -----------------------
|
|
|
|
|(a)  Acquisition of Summit                                  |                        
|                                                            |                        
|Fair value of net tangible assets acquired (excluding cash  |                        
|and cash equivalents) and liabilities assumed at            |                        
|acquisition date                                            |                        
|Fair value of net intangible assets acquired at acquisition |                        
|date                                                        |                        
|Less - Amount acquired by issuance of shares                |                        
|                                                            |                        
|                                                            |                        
|                                                            |                        
|                                                            |                        
|                                                            |                        
|(b) Acquisition of Dimex                                    |                        
|                                                            |                        
|Fair value of net tangible assets acquired (excluding cash  |                        
|and cash equivalents) and liabilities assumed at            |                        
|acquisition date                                            |                        
|Fair value of net intangible assets acquired at acquisition |                        
|date                                                        |                        
|Less - Amount acquired by issuance of shares                |                        
|Less - unpaid balance on account of acquisition             |                        
|                                                            |                        
|                                                            |                        
|                                                            |                        
|                                                            |                        
|                                                            |                        
|(c) Acquisition of CYMS Ltd assets and liabilities          |                        
|                                                            |                        
|Fair value of net tangible assets acquired (excluding cash  |                        
|and cash equivalents) and liabilities assumed at            |                        
|acquisition date                                            |                        
|Fair value of net intangible assets acquired at acquisition |                        
|date                                                        |                        
|Less amount acquired by issuance of shares                  |                        
|                                                            |                        
|                                                            |                        
|                                                            |                        
|                                                            |                        
|(d) Acquisition of OptimizeIT assets and liabilities        |                        
|                                                            |                        
|Fair value of net intangible assets acquired at acquisition |                        
|date                                                        |                        
|Less amount acquired by issuance of shares                  |                        
|                                                            |                        
|                                                            |                        
|                                                            |                        
|                                                            |                        

F - 10

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 1:  GENERAL

| | a. | B.O.S.
Better Online Solutions Ltd. (BOS) is an Israeli corporation
          (together with its subsidiaries the Company).
| | -- | -------------------------------------------------------------------------------------------------------------------------------

| | The
Company has two operating segments, the Mobile and RFID Solutions segment and the Supply
Chain Solutions segment.
| | ---------------------------------------------------------------------------------------------------------------------

| | The
Companys wholly owned subsidiaries include:
| | ------------------------------------------------

| | In
Israel:
| | ----------

| | (1) | Dimex
Solutions Ltd. (previously BOScom Ltd.), which purchased on March 2008           all of
Dimex Systems Ltd. assets and activities, and its wholly owned           subsidiary,
Dimex Hagalil Projects (2008) Ltd., which was incorporated in           January 2008and
purchased all of Dimex Hagalil Ltd. assets and           activities (together: Dimex).
Dimex is a part of the Mobile and RFID           segment;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Odem
Electronic Technologies 1992 Ltd., which was purchased on November 18,           2004
from Odems previous shareholders, and in which, by November 2005, the
          Companys holdings increased to 100%. Odem, an Israeli company, is a major
          solution provider and distributor of RFID and electronics components and
advance           technologies in the Israeli market. Odem is a part of the Supply Chain
Solutions           segments; and
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Quasar
Telecom (2004) Ltd. (Quasar Telecom), which is inactive.
| | --- | -----------------------------------------------------------------

| | In
the U.S.:
| | ------------

| | (1) | Ruby-Tech
Inc., a New York corporation, a wholly owned subsidiary of Odem and a           part of
both the Mobile and RFID and the Supply Chain Solutions segments;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Lynk
USA Inc., a Delaware Corporation, and its subsidiaries:
| | --- | ------------------------------------------------------------

| | a. | Summit
Radio Corp., part of the Supply Chain Solutions segment, was purchased           on
November 21, 2007 from Summits shareholders. Summit is a supply chain
          provider, mainly of electronic components to the aircraft and defense industry.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Pacific
Information Systems, Inc. (PacInfo), a Delaware corporation           and
PacInfos subsidiary, Dean Tech Technologies Associates, LLC., a Texan
          corporation, are no longer active.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | BOS
Delaware Inc., a Delaware corporation, which operations ceased in 2002.
| | --- | ---------------------------------------------------------------------------

F - 11

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 1:  GENERAL (Cont.)

| | In
Europe:
| | ----------

| | BOScom
had a UK subsidiary, Better On-Line Solutions Ltd., and its subsidiary, Better On-Line
Solutions S.A.S in France. Since 2002, these subsidiaries are no longer active.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Company holds shares in three other companies:
| | ---------------------------------------------------------------

| | 1.       
Surf
Communication Systems Ltd. (Surf), is a developer and global
          supplier of universal access and network convergence software solutions to the
          wire line and wireless telecommunications and data communications industries.
As           of December 31, 2008, the Company holds 6.1% of the outstanding shares of
Surf           (see note 2g).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.       
Qualmax
Inc. (Qualmax), a U.S. public corporation listed on the           Pink Sheets
(QMXI.PK), and its subsidiary New World Brands Inc.           (OTC: NWBD.OB) (NWB).
The Company holds 17.87% of the issued and           outstanding shares of Qualmax Inc.
and 2.38% of the issued and outstanding           shares of NWB as of December 31, 2008
(see note 20a). The Companys           holdings in Qualmax and NWB were received as
the consideration for the sale of           the communication segment (see c).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Business
combination:
| | -- | ---------------------

| | Acquisition
of Summit:
| | ----------------------

| | On
November 21, 2007 the Company purchased 100% of the outstanding shares of Summit, from
Summits shareholders. In consideration for Summits shares the Company (i)
issued 360,000 of the Companys Ordinary shares subject to lock-upperiods
of 1-2 years and (ii) paid an amount of $4,472 in cash. In addition, Summits
selling shareholders will receive contingent consideration up to $500, based on
performance in the years 2008 and 2009. As of December 31, 2008 the Company accrued $60in
related with the earn out of year 2008.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys consolidated financial statements reflect the purchase price determined as
follows:
| | -------------------------------------------------------------------------------------------------

| |                                                                  | November 21,
2007
| | ---------------------------------------------------------------- | -----------------
|
|
|
|
| | Issuance of shares (1)                                           |                  
| | Cash consideration                                               |                  
| | Transaction costs (includes issuance costs in the amount of $29) |                  
| |                                                                  |                  
| |                                                                  |                  
| | Total purchase price                                             |                  
| |                                                                  |                  

| | (1) | The
value of the Ordinary shares issued was determined based on the average           market
price of the Companys Ordinary shares over the period of two days           before
and after the terms of the transaction were agreed to and announced.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 1:  GENERAL (Cont.)

| | The
Company has allocated the total purchase price as follows:
| | --------------------------------------------------------------

| | Allocation of purchase price | Summit As of
November 21,
2007 | Estimated
useful life
| | ---------------------------- | ------------------------------ | ---------------------
|
|
|
|
| | Cash                         |                                |                      
| | Tangible assets (1)          |                                |                      
| | Backlog (2)                  |                                |                      
| | Customer list (3)            |                                |                      
| | Non-competing rights (4)     |                                |                      
| | Deferred tax liability       |                                |                      
| | Goodwill                     |                                |                      
| |                              |                                |                      
| |                              |                                |                      
| | Total purchase price         |                                |                      
| |                              |                                |                      

| | (1) | Includes
fair value of inventory  Reflects the expected profit from           realization of
the inventory.
| | --- | ------------------------------------------------------------------------------------------------------------

| | (2) | Backlog
 The economic value of the backlog is calculated by deducting the
          relative expenses which will be accrued to sales equal to the Backlog.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Customer
list  The Companys allocation of purchase price is valued           the
acquired customer list by calculating cash flow benefit based on income
          approach.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Non-competing
rights  The value of the non-competing right is calculated           by assessing
the economic damage which might occur due to possible competing by           the Sellers,
and which is mitigated by having a non-competing agreement. The           value of the
non-competing right is the discounted cash flow which relates to           portion of the
Companys income that could have been lost if the Sellers           would compete.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
acquisitions have been treated using the purchase method of accounting in accordance with
SFAS 141 Business Combinations. The purchase price has been allocated to the
assets acquired and liabilities assumed based on their estimated fair value at the date
of acquisition.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
excess of the purchase price over the estimated fair value of the tangible and intangible
assets acquired has been recorded as goodwill.
| | --------------------------------------------------------------------------------------------------------------------------------------------

| | The
results of operations of Summit have been included in the Companys consolidated
statements of income since the completion of the acquisition in November 21, 2007. The
following unaudited pro forma information presents a summary of the results of operations
of the Company assuming the acquisition of Summit occurred January 1, 2006:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

NOTE 1:  GENERAL (Cont.)

| |                                          | Year Ended
December 31,
| | ---------------------------------------- | -----------------------
|
|
|
|
| | Revenues                                 |                        
| | Net income (loss)                        |                        
| | Net income per share - basic and diluted |                        

| | The
unaudited pro forma results of operations are not necessarily indicative of what would
have occurred had the acquisition been made as of at January 1, 20076, or of the results
that may occur in the future.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Acquisition
of Dimex:
| | ---------------------

| | In March 2008, BOScom Ltd. (now Dimex
Solutions) and its subsidiary Dimex Hagalil Projects (2008) Ltd., purchased the assets and
activities of Dimex Systems (1988) Ltd., an Israeli private company and its subsidiary,
Dimex Hagalil Ltd. Dimex is an integrator of AIDC (Automatic Identification and Data
Collection) solutions based on RFID and barcode technology. The consideration was NIS 44.6
million (approximately $12,426). The consideration is comprised of cash, payable over a
24-month period and of 500,224 BOS shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys consolidated financial statements reflect the purchase price determined as
follows:
| | -------------------------------------------------------------------------------------------------

| |                                                      | March 1, 2008
| | ---------------------------------------------------- | -------------
|
|
|
|
| | Cash consideration                                   |              
| | Issuance BOS shares (1)                              |              
| | Deferred payment (include transaction costs of $181) |              
| |                                                      |              
| |                                                      |              
| | Total purchase price                                 |              
| |                                                      |              

| | (1) | The
value of the Ordinary shares issued was determined based on the average           market
price of the Companys Ordinary shares over the period of two days           before
and after the terms of the transaction were agreed to and announced.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 1:  GENERAL (Cont.)

| | The
Company has allocated the total purchase price as follows:
| | --------------------------------------------------------------

| | Allocation of purchase price | Dimex | Estimated
useful life
| | ---------------------------- | ----- | ---------------------
|
|
|
|
| | Cash                         |       |                      
| | Tangible assets              |       |                      
| | Customer list (1)            |       |                      
| | Brand name (2)               |       |                      
| | Backlog (3)                  |       |                      
| | Deferred tax liability       |       |                      
| | Goodwill                     |       |                      
| |                              |       |                      
| |                              |       |                      
| | Total purchase price         |       |                      
| |                              |       |                      

| | (1) | Customer
list  The Companys allocation of purchase price is valued           the
acquired customer list by calculating cash flow benefit based on income
          approach.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Brand
name  The Companys allocation of purchase price is valued the
          acquired Brand name by calculating cash flow benefit based on relief from
          royalties approach.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Backlog
 The economic value of the backlog is calculated by deducting the
          relative expenses which will be accrued to sales equal to the Backlog.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
acquisitions have been treated using the purchase method of accounting in accordance with
SFAS 141 Business Combinations. The purchase price has been allocated to the
assets acquired based on their estimated fair value at the date of acquisition. The
results of operations of Dimex are included in the consolidated financial statements of
operations as of the acquisition date.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
excess of the purchase price over the estimated fair value of the tangible and intangible
assets acquired has been recorded as goodwill.
| | --------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 1:  GENERAL (Cont.)

| | The
results of operations of Dimex have been included in the Companys consolidated
statements of income since the completion of the acquisition in March 1, 2008. The
following unaudited pro forma information presents a summary of the results of operations
of the Company assuming the acquisition of Dimex occurred at January 1, 2007:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                          | Year Ended
December 31,
 2008 | Year Ended
December 31,
2007
| | ---------------------------------------- | ----------------------------- | ----------------------------
|
|
|
|
| | Revenues                                 |                               |                             
| | Net loss                                 |                               |                             
| | Net income per share - basic and diluted |                               |                             

| | The
unaudited pro forma results of operations are not necessarily indicative of what would
have occurred had the acquisition been made as of at January 1, 2007, or of the results
that may occur in the future.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Acquisition
of Cyms Ltd. and OptimizeIT:
| | ----------------------------------------

| | On
July 1, 2007, the Company entered into an agreement with Cyms Ltd. (Cyms), to
purchase its assets and liabilities, for an aggregate consideration of $ 66 which
was paid by issuance of 5,594 shares of the Company and cash payment of $51. The assets
of Cyms were transferred into the Company on July 1, 2007.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 1, 2007, the Company entered into an agreement with OptimizeIT to purchase its
assets, for an aggregate consideration of $ 170 which was paid by issuance of 8,000
shares of the Company and a cash payment of $150. The assets of Optimize IT were
transferred into the Company on October 1, 2007. In December 2008 the company decided to
cease the operation of this product line (see note 1c)
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys consolidated financial statements reflect the purchase price determined as
follows:
| | -------------------------------------------------------------------------------------------------

| |                        | Cyms
July 1, 2007 | OptimizeIT
November 21, 2007
| | ---------------------- | ----------------- | ----------------------------
|
|
|
|
| | Issuance of shares (1) |                   |                             
| | Cash consideration     |                   |                             
| |                        |                   |                             
| | Total purchase price   |                   |                             
| |                        |                   |                             

| | (1) | The
value of the Ordinary shares issued was determined based on the average           market
price of the Companys Ordinary shares over the period of two days           before
and after the terms of the transaction were agreed to and announced.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 1:  GENERAL (Cont.)

| | The
Company has allocated the total purchase price as follows:
| | --------------------------------------------------------------

| | Allocation of purchase price        | Cyms | OptimizeIT | Estimated
useful life
| | ----------------------------------- | ---- | ---------- | ---------------------
|
|
|
|
| | Tangible assets                     |      |            | $                    
| | Technology (1)                      |      |            |                      
| | Research and development in process |      |            |                      
| |                                     |      |            |                      
| |                                     |      |           
| | Total purchase price                |      |            | $                    
| |                                     |      |            |                      

| | (1) | The
Companys allocation of purchase price valued the acquired technology           by
calculating cash flow benefit as a direct result of the technology.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recorded a charge of $170 with respect to the OptimizeIT transaction related to
in process research and development for projects which have not yet reached technological
feasibility and which have no alternative future use.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Cyms and OptimizeIT transactions have been treated as asset acquisitions on the basis of
the fair values exchanged.
| | -----------------------------------------------------------------------------------------------------------------------

| | c. | Discontinued
operations:
| | -- | ------------------------

| | The
Company has accounted for discontinued operations, in accordance with EITF 03-13 Applying
the Conditions in Paragraph 42 of FASB Statement 144 in Determining Whether to Report
Discontinued Operations. As such, the results of operations, including revenues,
cost of revenues, operating expenses, and other income and expenses related to the prior
periods of the discontinued operation, have been reclassified in the accompanying
statements of operations as discontinued operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Statement
of operation of discontinued operations
| | -------------------------------------------------

| |                               | Year ended December 31,
| | ----------------------------- | -----------------------
|
|
|
|
| | Revenues                      |                        
| | Cost of revenues              |                        
| | Operating expenses            |                        
| |                               |                        
| |                               |                        
| | Operating loss                |                        
| | Gain derived from sale of the |                        
| | discontinued operations       |                        
| |                               |                        
| |                               |                        
| | Net income (loss)             |                        
| |                               |                        

F - 17

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 1:  GENERAL (Cont.)

| | Statement
of operation of Cash flows of discontinued operations
| | ---------------------------------------------------------------

| |                                                            | Year ended December 31,
| | ---------------------------------------------------------- | -----------------------
|
|
|
|
| | Cash flows from operating activities                       |                        
| | Gain (Loss) from discontinued operations                   |                        
| | Depreciation and amortization of equipment and intangibles |                        
| | Capital gain                                               |                        
| | Adjustments due to changes in working capital              |                        
| |                                                            |                        
| |                                                            |                        
| | Net cash flows used in operating activities                |                        
| |                                                            |                        
| |                                                            |                        
| | Cash flows from investing activities                       |                        
| | Communication sales costs                                  |                        
| |                                                            |                        
| |                                                            |                        
| | Net cash flows used in investing activities                |                        
| |                                                            |                        

| | 1. | Cease
the operations of Pacific Information Systems Inc
| | -- | -------------------------------------------------------

| | On
June 1, 1998, the Company acquired 100% of the share capital of Pacific Information
Systems Inc. (PacInfo), a U.S. corporation. PacInfo was a reseller of
computer networking products. During the fourth quarter of 2002, the Company ceased the
operation of Pacific. In year 2007 the Company recorded a non cash gain of $237 related
to this product line.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Sale
of communication segment:
| | -- | ------------------------------

| | On
December 31, 2005, the Company sold its communication segment, including its property and
equipment, goodwill, technology, trade name, existing distribution channels and related
contingent liability to the Office of the Chief Scientist to IP Gear Ltd. (IP Gear),
a wholly owned Israeli subsidiary of Qualmax. The consideration paid to the Company in
the transaction was approximately 3.2 million Qualmax shares of Common stock constituting
approximately 16% of Qualmaxs total issued and outstanding Common stock and $800 in
royalties to be paid at a rate of 4% from future revenues IP Gear will generate from the
disposed segment (Royalties) with the entire $800 due no later than 90 days
from the third anniversary of the closing of the transaction. In June 2006, the Company
received 250,000 of Qualmax shares, valued at $1.43 per share, as part of the Earn Out
Shares consideration.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company received certain piggy-back registration rights with respect to the Qualmax
shares. The Company does not have a representative on the Board of Qualmax.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Company and IP Gear entered into an Outsourcing Agreement, pursuant to
which the Company provided IP Gear with certain operating services relating to the sold
communication segment through December 31, 2006. For services rendered from April 2006
through December 2006, the Company charged IP Gear $240, which was paid by issuing the
Company Qualmax subsidiarys shares in December 2006, as part of an agreement signed
by the parties (see below).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 1:  GENERAL (Cont.)

| | The
Company also granted a bridge loan to IP Gear in the amount of $1,000. The term of the
loan is three years and it bears interest equal to the Prime rate plus 2.5%, up to a
maximum of 12%. Qualmax also issued to the Company a five-year warrant for the purchase
of up to 107,143 shares, constituting less than 1%, of its outstanding shares in Qualmax,
at the exercise price of $2.80 per share (Warrants). The Company received
certain piggy-back registration rights with respect to the shares underlying the Warrants.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
loan to IP gear was converted into shares as follow:
| | --------------------------------------------------------

| | a. | In
May 2006, Qualmax issued to the Company 244,755 shares, at a price of $1.43
               per share, resulting in an amount of $350.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------

| | b. | In
June 2006, Qualmax issued BOS an additional 174,825 shares, reducing the
               principal amount of the loan to $400.
| | -- | --------------------------------------------------------------------------------------------------------------------------------

| | c. | The
Company signed in December 2006 an agreement with Qualmax and its           subsidiaries,
NWB and IP Gear, pursuant to which, the outstanding debt of           Qualmax to the
Company, in the amount of $1,480 (which included long-term debt,           outsourcing
fees, royalties and other debts), was repaid to the Company through           the
issuance 16,446,544 shares of NWB.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys registration rights with respect to the Qualmax shares shall also apply to
NWB shares. In addition, the Company agreed to enter into a lock up agreement,
restricting the transfer of its share holdings in Qualmax and in NWB, for up to two years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with the transaction, the Company agreed to grant NWB, contingent upon the
satisfaction of certain conditions, a three-year option that will expire on December 31,
2009, to purchase up to 30% of the NWBs shares held by the Company, at prices
ranging from $0.12 to $0.24 per share of Common stock. As of December 31, 2008 the
conditions have not been met, hence the option has not been granted and the fair value of
the option is $0.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
year 2008 the company sold 6.6 million shares of NWB for total consideration of $165 and
recorded a gain of $8. During year 2008 the Company recorded losses in amount of $368 and
$376, to other-than-temporary impairment related to NWB and QMX (see note 2g).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 1:  GENERAL (Cont.)

| | As
of December 31, 2008 the company holds 17.87% of the issued and outstanding Common stock
of QMX and 2.38% of the issued and outstanding Common stock of NWB (see note 20a).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the restriction on the sale of shares held in NWB terminated and as
a result the shares should be recorded at fair value. Therefore, the Company accounts for
its holdings in Qualmax and NWB shares as available for sale in accordance with Statement
of Financial Accounting Standard 115 Accounting for Certain Investments in Debt and
Equity Securities. The investment in Qualmax, which is traded in the Pink Sheet
presented at cost according to APB 18 due to low trading volume in share.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the year ended December 31, 2006, the Companys consolidated financial statements
reflected a capital gain from the sale of the communication segment, which was determined
as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                 | Year ended December
31,
| | ----------------------------------------------- | -----------------------
|
|
|
|
| | Consideration:                                  |                        
| | Ordinary shares of Qualmax (1)                  |                        
| | 5.50652 series A Preferred stock of NWB (2)     |                        
| |                                                 |                        
| |                                                 |                        
| | Total consideration                             |                        
| |                                                 |                        
| |                                                 |                        
| | Cost:                                           |                        
| | Disposal of assets (liabilities) related to the |                        
| | communication segment                           |                        
| |                                                 |                        
| |                                                 |                        
| | Total cost                                      |                        
| |                                                 |                        
| |                                                 |                        
| | Capital gain                                    |                        
| |                                                 |                        

| | There | was
no capital gain in 2008 and 2007 with respect to the discontinued operation.
| | ----- | --------------------------------------------------------------------------------

| | (1) | Valued
at $1.43 per share.
| | --- | --------------------------

| | (2) | 5.50652
series A Preferred stock convertible into 16.5 million shares of Common           stock
of NWB. Each share of Common stock is valued at $0.09 per share.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 1:  GENERAL (Cont.)

| | 3. | On
October 1, 2007, the Company entered into an agreement with OptimizeIT to
          purchase its assets, for an aggregate consideration of $ 170 which was
paid           by issuance of 8,000 shares of the Company and a cash payment of $150. The
          assets of Optimize IT were transferred into the Company on October 1, 2007. In
          December 2008 the Company decided to cease the operation of this product line
          (see note 20b)
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Summarized
selected financial information and cash flows of the discontinued operations are as
follows:
| | -------------------------------------------------------------------------------------------------------

|                              | Year ended
December 31,
|----------------------------- | -----------------------
|
|
|
|
|Revenues                      |                        
|Cost of revenues              |                        
|                              |                        
|Operating expenses:           |                        
|Research and development      |                        
|Sales and marketing           |                        
|                              |                        
|Total Operating expenses      |                        
|                              |                        
|Operating loss                |                        
|Gain derived from sale of the |                        
|discontinued operations       |                        
|                              |                        
|                              |                        
|Net income (loss)             |                        
|                              |                        

| | The
results of operations, including revenues, cost of revenues, operating expenses and other
income and expenses of the discontinued product line operations for 2008, 2007 and 2006,
have been reclassified in the statements of operations. Taxes were not attributed to the
discontinued operations due to utilization of losses from previous years, for which a
valuation allowance was provided.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 2:  SIGNIFICANT
ACCOUNTING POLICIES

| | The
 consolidated  financial  statements are prepared  according to United States  generally
              accepted accounting principles ("U.S. GAAP").
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Use
of estimates:
| | -- | -----------------

| | The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ
from those estimates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 2:  SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | b. | Financial
statements in U.S. dollars:
| | -- | -------------------------------------

| | A
substantial portion of the Companys revenues is generated in U.S. dollar (dollars).
In addition, most of the Companys costs are incurred in dollars. Companys
management believes that the dollar is the primary currency of the economic environment
in which the Company operates. Thus, the functional and reporting currency of the Company
is the dollar.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured into U.S.
dollars in accordance with Statement 52 of the Financial Accounting Standards Board (FASB)
Foreign Currency Translation. All transactions gains and losses from the
remeasurement of monetary balance sheet items are reflected in the statement of
operations as financial income or expenses as appropriate.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
financial statements of certain subsidiary, whose functional currency is other than
dollar, have been translated into U.S. dollars. All balance sheet accounts have been
translated using the exchange rates in effect at the balance sheet date. Statement of
operations amounts have been translated using the average exchange rate for the period.
The resulting translation adjustments are reported as a component of shareholdersequity
in accumulated other comprehensive income (loss).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Principles
of consolidation:
| | -- | ----------------------------

| | The
consolidated financial statements include the accounts of the Company and its
subsidiaries. Intercompany transactions and balances including profits from intercompany
sales not yet realized outside the Company have been eliminated upon consolidation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Cash
equivalents:
| | -- | -----------------

| | Cash
equivalents are short-term highly liquid investments that are readily convertible to cash
purchased with original maturities of less than three months.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Inventories:
| | -- | ------------

| | Inventories
are valued at the lower of cost or market value. Cost is determined as moving average
cost method.
| | --------------------------------------------------------------------------------------------------------------

| | Inventory
write-offs are provided to cover risks arising from slow-moving items or technological
obsolescence. As of December 31, 2008 and 2007, inventory is presented net of $1,059 and
$358, respectively, for technological obsolescence and slow moving items (see also Note
5).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Grants
and royalty-bearing grants:
| | -- | ----------------------------------

| | Grants
and royalty-bearing grants from the Chief Scientist of the Ministry of Industry and Trade
in Israel for funding certain approved research and development projects are recognized
at the time the Company is entitled to such grants, on the basis of the related costs
incurred, and are presented as a deduction of research and development costs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | There
were no grants in 2008, 2007 and 2006.
| | --------------------------------------------

F - 22

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 2:  SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | g. | Investment
in other companies:
| | -- | ------------------------------

| | 1. | Investment
in NWB and QMX:
| | -- | --------------------------

| | The Company accounts for its holdings
NWB shares as available for sale in accordance with Statement of Financial Accounting
Standard 115 Accounting for Certain Investments in Debt and Equity Securities.
Unrealized gains and losses, net of the related tax effect as of December 31, 2008, are
included in other comprehensive income. The investment in Qualmax, which is traded in the
Pink Sheet presented at cost according to APB 18 due to hardly no trading volume in share.
Management evaluates investments in other companies for evidence of other than temporary
declines in value. During 2008 and 2007, an impairment loss, due to other than temporary
decline, of $744 and $5,588 has been recorded, accordingly and presented in other
expenses, net in the consolidated statements of operations for both investments.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008 the Company holds 17.87% of the issued and outstanding Common stock
of QMX and 2.38% of the issued and outstanding Common stock of NWB (see note 20a)
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the Companys policy, FASB Staff Position (FSP) No. SFAS 115-1 The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments and
SAB Topic 5M Other Than Temporary Impairment Of Certain Investments In Debt And
Equity Securities, the Company recognizes an impairment charge when a decline in
the fair value of its marketable securities below the cost basis is judged to be
other-than-temporary. The Company considers various factors in determining whether to
recognize an impairment charge, including the Companys intent and ability to hold
the marketable securities for a period of time sufficient to allow for any anticipated
recovery in market value, the length of time and extent to which the fair value has been
less than the cost basis and the financial condition and near-term prospects of the
issuers. If, after consideration of all available evidence to evaluate the realizable
value of its marketable securities, impairment is determined to be other than- temporary,
then an impairment loss should be recognized equal to the difference between the
marketable securities carrying amount and its fair value. Accordingly, during 2008
and 2007, an impairment loss, due to other than temporary decline, of $744 and $5,588 has
been recorded and presented in other expenses, net in the consolidated statements of
operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Investment
in Surf:
| | -- | -------------------

| | The
Company holding in Surf as of December 31, 2008 is 6.1% of Surfs issued and
outstanding shares. The Companys investment in Surf is accounted for based on the
cost accounting method.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys investment in Surf is reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the investment may not be
recoverable, in accordance with Accounting Principle Board Opinion 18 The Equity
Method of Accounting for Investments in Common Stock (APB 18). During
2008, an impairment of $712 has been recorded in other expenses in the
statement of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 2:  SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | h. | Property,
plant and equipment:
| | -- | ------------------------------

| | Property,
plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is
calculated by using the straight line method over the estimated useful lives of the
assets, at the following annual rates:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                | % | 
| | ------------------------------ | - | 
|
|
|
|
| | Computers and software         |   | 
| | Office furniture and equipment |   | 
| | Leasehold improvements         |   | 
| |                                |   | 
| | Motor vehicles                 |   | 
| | Plant                          |   | 

| | i. | Impairment
of long-lived assets:
| | -- | --------------------------------

| | The
Companys long-lived assets are reviewed for impairment in accordance with Statement
of Financial Accounting Standard 144 Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144) whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to the future undiscounted cash flows expected to be generated by the
assets. If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the fair value
of the assets. During 2008, 2007 and 2006, no impairment losses have been identified.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | j. | Goodwill:
| | -- | ---------

| | Goodwill represents excess of the
costs over the net assets of businesses acquired. Under SFAS 142 goodwill is not amortized
but instead is tested for impairment at least annually or between annual tests in certain
circumstances, and written-down when impaired. Goodwill attributable to each of the
reporting units is tested for impairment by comparing the fair value of each reporting
unit with its carrying value. The reporting units of the Company for purposes of the
impairment test are: the Companys Mobile and RFID operating segments, and the Supply
Chain segment, as these are the components of the business for which discrete financial
information is available and segment management regularly reviews the operating results of
those components. Fair value is determined using income and market approaches. Significant
estimates used in the methodologies include estimates of future cash flows, future
short-term and long-term growth rates, weighted average cost of capital and estimates of
market multiples for each of the reportable units. During 2008 impairment in the amount of
$1,873 was recorded attributable to the supply chain reporting unit. In years 2007 and
2006, no impairment losses have been identified.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 2:  SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | k. | Research
and development costs:
| | -- | -------------------------------

| | Statement
of Financial Accounting Standards 86 Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed, (SFAS 86) requires
capitalization of certain software development costs subsequent to the establishment of
technological feasibility. Based on the Companys product development process,
technological feasibility is established upon completion of a working model. Research and
development costs incurred in the process of developing product improvements or new
products, are generally charged to expenses as incurred, net of royalty baring grants from the Office of the Chief Scientist of the
Israeli Ministry of Industry and Trade. Costs incurred by the Company between completion
of the working model and the point at which the product is ready for general releases are
insignificant.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | l. | Severance
pay:
| | -- | --------------

| | The
Companys liability for severance pay for Israeli resident employees is calculated
pursuant to the Israeli severance pay law based on the most recent salary of the
employees multiplied by the number of years of employment as of the balance sheet date.
Employees are entitled to one months salary for each year of employment or a
portion thereof. The Companys liability for its Israeli resident employees is
covered by insurance policies designed solely for distributing severance pay. The value
of these policies is recorded as an asset in the Companys balance sheet.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
insurance policies include profits accumulated up to the balance sheet date. The
insurance policies may be withdrawn only upon complying with the Israeli severance pay
law or labor agreements. The value of the deposited funds is based on the cash
surrendered value of these policies and includes profits.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys payroll includes employees regarding whom its liability for severance pay
is calculated pursuant to article 14 of Israels Severance Pay Law. The Company
currently deposits the corresponding amounts to the relevant pension funds. As a result,
the Company is released from the fulfillment of the obligation pursuant to Israels
Severance Pay Law. The aforementioned deposited amounts are not reflected on the
financial statements due to the fact that they are not under the Companys control.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
expenses for 2008, 2007 and 2006 amounted to $593, $275 and $298, respectively.
| | -----------------------------------------------------------------------------------------

| | m. | Revenue
recognition:
| | -- | --------------------

| | The
Company sells its products through direct sales, distributors and resellers channels.
| | -----------------------------------------------------------------------------------------

| | The
Company derives its revenues from the sale of products, license fees for its products,
commissions, support and services.
| | -----------------------------------------------------------------------------------------------------------------------------

F - 25

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 2:  SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | Revenues from product sales, related
to both supply chain and Mobile and RFID segments, are recognized in accordance with Staff
Accounting Bulletin 104 Revenue Recognition in Financial Statements (SAB
104) when delivery has occurred, persuasive evidence of an arrangement exists, the
vendors fee is fixed or determinable, no further obligation exists, and
collectibility is reasonably assured.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Most
of the Companys revenues are generated from sales of its products directly to
end-users and indirectly, mostly through independent distributors. Other than pricing
terms which may differ due to the volume of purchases between distributors and end-users,
there are no material differences in the terms and arrangements involving direct and
indirect customers. The majority of the Companys products sold through agreements
with independent distributors are non-exchangeable, non refundable, non-returnable
without any rights of price protection or stock rotation. Accordingly, the Company
considers the distributors as end-users.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue from license fees, related to
the Mobile and RFID segment, is recognized in accordance with Statement of Position
(SOP) 97-2 Software Revenue Recognition, when persuasive
evidence of an agreement exists, delivery has occurred, no significant obligations with
regard to implementation remain, the fee is fixed or determinable, and collectibility is
probable. The Company generally does not grant a right of return to its customers. When a
right of return exists, the Company defers revenue until the right of return expires, at
which time revenue is recognized provided that all other revenue recognition criteria have
been met.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from maintenance and support are recognized ratably over the period of the support
contract. The fair value of the support is determined based on the price charged when it
is sold separately or renewed.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
regard to software arrangements involving multiple elements such as software product and
maintenance and support, the Company has adopted Statement of Position No. 98-9, Modification
of SOP No. 97-2, Software Revenue Recognition with Respect to Certain Transactions (SOP
No. 98-9). According to SOP No. 98-9, revenues should be allocated to the
different elements in the arrangement under the residual method when Vendor
Specific Objective Evidence (VSOE) of fair value exists for all undelivered
elements and no VSOE exists for the delivered elements. Under the residual method, at the
outset of the arrangement with the customer, the Company defers revenue for the fair
value of its undelivered elements (maintenance and support) and recognizes revenue for
the remainder of the arrangement fee attributable to the elements initially delivered in
the arrangement (software product) when the basic criteria in SOP No. 97-2 have been met.
Any discount in the arrangement is allocated to the delivered element. Maintenance and
support revenue is deferred and recognized on a straight-line basis over the term of the
maintenance and support agreement. The VSOE of fair value of the undelivered elements
(maintenance and support) is determined based on the price charged for the undelivered
element when sold separately.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 2:  SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | n. | Income
taxes:
| | -- | -------------

| | The
Company and its subsidiaries account for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes(SFAS
No. 109). This Statement prescribes the use of the liability method whereby
deferred tax assets and liability account balances are determined based on the
differences between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company and its subsidiaries provide a valuation allowance,
if necessary, to reduce deferred tax assets to the amounts that are more likely-than-not
to be realized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN
48), Accounting for Uncertainty in Income Taxes  An interpretation of FASB
Statement No. 109.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Interpretation clarifies the accounting for uncertainties in income taxes recognized in
an enterprises financial statements and prescribes a recognition threshold and
measurement attributes of income tax positions taken or expected to be taken on a tax
return. Under FIN 48, the impact of an uncertain tax position taken or expected to be
taken on an income tax return must be recognized in the financial statements at the
largest amount that is more-likely-than-not to be sustained upon audit by the relevant
taxing authority. An uncertain income tax position will not be recognized in the
financial statements unless it is more likely than not of being sustained. The Company
adopted the provisions of FIN 48 as of January 1, 2007. The impact of adopting FIN 48 was
insignificant to the Companys consolidated financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o. | Concentrations
of credit risk:
| | -- | ------------------------------

| | Financial
instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents, trade receivables, other accounts receivable
and marketable securities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
trade receivables of the Company are derived from sales to customers located primarily in
Israel, South America, North America and Europe. The Company generally does not require
collateral; however, in certain circumstances, the Company may require letters of credit,
other collateral, additional guarantees or advanced payments. An allowance for doubtful
accounts is determined with respect to specific debts that are doubtful of collection.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has no off-balance-sheet concentrations of credit risk such as foreign exchange
contracts, option contracts or other foreign hedging arrangements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Basic
and diluted net earnings (loss) per share:
| | -- | ------------------------------------------------

| | Basic
net earnings (loss) per share are calculated based on the weighted average number of
Ordinary shares outstanding during each year. Diluted net earnings (loss) per share is
calculated based on the weighted average number of Ordinary shares outstanding during
each year, plus dilutive potential Ordinary shares considered outstanding during the
year, in accordance with SFAS 128, Earnings Per Share.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 2:  SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | The
total number of shares related to the outstanding options and warrants excluded from the
calculations of diluted net earnings (loss) per share, since they would have an
anti-dilutive effect, were 4,013,309, 3,305,333 and 1,386,424 for the years ended
December 31, 2008, 2007 and 2006, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | q. | Accounting
for share-based compensation:
| | -- | ----------------------------------------

| | On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards 123
(revised 2004), Share-Based Payment (SFAS 123(R)) which requires
the measurement and recognition of compensation expense based on estimated fair values
for all share-based payment awards made to employees and directors. SFAS 123(R) supersedes Accounting Principles
Board Opinion 25, Accounting for Stock Issued to Employees (APB 25),
for periods beginning in fiscal 2006. The Company has applied the provisions of Staff
Accounting Bulletin 107 (SAB 107) in its adoption of SFAS 123(R).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
123(R) requires companies to estimate the fair value of equity-based payment awards on
the date of grant using an option pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as an expense over the requisite
service periods in the Companys consolidated statement of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the Accounting Standard starting from January 1, 2006,
the first day of the Companys fiscal year 2006. Under that transition method,
compensation cost recognized in the year ended December 31, 2006 includes: (a)
compensation cost for all share-based payments granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123, and (b) compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS 123(R). Results for prior periods have not been
restated.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognizes compensation expenses for the value of its awards granted based on the
straight line method over the requisite service period of each of the awards, net of
estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Estimated forfeitures are based on actual historical pre-vesting
forfeitures. The Company considers many factors when estimating forfeitures, including
employee class and historical experience.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 2:  SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | The
Company estimates the fair value of stock options granted using the Black-Scholes options
pricing model. The option-pricing model requires a number of assumptions, of which the
most significant are expected stock price volatility and the expected option term.
Expected volatility was calculated based upon actual historical stock price movements over the
most recent periods ending on the date of grant, equal to the expected option term. The
expected option term represents the period that the Companys stock options are
expected to be outstanding and was determined based on the simplified method permitted by
SAB 107 and extended by SAB 110 as the average of the vesting period and the contractual
term. The Company currently use the simplified method as adequate historical experience
is not available to provide a reasonable estimate. The Company adopted SAB 110 effective
January 1, 2008 and will continue to apply the simplified method until enough historical
experience is available to provide a reasonable estimate of the expected term for stock
option grants. The risk-free interest rate is based on the yield from U.S. Treasury
zero-coupon bonds with an equivalent term. The Company has historically not paid
dividends and has no foreseeable plans to pay dividends.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value for options granted in 2008, 2007 and 2006 is estimated on the date of grant
using a Black-Scholes options pricing model with the following weighted average
assumptions:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                      | Year ended December 31,
| | -------------------- | -----------------------
|
|
|
|
| | Risk free interest   |                        
| | Dividend yields      |                        
| | Volatility           |                        
| | Expected option term |                        
| | Forfeiture rate      |                        

| | During
2008, 2007 and 2006, the Company recognized stock-based compensation expense related to
employee stock options in the amount of $ 581, $516 and $ 727 respectively as
follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                        | Year ended December 31,
| | -------------------------------------- | -----------------------
|
|
|
|
| | Selling and marketing                  |                        
| | General and administrative             |                        
| |                                        |                        
| |                                        |                        
| | Total Stock-based compensation expense |                        
| |                                        |                        

| | The
Company applies SFAS 123 Accounting for stock Based Compensation (SFAS
123) and EITF 96-18, Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Conjunction With, Selling, Goods or Services,
with respect to warrants issued to non-employees. SFAS 123 requires the use of option
valuation models to measure the fair value of the warrants at the date of grant.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 2:  SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | r. | Fair
value of financial instruments:
| | -- | ------------------------------------

| | The
following methods and assumptions were used by the Company in estimating fair value
disclosures for financial instruments:
| | ------------------------------------------------------------------------------------------------------------------------------

| | The
carrying amounts of cash and cash equivalents, trade receivables, other accounts
receivable and trade payables approximate their fair value due to the short-term
maturities of such instruments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements and,
effective October 10, 2008, adopted FSP No. SFAS 157-3, Determining the Fair Value
of a Financial Asset When the Market for That Asset Is Not Active, except as it
applies to the nonfinancial assets and nonfinancial liabilities subject to FSP 157-2.
SFAS 157 clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in pricing
an asset or a liability. As a basis for considering such assumptions, SFAS 157
establishes a three-tier value hierarchy, which prioritizes the inputs used in the
valuation methodologies in measuring fair value:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Level
1  Observable inputs that reflect quoted prices (unadjusted) for identical assets
or liabilities in active markets.
| | --------------------------------------------------------------------------------------------------------------------------

| | Level
2  Include other inputs that are directly or indirectly observable in the
marketplace.
| | ---------------------------------------------------------------------------------------------

| | Level
3  Unobservable inputs which are supported by little or no market activity.
| | ----------------------------------------------------------------------------------

| | The
fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | s. | Impact of recently issued accounting pronouncements:
| | -- | ----------------------------------------------------

| | In
March 2008, the FASB issued Statement 161 Disclosures about Derivative Instruments
and Hedging Activities (SFAS 161) an amendment to FASB No. 133.  This
statement changes the disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures about (a)
how and why and entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an
entitys financial position, financial performance, and cash flows.  This
statement is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008.  Early application is encouraged.  The
Company does not expect the adoption of SFAS 161 to have a material impact on its
financial position, results of operations or cash flows.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 2:  SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | In
December 2007, the Financial Accounting Standards Board ratified a consensus opinion
reached by the Emerging Issues Task Force (EITF) on EITF Issue 07-1, Accounting
for Collaborative Arrangements (EITF 07-1). The guidance in EITF 07-1
defines collaborative arrangements and establishes presentation and disclosure
requirements for transactions within a collaborative arrangement (both with third parties
and between participants in the arrangement).  The consensus in EITF 07-1 is
effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2008. The consensus requires retrospective application to all
collaborative arrangements existing as of the effective date, unless retrospective
application is impracticable. The impracticability evaluation and exception should be
performed on an arrangement-by-arrangement basis.  The Company is evaluating
the impact EITF 07-1 will have on its financial statements. The Company currently does
not believe that the adoption of EITF 07-1 will have a significant effect on its
financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS 160). SFAS 160 amends ARB 51,
Consolidated Financial Statements, to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 also changes the way the consolidated income
statement is presented by requiring consolidated net income to be reported at amounts
that include the amounts attributable to both the parent and the noncontrolling interest.
It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the
noncontrolling interest. SFAS 160 requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated and requires expanded disclosures in the
consolidated financial statements that clearly identify and distinguish between the
interests of the parent owners and the interests of the noncontrolling owners of a
subsidiary. SFAS 160 is effective for fiscal periods, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The adoption of SFAS 160
is not expected to have a material effect on accounting for current subsidiaries.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued SFAS 141(R), Business Combinations(SFAS
141(R)). This Statement replaces SFAS No. 141, Business Combinations,
and requires an acquirer to recognize the assets acquired, the liabilities assumed,
including those arising from contractual contingencies, any contingent consideration and
any noncontrolling interest in the acquiree at the acquisition date, measured at their
fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R)
also requires the acquirer in a business combination achieved in stages (sometimes
referred to as a step acquisition) to recognize the identifiable assets and liabilities,
as well as the noncontrolling interest in the acquiree, at the full amounts of their fair
values (or other amounts determined in accordance with SFAS 141(R)). In addition, SFAS
141(R)s requirement to measure the noncontrolling interest in the acquiree at fair
value will result in recognizing the goodwill attributable to the noncontrolling interest
in addition to that attributable to the acquirer.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
141(R) applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. As such,  the  adoption of SFAS 141(R) is not  expected to have a material  effect on
                     accounting for the Company current subsidiaries.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 2:  SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | In
April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets. FSP 142-3 is effective for fiscal years beginning after December
15, 2008. The Company does not expect the adoption of FSP 142-3 will have a material
impact on the Companys consolidated financial position, results of operations and
cash flows.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. It is effective 60 days following
the SECs approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. The Company statements evaluated the impact of FAS No. 162
on the Companys financial statement and the adoption of the statement did not have
a material effect on the Companys financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2008, the FASB issued FASB Staff Position (FSP) FAS No. 157-2, Effective
Date of FASB Statement No. 157 (FSP FAS 157-2), to delay the effective
date of FASB Statement 157 for one year for certain nonfinancial assets and nonfinancial
liabilities, excluding those that are recognized or disclosed in financial statements at
fair value on a recurring basis (that is, at least annually). For purposes of applying
the FSP FAS 157-2, nonfinancial assets and nonfinancial liabilities include all assets
and liabilities other than those meeting the definition of a financial asset or a
financial liability in FASB Statement 159. FSP FAS 157-2 defers the effective date of
Statement 157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of this FSP FAS 157-2. The Company
does not expect the adoption of FAS 157 for certain nonfinancial assets and nonfinancial
liabilities, excluding those that are recognized or disclosed in the financial statements
at fair value on a recurring basis, to have a material impact on its financial position,
statements of operations or cash flows.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
October 29, 2008, the FASB issued FSP No.132 (R)-a, Employers Disclosures
about Pensions and Other Postretirement Benefits, to require that an employer
disclose the following information about the fair value of plan assets: 1) the level
within the fair value hierarchy in which fair value measurements of plan assets fall; 2)
information about the inputs and valuation techniques used to measure the fair value of
plan assets; and 3) a reconciliation of beginning and ending balances for fair value
measurements of plan assets using significant unobservable inputs.  The FSP
will be effective for fiscal years ending after December 15, 2009, with early application
permitted. Application of the FSP would not be required for earlier periods that are
presented for comparative purposes.  The company is currently evaluating the potential impact of adopting this FSP on its disclosures in the financial
statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 3:  OTHER ACCOUNTS
RECEIVABLE AND PREPAID EXPENSES

| |                        | December 31,
| | ---------------------- | ------------
|
|
|
|
| | Government authorities |             
| | Advances to suppliers  |             
| | Prepaid expenses       |             
| | Deferred tax           |             
| | Other                  |             
| |                        |             
| |                        |             
| |                        |             
| |                        |             

# NOTE 4:  FAIR VALUE OF
FINANCIAL INSTRUMENTS

| | In
accordance with SFAS 157, the Company measures its investment in NWB and Surf at fair
value. Investment in NWB is classified within level 1 because it is valued using quoted
market prices in an active market. Investment in Qualmax is classified within level 2
because it is valued by other inputs that are directly or indirectly observable in the
marketplace. Investment in Surf is classified within Level 3, because it valued using
unobservable inputs which are not supported by market activity.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys financial assets and liabilities measured at fair value on a recurring
basis, consisted of the following types of instruments as of December 31, 2008:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                    | Level 1 | Level 2 | Level 3
| | ------------------ | ------- | ------- | -------
|
|
|
|
| | Investment in NWB  |         |         | $      
| |                    |         |        
| | Investment in QMX  |         |         |        
| |                    |         |        
| | Investment in Surf |         |         |        
| |                    |         |         |        
| |                    |         |        
| | Total              |         |         | $      

| | The
 following  table  presents the changes in Level 3  instruments  measured on a recurring
              basis for the year ended December 31, 2008. The Company's  Level 3
instrument  consists of a               cost method  investment in Surf (see Note 6).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                        | Investment in Surf
| | ---------------------- | ------------------
|
|
|
|
| | Balance, January 2008  |                   
| |                        |                   
| | Transfer to Level 3    |                   
| |                        |                   
| | Total realized losses  |                   
| |                        |                   
| |                        |                   
| | Balance, end of period |                   
| |                        |                   

NOTE 5:  INVENTORIES

| |                   | December 31,
| | ----------------- | ------------
|
|
|
|
| | Raw materials     |             
| | Finished products |             
| |                   |             
| |                   |             
| |                   |             
| |                   |             

| | The
inventories are presented net of write-off for technological obsolescence and slow moving
items of $1,059 and $358 as of December 31, 2008 and 2007, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 6:  INVESTMENT IN
OTHER COMPANIES

| | The Companys investments in companies comprise of:
| | ---------------------------------------------------

| |                                               | December 31,
| | --------------------------------------------- | ------------
|
|
|
|
| | Surf Communication Systems Ltd. (see note 2g) |             
| |                                               |             
| | Qualmax Inc. (see note 1d and 2h)             |             
| |                                               |             
| | New World Brands Inc. (see note 1d and 2h)    |             
| |                                               |             
| |                                               |             
| |                                               |             
| |                                               |             

# NOTE 7:  PROPERTY, PLANT
AND EQUIPMENT

| |                                  | December 31,
| | -------------------------------- | ------------
|
|
|
|
| | Cost:                            |             
| | Computers and software           |             
| | Office furniture and equipment   |             
| | Leasehold improvements and plant |             
| | Vehicles                         |             
| |                                  |             
| |                                  |             
| |                                  |             
| |                                  |             
| | Accumulated depreciation:        |             
| | Computers and software           |             
| | Office furniture and equipment   |             
| | Leasehold improvements and plant |             
| | Motor vehicles                   |             
| |                                  |             
| |                                  |             
| |                                  |             
| |                                  |             
| |                                  |             
| | Depreciated cost                 |             
| |                                  |             

| | Depreciation
expenses amounted to $261, $123 and $171 for the years ended December 31, 2008, 2007
and 2006, respectively.
| | -------------------------------------------------------------------------------------------------------------------------

F - 34

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 8:  OTHER
INTANGIBLE ASSETS

| |                           | December 31,
| | ------------------------- | ------------
|
|
|
|
| | Cost:                     |             
| | Backlog                   |             
| | Non-competing rights      |             
| | Technology                |             
| | Brand name                |             
| | Customer list             |             
| |                           |             
| |                           |             
| |                           |             
| |                           |             
| |                           |             
| | Accumulated amortization: |             
| | Backlog                   |             
| | Non-competing rights      |             
| | Technology                |             
| | Brand name                |             
| | Customer list             |             
| |                           |             
| |                           |             
| |                           |             
| |                           |             
| |                           |             
| | Amortized cost            |             
| |                           |             

| | Amortization
expenses amounted to $413, $439 and $207 for the years ended December 31, 2008, 2007 and
2006, respectively.
| | -------------------------------------------------------------------------------------------------------------------------

| | Estimated
amortization expenses for the years ended:
| | ----------------------------------------------------

| |                     | December 31,
| | ------------------- | ------------
|
|
|
|
| | 2009                |             
| | 2010                |             
| | 2011                |             
| | 2012                |             
| | 2013 and thereafter |             
| |                     |             
| |                     |             
| |                     |             

F - 35

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 9:  GOODWILL

| | Goodwill
attributed to operating segments for the years ended December 31, 2008 and 2007 is as
follows:
| | -------------------------------------------------------------------------------------------------------

| |                                 | Mobile and
RFID | Supply
chain solutions | Total
| | ------------------------------- | --------------- | ---------------------- | -----
|
|
|
|
| | Balance as of January 1, 200$   |                 |                        | $    
| |                                 |                 |                       
| | Acquisition of Summit           |                 |                        |      
| |                                 |                 |                        |      
| |                                 |                 |                       
| | Balance as of December 31, 2007 |                 |                        | $    
| |                                 |                 |                       
| | Acquisition of Summit           |                 |                        |      
| |                                 |                 |                       
| | Acquisition of Dimex            |                 |                        |      
| |                                 |                 |                       
| | Impairment                      |                 |                        |      
| |                                 |                 |                        |      
| |                                 |                 |                       
| | Balance as of December 31, 2008 |                 |                        | $    
| |                                 |                 |                        |      

| | In
accordance with Statement of Financial Accounting Standards No. 142, (SFAS 142),
Goodwill and Other Intangible Assets, goodwill is not amortized, but instead is reviewed
and tested for impairment at least annually and whenever events or circumstances occur
which indicate that goodwill might be impaired. Impairment of goodwill is tested at the
Companys reporting unit level by comparing the carrying amount, including goodwill,
to the fair value. In performing the analysis, the Company uses the best information
available, including reasonable and supportable assumptions and projections. If the
carrying amount of the Company exceeds its implied fair value, goodwill is considered
impaired and a second step is performed to measure the amount of impairment loss, if any.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection to the annual impairment test perform on December 31, of each year and due to
the decline of the Companys market capitalization as result of the overall global
economic conditions and its impact on the Companys business operations as of
December 31, 2008, it was determined that goodwill has been impaired. The Company assess
whether goodwill carried on the books need to be written down.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company assets whether the goodwill carried in the books is in accordance with the
guidance set forth in paragraphs 19-22 of SFAS 142, which requires a two-step analysis.
The first step used the Discounted Cash flow approach to measure the fair value of the
reporting units of the Company, the result of which indicated that the carrying amount of
the Supply chain reporting unit, including goodwill, exceeded its fair value. The second
step was then conducted in order to measure the amount of impairment loss, by means of a
comparison between the implied fair value of the goodwill and the carrying amount of the
goodwill. In the second step, fair value of the supply chain reporting unit of the
Company, as determined in the first step, was assigned to the reporting units
individual assets and liabilities. The excess of the fair value of the reporting unit
over the amounts assigned to its assets and liabilities represented the amount of the
implied fair value of the goodwill. The excess of the current amount of goodwill over the
implied fair value of goodwill was identified as the amount of the impairment loss.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 36

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 10:  SHORT-TERM
BANK LOANS

| | Loan currency          | Weighted
Interest
Rate as of
December
31, 2008 | December 31,
| | ---------------------- | ---------------------------------------------- | ------------
|
|
|
|
| | NIS                    |                                                |             
| | Euro                   |                                                |             
| | $                      |                                                |             
| |                        |                                                |             
| |                        |                                                |             
| | Add current maturities |                                                |             
| |                        |                                                |             
| |                        |                                                |             
| |                        |                                                |             
| |                        |                                                |             

| | The
repayment the Companys bank debt is secured by a first priority floating charge on
all of the Companys assets, and by a first priority fixed charge on all of the
Companys issued and unpaid-for share capital, its goodwill and its shares of the
subsidiaries. In addition, the Company and its subsidiaries entered into a series of
inter company guarantees in favor of its lenders.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companies loan agreements also contain various covenants which require that the Company
maintains certain financial ratios related to shareholders equity and operating
results. As of December 31 2008, the Company meet the Banks covenants as revised
(see note 20g).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 11:  ACCRUED
EXPENSES AND OTHER LIABILITIES

| |                                            | December 31,
| | ------------------------------------------ | ------------
|
|
|
|
| | Government of Israel - royalties and V.A.T |             
| | Professional services                      |             
| | Short term deferred tax                    |             
| | Liability to Dimex sellers (1)             |             
| | Other                                      |             
| |                                            |             
| |                                            |             
| |                                            |             
| |                                            |             

| | (1)
See Note 20c.
| | -----------------

F - 37

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 12:  LONG-TERM BANK
LOANS

| | a. | Classified
by linkage terms and interest rates, the total amount of the loans           is as
follows:
| | -- | ------------------------------------------------------------------------------------------------------

| | Loan currency             | Weighted
Interest
Rate as of
December
31, 2008 | December 31,
| | ------------------------- | ---------------------------------------------- | ------------
|
|
|
|
| | NIS                       |                                                |             
| | $                         |                                                |             
| |                           |                                                |             
| |                           |                                                |             
| | Less - current maturities |                                                |             
| |                           |                                                |             
| |                           |                                                |             
| |                           |                                                |             
| |                           |                                                |             

| | The
repayment of the Companys bank debt is secured by a first priority floating charge
on all of the Companys assets, present and future as they may be changing from time
to time, and by a first priority fixed charge on all of the Companys issued and
unpaid-for share capital, its goodwill and its shares of the subsidiaries. In addition,
the Company and its subsidiaries entered into a series of inter company guarantees in
favor of its lenders.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Companys loan agreements
also contain various covenants which require that the Company maintain certain financial
ratios related to shareholders equity and operating results. As of December 31 2008,
the Company meet the Banks covenants as revised (see note 20g)
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | The
loans mature in the following years subsequent to the balance sheet dates:
| | -- | ------------------------------------------------------------------------------

| |                                 | 
| | ------------------------------- | 
|
|
|
|
| | First year (current maturities) | 
| | 2010                            | 
| | 2011                            | 
| | 2012                            | 
| | 2013                            | 

F - 38

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 13:  LONG-TERM
CONVERTIBLE NOTE

| | In September 2005, the Company
entered into a Second Securities Purchase Agreement (the Second Purchase
Agreement) with the Investor, under which the Company issued to the Investor in a
private placement (i) a Secured Convertible Term Note of a $1,500 principal amount, due
September 2008 (the Note), and (ii) a warrant to purchase 73,052 ordinary
shares at an exercise price of $4.04 per share (the Warrant). The Warrant is
exercisable, in whole or in part, until September 29, 2012. Pursuant to its undertaking in
the Registration Rights agreement with the Investor, the Company filed with the Securities
and Exchange Commission a registration statement on Form F-3 covering the resale of
Ordinary shares that is issuable upon conversion of the Note and/or exercise of the
Warrants, and/or issuable in payment of principal and interest on the Note.. The
registration statement became effective on February 8, 2006.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 17, 2006 the Company entered into a Third Securities Purchase Agreement (the Third
Agreement) with the Investor under which the Company issued to the Investor in a
private placement (i) a third Convertible Term Note of a $1,500 principal amount, due
August 2009 (the Note), and (ii) a warrant to purchase 73,052 Ordinary shares
at an exercise price of $4.04 per share (the Warrant). The Note is
convertible into Ordinary shares at a price of $3.08 per share for the first 500,000 and
$4.08 for any additional amount payable thereunder.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
registration statement became effective on December 5, 2006.
| | ----------------------------------------------------------------

| | On
June 21, 2007, the Company entered into an agreement with the Investor, pursuant to which
the Investor converted the entire outstanding principal amount of Convertible Note of the
Second and the Third Agreements of approximately $ 2,223 into 878,670 Ordinary Shares of
the Company at a conversion price of $2.53. As a result the Company recorded expenses
upon conversion of $611 in year 2007.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 14:  COMMITMENTS
AND CONTINGENT LIABILITIES

| | a. | Commitments:
| | -- | ------------

| | 1. | Royalty
commitments:
| | -- | --------------------

| | a) | Under
the Companys research and development agreements with the Office of           the
Chief Scientist (OCS) and pursuant to applicable laws, the           Company
is required to pay royalties at the rate of 3.5% of sales of products           developed
with funds provided by the OCS, up to an amount equal to 100% of the           research
and development grants (dollar-linked) received from the OCS. The           obligation to
pay these royalties is contingent upon actual sales of the           products. Royalties
payable with respect to grants received under programs           approved by the OCS
after January 1, 1999, are subject to interest on the U.S.           dollar-linked value
of the total grants received at the annual rate of LIBOR           applicable to U.S.
dollar deposits at the time the grants are received. No           grants were received
during the years 2006 through 2008.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the Company has an outstanding contingent obligation to pay
royalties, including interest, in the amount of approximately $3,474, in respect of these
grants.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 39

---

---

# NOTE 14:  COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

| | b) | The
Israeli Government, through the Overseas Marketing Fund, awarded the           Company
grants for participation in expenses for overseas marketing. The Company           is
committed to pay royalties to the Fund for Encouragement of Marketing
          Activities at the rate of 3% of the increase in export sales, up to the amount
          of the grants received by the Company linked to the dollar and bearing
interest.           No grants were received during the years 2006 through 2008.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the Company has an outstanding contingent obligation to pay
royalties including interest of $84 with respect to these grants.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Other
commitments:
| | -- | ------------------

| | The
facilities of the Company are rented under operating lease agreements that expire on
various dates ending in 2012. Minimum future rental payments for 2009, 2010, 2011, and
2012 are $132, $63, $58 and $5 respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys motor vehicles are rented under various cancelable operating lease
agreements. The lease agreements for the motor vehicles expire on various dates ending in
2009. The maximum breach of contract fees can amount to $71.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Lease
payments for the facilities occupied by the Company and the Companys motor vehicles
in 2008, 2007 and 2006 amounted to $699, $407 and $343, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Litigation
| | -- | ----------

| | 1. | In
January 2008, a former employee of the Company, filed a claim against the
               Company in the Labor Court in Tel Aviv, for severance payments in the
amount of                NIS 306 (approximately $80). The plaintiff also demands
compensation for delay                in payment of the said severance pay of NIS 207
(approximately $54). The Company                is yet to file its statement of defense.
The Companys financial statements                include a provision in this
respect.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | A
former employee of the Company claims before the Ministry of Defense Employment Committee
(which is a special tribunal) that the Company alleged breach the law by terminating his
employment. on The employee claims from the Company compensation in the amount of o $40
and additional amount of approximately $15. The Company assesses the prospect of claimant
as remote. The Companys financial statements do not include a provision in this
respect.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | In April 2006, BOSâNOVA EURL, a
French company and former distributor of the Company, served the Company with a
claim filed with the French Trade Tribunal alleging breach of exclusive distributor rights
in France and asserting ownership to certain intellectual property rights in the
Companys products. The plaintiff seeked an amount of approximately 3.3 million Euros
and additional remedies. In June 29, 2008, the parties entered into a settlement
agreement, pursuant to which they waive their respective claims against each other and
shall terminate the court proceedings they had initiated on the basis of these claims. In
connection with such settlement, the Company paid BOSâNOVA an amount of $20and offer
it a rebate of $40on future purchases.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 40

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 15: 
SHAREHOLDERS EQUITY

| | a. | Private
placements:
| | -- | -------------------

| | In
April 2007, the Company completed a right offering in which it issued 1,739,398 ordinary
shares at a share price of $2.5. The gross proceeds amounted to $4.4 million and the
issuance costs amounted to $400.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 21, 2007 Laurus Master Fund Ltd. converted the entire outstanding principal amount
under its Convertible Notes of approximately $2,223 into 878,670 Ordinary Shares of BOS.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 26, 2007 the Company entered into a definitive private placement agreement with a
European private investor for the issuance of 226,415 Ordinary Shares at a price per
share of $2.65. Issuance costs amounted to $36.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 1, 2007 the Company issued 5,594 shares of the Company as part of the consideration
paid for the purchasing the assets of Cyms Ltd. (See Note 1b).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 1, 2007 the Company issued 8,000 shares of the Company as part of the
consideration paid for the purchasing of OptimizeIT assets (See Note 1b).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
November 21, 2007 the Company issued 360,000 shares of the Company as part of the
consideration paid for the purchasing of Summit shares (See Note 1b).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 31, 2007 the Company entered into a Share Purchase Agreement with Catalyst Fund
L.P. (Catalyst) and three subsidiaries of D.S. Apex Holdings Ltd. (Apex),
under which the Company issued 833,560 Ordinary Shares at a price of $2.40 per share
(reflecting an aggregate investment of approximately $2 million), and 541,814 warrants at
exercise price of $2.76, exercisable for four years from their date of issuance. The
Company has paid 3% placement fees in cash to Apex and 6% in 25,007 Ordinary Shares to
Catalyst. The Company also entered into a Registration Rights Agreement pursuant to which
the Company shall prepare and file with the Securities and Exchange Commission a
registration statement covering the resale of the Ordinary Shares issued to the
investors.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2008, Dimex Solutions Ltd. purchased the assets and activities of Dimex Systems
Ltd., an Israeli private company and Dimex Hagalil Projects (2008) Ltd. purchased assets
and activities of Dimex Hagalil Ltd., a subsidiary of Dimex Systems Ltd. Portion of the
acquisition expenses were paid by issuance of 110,000 shares.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 9, 2008 the Company entered into a definitive private placement agreement with three
foreign investors. The agreement is for the issuance of an aggregate of 740,740 Ordinary
Shares at a price per share of $1.35 or $1,000in total. In addition, the Company issued
to the investors 370,370 warrants. The exercise price of the warrants is $1.60 per
ordinary share, exercisable for two years from their date of issuance to purchase
ordinary shares at a purchase price of $1.60 per ordinary share.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND SUBSIDIARIES
|---------------------------------------------------

|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|----------------------------------------------------------
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 15: 
SHAREHOLDERS EQUITY (Cont.)

| | On
August 25, 2008 the Company entered into a definitive private placement agreement with an
Australian investor. The agreement is for the issuance of an aggregate of 816,327
Ordinary Shares at a price per share of $1.225 or $1,000in total. In addition, the
Company issued to the investors 408,164 warrants. The exercise price of the
warrants is $1.475 per ordinary share, exercisable for two years from their date of
issuance for purchase of ordinary shares at a price of $1.475 per share.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys outstanding warrants to shareholders as of December 31, 2008 are as
follows:
| | ------------------------------------------------------------------------------------------

| | Exercise
price | Outstanding
and
exercisable
warrants
as of
December 31,
2008 | Weighted average
exercise
Price of
outstanding
warrants | Weighted
average
remaining
contractual
life (years) | Weighted
average
exercise
price of
warrants
exercisable
| | -------------- | ------------------------------------------------------------ | ------------------------------------------------------- | --------------------------------------------------- | -------------------------------------------------------
|
|
|
|
| | $              | 1.48                                                         |                                                         |                                                     | 408,164                                                
| | $              | 1.60                                                         |                                                         |                                                     | 370,370                                                
| | $              | 2.76                                                         |                                                         |                                                     | 541,814                                                
| |                |                                                              |                                                         |                                                     |                                                        
| |                |                                                              |                                                        
| |                |                                                              |                                                         |                                                     | 1,320,348                                              
| |                |                                                              |                                                         |                                                     |                                                        

| | b. | Stock
option plans:
| | -- | -------------------

| | In
May 2003, the Companys shareholders approved the adoption of the 2003 Stock Option
Plan (the Plan), pursuant to which 625,000 Ordinary Shares are reserved for
purchase by employees, directors, consultants and service providers of the Company.
During 2005  2007, the Companys shareholders approved an increase of the
number of Ordinary shares reserved for issuance under the Plan, to 2,600,000. Any option
which is canceled or forfeited before expiration will become available for future grants.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008 an aggregate of 150,988 of these options are still available for
future grants. Each option granted under the Plans expires between 3-10 years from the
date of the grant. The options vest gradually over a period of up to four years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of the Companys employees and directors stock option activity and
related information for the year ended December 31, 2008, is as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

F - 42

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND ITS SUBSIDIARIES   
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 15: 
SHAREHOLDERS EQUITY (Cont.)

| |                                  | Number ofoptions | Weighted-averageexercise price | Weighted-averageremainingcontractualterm (in years) | Aggregateintrinsicvalue
| | -------------------------------- | ---------------- | ------------------------------ | --------------------------------------------------- | -----------------------
|
|
|
|
| | Outstanding at January 1, 2008   |                  |                                |                                                     | 1,820,196              
| | Changes during the year:         |                  |                               
| | Granted                          |                  |                                |                                                     | 597,500                
| | Exercised                        |                  |                                |                                                     | (2,669                 
| | Forfeited or cancelled           |                  |                                |                                                     | (93,170                
| |                                  |                  |                               
| | Outstanding at December 31, 2008 |                  |                                |                                                     | 2,321,857              
| |                                  |                  |                                |                                                     |                        
| |                                  |                  |                               
| | Vested and expected to vest      |                  |                                |                                                     | 1,932,832              
| |                                  |                  |                                |                                                     |                        
| | Exercisable at December 31, 2008 |                  |                                |                                                     | 736,982                
| |                                  |                  |                                |                                                     |                        

| | The
weighted-average grant-date fair value of options granted during the year ended December
31, 2008 2007 and 2006 was $ 0.38, $ 1.43 and $1.45 respectively. The aggregate
intrinsic value in the table above represents the total intrinsic value (the difference
between the fair market value of the Company Ordinary Shares on December 31, 2008 and the
exercise price, multiplied by the number of in-the-money options) that would have been
received by the option holders had all option holders exercised their options on December
31, 2008.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Total
aggregate intrinsic value of options exercised for the year ended December 31, 2008 and
2007 was $ 4 and $ 14 respectively. The aggregated intrinsic value of options
outstanding for the year ended December 31, 2008 and 2007 was $368 and $277, respectively
(the difference between the fair market value of the Company Ordinary Shares on grant
date and the exercise price, multiplied by the number of in-the-money options). As of
December 31, 2008 there was $ 716 of total unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under the Companys stock
option plans. That cost is expected to be recognized over a weighted-average period of 25
months.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
received from exercise of options for the years ended December 31, 2008, 2007 and 2006
were approximately $ 0, $ 46 and $135 respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

F - 43

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND ITS SUBSIDIARIES   
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

NOTE 15:  SHAREHOLDERS EQUITY
(Cont.)

| | The
options granted to employees and director outstanding as of December 31, 2008 have been
separated into ranges of exercise prices, as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------

| | Exerciseprice | Optionsoutstandingas ofDecember 31,2008 | Weightedaverageremainingcontractuallife (years) | Optionsexercisableas ofDecember 31,2008 | WeightedaverageremainingcontractualLife ofoptionsexercisable(years)
| | ------------- | --------------------------------------- | ----------------------------------------------- | --------------------------------------- | -------------------------------------------------------------------
|
|
|
|
| | $ 0           |                                         |                                                 |                                         | 220,331                                                            
| | $ 0.61        |                                         |                                                 |                                         | 60,000                                                             
| | $ 0.70        |                                         |                                                 |                                         | 7,500                                                              
| | $ 1.04        |                                         |                                                 |                                         | 7,500                                                              
| | $ 1.05        |                                         |                                                 |                                         | 250,000                                                            
| | $ 1.47        |                                         |                                                 |                                         | 7,500                                                              
| | $ 1.50        |                                         |                                                 |                                         | 7,500                                                              
| | $ 1.68        |                                         |                                                 |                                         | 100,000                                                            
| | $ 1.71        |                                         |                                                 |                                         | 7,500                                                              
| | $ 2.00        |                                         |                                                 |                                         | 2,929                                                              
| | $ 2.28        |                                         |                                                 |                                         | 7,500                                                              
| | $ 2.39        |                                         |                                                 |                                         | 400,000                                                            
| | $ 2.48        |                                         |                                                 |                                         | 5,000                                                              
| | $ 2.52        |                                         |                                                 |                                         | 667,000                                                            
| | $ 2.57        |                                         |                                                 |                                         | 10,000                                                             
| | $ 2.58        |                                         |                                                 |                                         | 67,261                                                             
| | $ 2.63        |                                         |                                                 |                                         | 7,500                                                              
| | $ 2.68        |                                         |                                                 |                                         | 420,976                                                            
| | $ 2.70        |                                         |                                                 |                                         | 15,000                                                             
| | $ 3.00        |                                         |                                                 |                                         | 48,000                                                             
| | $ 6.80        |                                         |                                                 |                                         | 1,160                                                              
| | $ 18.00       |                                         |                                                 |                                         | 450                                                                
| | $ 28.00       |                                         |                                                 |                                         | 1,250                                                              
| |               |                                         |                                                 |                                         |                                                                    
| |               |                                         |                                                
| |               |                                         |                                                 |                                         | 2,321,857                                                          
| |               |                                         |                                                 |                                         |                                                                    

| | c. | Warrants
issued to service providers:
| | -- | -------------------------------------

| | The
Company accounts for these options in accordance with the provisions of SFAS 123 and EITF
96-18. The fair value for these options was estimated at the date of grant using
Black-Scholes options pricing model with the following assumptions for the years ended
December 31, 2006 and 2005: risk-free interest rate of 4.9% and 1.5%, respectively,
dividend yields of 0% and 0%, respectively, volatility of 77% and 70%, respectively, and
an expected life of 4.2 years and 2.5 years, respectively. No warrants were granted to
service provider during years 2008 and 2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
compensation expenses that have been recorded in the consolidated financial statements
regarding these warrants for the years ended December 31, 2008, 2007 and 2006 were $0,
$43 and $116, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 44

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND ITS SUBSIDIARIES   
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 15: 
SHAREHOLDERS EQUITY (Cont.)

| | The
Companys outstanding warrants to service providers as of December 31, 2008 are as
follows:
| | -----------------------------------------------------------------------------------------------

| | Range of
exercise
price | Outstanding
and
exercisable
warrants
as of
December 31,
2008 | Warrants
outstanding
Weighted
average
exercise
price | Weighted average
exercise
price of
warrants
exercisable | Weighted
average
remaining
contractual
life (years)
| | ----------------------- | ------------------------------------------------------------ | ---------------------------------------------------- | ------------------------------------------------------- | ---------------------------------------------------
|
|
|
|
| | $ 2.3                   |                                                              |                                                      |                                                         | 10,000                                             
| | $ 3.08                  |                                                              |                                                      |                                                         | 10,000                                             
| | $ 4.00                  |                                                              |                                                      |                                                         | 75,000                                             
| | $ 4.04                  |                                                              |                                                      |                                                         | 227,403                                            
| | $ 5.30                  |                                                              |                                                      |                                                         | 48,701                                             
| |                         |                                                              |                                                      |                                                         |                                                    
| |                         |                                                              |                                                     
| |                         |                                                              |                                                      |                                                         | 371,104                                            
| |                         |                                                              |                                                      |                                                         |                                                    

# NOTE 16:  TAXES ON INCOME

| | a. | Reduction
in corporate tax rate:
| | -- | --------------------------------

| | Generally,
Israeli companies are subject to Corporate Tax on their taxable income at the
rate of 27% for the 2008 tax year. Following an amendment to the Israeli Income Tax
Ordinance [New Version], 1961 (the Israeli Tax Ordinance), which came into
effect on January 1, 2006, the corporate tax rate is scheduled to decrease as follows:
26% for the 2009 tax year and 25% for the 2010 tax year and thereafter. Israeli companies
are generally subject to capital gains tax at a rate of 25% for capital gains (other than
gains deriving from the sale of listed securities) derived after January 1, 2003
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Loss
carryforward:
| | -- | ------------------

| | Domestic
(Israel):
| | ------------------

| | The
Company and its Israeli subsidiary have accumulated losses for Israel income tax purposes
as of December 31, 2008, in the amount of approximately $38,964. These losses may be
carryforward and offset against taxable income in the future for an indefinite period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Foreign:
| | --------

| | As
of December 31, 2008, the U.S. subsidiaries had U.S. Federal and State net operating loss
carryforward of approximately $8,847, which can be carried forward and offset against
taxable income for 15 to 20 years. Utilization of U.S. net operating losses may be
subject to substantial annual limitations due to the change in ownership provisions
of the Internal Revenue Code of 1986 and similar state law provisions. The annual
limitations may result in the expiration of net operating losses before utilization.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 45

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND ITS SUBSIDIARIES   
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 16:  TAXES ON
INCOME (Cont.)

| | c. | Deferred
income taxes:
| | -- | ----------------------

| | Deferred
income taxes reflect the net tax effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Companys deferred tax
liabilities and assets are as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                    | December 31,
| | -------------------------------------------------- | ------------
|
|
|
|
| | Assets in respect of:                              |             
| |                                                    |             
| | Property, plant and equipment                      |             
| | Allowances and provisions                          |             
| | Net operating loss carry forward                   |             
| |                                                    |             
| |                                                    |             
| |                                                    |             
| | Liabilities in respect of intangible assets        |             
| |                                                    |             
| |                                                    |             
| | Net deferred tax assets before valuation allowance |             
| | Valuation allowance (1)                            |             
| |                                                    |             
| |                                                    |             
| | Net deferred tax assets (liability)                |             
| |                                                    |             

| | (1) | The
Company has provided valuation allowances on part of deferred tax assets
          resulting from tax loss carry forward and other reserves and allowances due to
          their history of operating losses and current uncertainty concerning their
          ability to realize these deferred tax assets in the future.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                     | December 31,
| | ----------------------------------- | ------------
|
|
|
|
| | Presented in balance sheet:         |             
| |                                     |             
| | Current assets                      |             
| | Long-term assets                    |             
| | Current liabilities                 |             
| | Long-term liabilities               |             
| |                                     |             
| |                                     |             
| | Net deferred tax assets (liability) |             
| |                                     |             

F - 46

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND ITS SUBSIDIARIES   
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 16:  TAXES ON
INCOME (Cont.)

| | d. | Taxes
on income (tax benefit) are comprised as follows:
| | -- | -------------------------------------------------------

| |             | Year ended December 31,
| | ----------- | -----------------------
|
|
|
|
| | Current     |                        
| | Prior years |                        
| | Deferred    |                        
| |             |                        
| |             |                        
| |             |                        
| |             |                        
| |             |                        
| | Domestic    |                        
| | Foreign     |                        
| |             |                        
| |             |                        
| |             |                        
| |             |                        

| | e. | Loss
before taxes is comprised as follows:
| | -- | ------------------------------------------

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        

F - 47

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND ITS SUBSIDIARIES   
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 16:   TAXES ON
INCOME (Cont.)

| | f. | Effective
tax
| | -- | -------------

| |                                                                                               |  |  |  
| | --------------------------------------------------------------------------------------------- |  |  | -
|
|
|
|
| | loss before taxes on income from operating activities related to continuing operations        |  |  | $
| |                                                                                               |  |  |  
| |                                                                                               |  | 
| | Statutory tax rate                                                                            |  |  |  
| |                                                                                               |  |  |  
| |                                                                                               |  | 
| | Provision at statutory tax rate                                                               |  |  |  
| | Non-deductible expenses                                                                       |  |  |  
| | Deferred taxes on losses reserves and allowances for which a valuation allowance was provided |  |  |  
| |                                                                                               |  |  |  
| |                                                                                               |  | 
| | Taxes on income (tax benefit)                                                                 |  |  | $
| |                                                                                               |  |  |  

| | g. | Tax
assessments:
| | -- | ----------------

| | BOS
Dimex and Quasar have final assessments through 2003. Odem has final assessments through
2004.
| | --------------------------------------------------------------------------------------------------

| | h. | The
Company adopted the provisions of FASB Interpretation No. 48, Accounting           for
Uncertainty in Income Taxes, on January 1, 2007. The impact of adopting FIN           48
was insignificant to the Companys consolidated financial statements.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the Companys accounting policy, both before and after adoption of
FIN 48, interest expense and potential penalties related to income taxes are included in
the tax expense line of the Companys consolidated statements of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and its subsidiaries files income tax returns in the U.S. federal jurisdiction,
and various states in the U.S. and Israel jurisdiction. BOS, Dimex Solutions and Quasar
may be subject to examination by the Israel tax authorities for fiscal years 2003 through
2008. Odem may be subjected to examination by the Israel tax authorities for fiscal years
2004 through 2008. Dimex Galil may be subjected to examination by the Israel tax
authorities for fiscal year 2008.Link USA (the U.S. subsidiary) may be subject to
examination by the U.S. Internal Revenue Service (IRS) for fiscal years 1998
through 2007.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company believes that it has adequately provided for any reasonably foreseeable outcomes
related to tax audits and settlement. The final tax outcome of the Companys tax
audits could be different from that which is reflected in the Companys income tax
provisions and accruals. Such differences could have a material effect on the Companys
income tax provision and net loss in the period in which such determination is made.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 48

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND ITS SUBSIDIARIES   
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 17:  SUPPLEMENTARY
INFORMATION TO STATEMENTS OF OPERATIONS

| | a. | Financial
expenses, net:
| | -- | ------------------------

| |                                            | Year ended December 31,
| | ------------------------------------------ | -----------------------
|
|
|
|
| | Financial income:                          |                        
| | Interest on bank deposits and marketable   |                        
| | securities                                 |                        
| | Other (mainly foreign currency translation |                        
| | income)                                    |                        
| |                                            |                        
| |                                            |                        
| |                                            |                        
| |                                            |                        
| | Financial expenses:                        |                        
| | In respect of bank loans and convertible   |                        
| | note                                       |                        
| | Other (mainly foreign currency translation |                        
| | losses)                                    |                        
| |                                            |                        
| |                                            |                        
| |                                            |                        
| |                                            |                        
| |                                            |                        
| |                                            |                        
| |                                            |                        

| | b. | Earnings
(loss) per share:
| | -- | --------------------------

| | 1. | Numerator:
| | -- | ----------

| |                                     |  |  |  
| | ----------------------------------- |  |  | -
|
|
|
|
| | Numerator for basic and diluted net |  |  |  
| | earnings (loss) per share:          |  | 
| | Loss from continuing operations     |  |  | $
| | Income (loss) from discontinued     |  | 
| | operations                          |  |  |  
| |                                     |  |  |  
| |                                     |  | 
| | Net earnings (loss) available to    |  | 
| | Ordinary shareholders               |  |  | $
| |                                     |  |  |  

| | 2. | Denominator
(in thousands):
| | -- | ---------------------------

| |                                        |  |  |  
| | -------------------------------------- |  |  | -
|
|
|
|
| | Basic weighted average Ordinary shares |  |  |  
| | outstanding (in thousands)             |  |  |  
| |                                        |  |  |  
| | Diluted weighted average Ordinary      |  | 
| | Shares outstanding (in thousands)      |  |  |  
| |                                        |  |  |  
| |                                        |  | 
| | Basic and diluted net loss per share   |  | 
| | from continuing operations             |  |  | $
| |                                        |  |  |  
| | Basic and diluted net earnings (loss)  |  | 
| | per share from discontinued            |  | 
| | operations                             |  |  | $
| |                                        |  |  |  
| | Basic and diluted net earnings (loss)  |  | 
| | per share                              |  |  | $
| |                                        |  |  |  

F - 49

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND ITS SUBSIDIARIES   
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 18:  SEGMENTS AND
GEOGRAPHICAL INFORMATION

| | Commencing
2007 and subsequent to the acquisition of Summit, the Company manages its business in two
reportable segments, consisting of the Mobile and RFID Solutions segment and Supply Chain
Solutions segment. Amounts for fiscal year 2006 had been recast to conform with the
current management view.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys management makes financial decisions and allocates resources, based on the
information it receives from its internal management system. The Company allocates
resources and assesses performance for each operating segment using information about
revenues and gross profit.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Revenues,
gross profit and assets for the operating segments for the years           2008, 2007 and
2006 were as follow:
| | -- | ------------------------------------------------------------------------------------------------------------------------

| |                           | Mobile and RFID | Supply
Chain
Solutions | Not
allocated | Consolidated
| | ------------------------- | --------------- | ---------------------- | ------------- | ------------
|
|
|
|
| | 2008                      |                 |                        |               |             
| |                           |                 |                       
| | Revenues                  |                 |                        | $             | 12,379      
| |                           |                 |                       
| | Gross profit              |                 |                        | $             | 3,834       
| |                           |                 |                       
| | Assets related to segment |                 |                        | $             | 20,918      
| |                           |                 |                       
| | 2007                      |                 |                       
| |                           |                 |                       
| | Revenues                  |                 |                        | $             | 2,673       
| |                           |                 |                       
| | Gross profit              |                 |                        | $             | 1,436       
| |                           |                 |                       
| | Assets related to segment |                 |                        | $             | 1,205       
| |                           |                 |                       
| | 2006                      |                 |                       
| |                           |                 |                       
| | Revenues                  |                 |                        | $             | 2,344       
| |                           |                 |                       
| | Gross profit              |                 |                        | $             | 1,401       
| |                           |                 |                       
| | Assets related to segment |                 |                        | $             | 243         

F - 50

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND ITS SUBSIDIARIES   
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 18:   SEGMENTS AND
GEOGRAPHICAL INFORMATION (Cont.)

| | b. | The
following presents total revenues and long-lived assets for the years 2008,
          2007 and 2006 based on the location of customers:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------

| |                   | Year ended December 31,
| | ----------------- | -----------------------
|
|
|
|
| | America           |                        
| | Far East          |                        
| | Europe            |                        
| | Israel and others |                        
| |                   |                        
| |                   |                        
| |                   |                        
| |                   |                        

| | Total
revenues are attributed to geographical areas based on the location of customers in
accordance with Statement of Financial Accounting 131, Disclosures about Segments
of an Enterprise and Related Information (SFAS 131).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | *) | Long-lived
assets comprise of goodwill, intangible assets and property, plant           and
equipment.
| | -- | ------------------------------------------------------------------------------------------------------

| | c. | Major
customers data as a percentage of total revenues:
| | -- | --------------------------------------------------------

| |                                      | Year ended December 31,
| | ------------------------------------ | -----------------------
|
|
|
|
| | Customer A (Mobile and RFID Segment) |                        
| |                                      |                        
| |                                      |                        
| | Customer B (Supply Chain Segment)    |                        
| |                                      |                        
| |                                      |                        
| | Customer C (Supply Chain Segment)    |                        
| |                                      |                        

# NOTE 19:  RELATED PARTIES

| | Service
Agreement of Cukierman & Co.:
| | -------------------------------------

| | The
Companys audit committee and Board approved the engagement of Cukierman & Co.
Investment House Ltd., to provide non-exclusive investment-banking services and business
development services to the Company, effective April 15, 2003. Cukierman & Co. is a
company indirectly controlled by Mr. Edouard Cukierman. Since June 26, 2003, Mr.
Cukierman serves as Chairman of the Companys Board, and he is also a co-manager of
the Catalyst Fund, the Companys largest shareholder. For its services, Cukierman
& Co. is paid a monthly sum of $10 plus VAT, in addition to a success fee of 4%-6%
for a consummated private placement. According to its terms, the Company may terminate
the agreement at any time, by giving one month prior written notice. The agreement
provides that the success fees for securing M&A transactions will be 3.5% of the
proceeds exchanged in such a transaction.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 51

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND ITS SUBSIDIARIES   
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 19:  RELATED
PARTIES (Cont.)

| | The
 payments  the  Company  paid  and  accrued  according  to the  Service  Agreement  with
              Cukierman & Co. are:
| | -------------------------------------------------------------------------------------------------------------------------------

| |                                               | Payments made inYear ended December 31, | Accruedliability asof December 31,
| | --------------------------------------------- | --------------------------------------- | ----------------------------------
|
|
|
|
| | Business development                          |                                         |                                   
| | Success fee in respect of merger acquisitions |                                         |                                   
| | Success fee in respect of issuance of         |                                         |                                   
| | convertible loan                              |                                         |                                   
| | Success fee in respect of issuance of         |                                         |                                   
| | investment in Summit                          |                                         |                                   
| | Success fee in respect of issuance of private |                                         |                                   
| | placements                                    |                                         |                                   
| |                                               |                                         |                                   
| |                                               |                                         |                                   
| | Total                                         |                                         |                                   
| |                                               |                                         |                                   

| | *
Payment by 12,600 shares of the Company at a price of $2.28 per share (reflecting the
Company share price at the grant date).
| | -------------------------------------------------------------------------------------------------------------------------------

| | On
May 18, 2006 the shareholders approved a grant to Mr. Edouard Cukierman of 21,666
Ordinary Shares (for no consideration), and 233,876 options to purchase Ordinary Shares
of the Company, pursuant to the Companys 2003 Israeli Share Option Plan, at an
exercise price of $2.68. The options exercise price was equal to the average
closing price of the Companys shares on the Nasdaq Global Market on the 20 trading
days preceding the shareholders meeting date at which the grant was approved (the
Grant Date). The options vest in three equal parts on the first, second and
third anniversary of the Grant Date, and expire from May 2010 through May 2012.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
November 7, 2007 the shareholders approved the Agreement with Edouard Cukierman, the
Chairman of the Board, pursuant to which, Mr. Edouard Cukierman shall be granted options
(the Options) to purchase up to 100,000 Ordinary Shares of the Company per
each calendar year of service as the Companys Chairman of the Board of Directors
(the Service) in the years 2007-2010 (pro-rated for any part of the Calendar
year). The Options shall be in lieu of any compensation, fees or options otherwise
payable by the Company to Cukierman as a director.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Options shall vest on a quarterly basis. The exercise price of the Options is $2.385
which was equal to the weighted average of the closing prices of the Companys
Ordinary Shares on the Nasdaq Global Market during the thirty-day period preceding the
shareholders approval. Unexercised Options shall expire after five years from their
respective grant date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the Agreement, if the Service is terminated by the Company for no Cause (as defined in
the Agreement) then: (i) any unvested Options shall be immediately vested in full as of
the date of the termination; (ii) the Company shall grant Cukierman such number of
Options amounting, together with Options previously granted, to 400,000 Options, and such
additional options shall be vested upon grant; and (iii) the Options shall be exercisable
for a period of twenty four (24) months from termination.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 52

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND ITS SUBSIDIARIES   
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 19:  RELATED
PARTIES (Cont.)

| | If
the Service is terminated by Cukierman in circumstances not involving Cause, his vested
options shall be exercisable for six (6) months from the date of said termination.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 31, 2007 the Company entered into a Share Purchase Agreement with Catalyst Fund
L.P. (Catalyst) and three subsidiaries of D.S. Apex Holdings Ltd. (Apex),
under which the Company issued 833,560 Ordinary Shares at a price of $2.40 per share
(reflecting an aggregate investment of approximately $2 million), and 541,814 warrants at
exercise price of $2.76, exercisable for four years from their date of issuance. The
Company has paid 3% placement fees in cash to Apex and 6% in 25,007 Ordinary Shares to
Catalyst. The Company also entered into a Registration Rights Agreement pursuant to which
the Company shall prepare and file with the Securities and Exchange Commission a
registration statement covering the resale of the Ordinary Shares issued to the investors
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
payments the Company paid and accrued according to the Share Purchase Agreement are:
| | ----------------------------------------------------------------------------------------

| |          | Payments in Year ended
December 31,
| | -------- | -----------------------------------
|
|
|
|
| | Catalyst |                                    
| | APEX     |                                    

| | * | Payment
by 25,007 shares of the Company at a price of $1.90 per share (reflecting the Company
share price at the grant date).
| | - | -----------------------------------------------------------------------------------------------------------------------------

| | a. | On
January 30, 2009, New World Brands, Inc. and Qualmax, Inc. entered into a
               merger by which Qualmax Inc. merged with and into New World Brands, Inc.
and the                separate corporate existence of Qualmax Inc. ceased. As a result
BOS holds 15.6%                of the outstanding shares of New World Brands, Inc.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | In
February 2009, the Company sold its OptimizeIT product and related IP in
               consideration for $70 plus contingent consideration based on future
revenues of                up to $1.5 million. .
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | In
March 2009, the Company entered into an agreement with Dimex Systems Ltd. and
               Dimex Hagalil Ltd. that revises the payment schedule of approximately NIS
10                million still owed by the Company under the Dimex Asset Purchase
Agreement dated                January 29, 2008. The aforementioned amount was payable in
three semi-annual                installments through March 2010. The amendment to the
agreement provides for a                NIS 3 million payment in March 2009, NIS 4
million will be paid in 6 equal                monthly installments each, starting on
January 15th, 2010, and the remaining                approximately NIS 2.5 million shall
be paid in two equal installments in March                and April 2010.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 53

---

---

|B.O.S. BETTER ONLINE SOLUTIONS LTD.AND ITS SUBSIDIARIES   
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

# NOTE 20:  SUBSEQUENT
EVENTS (UNAUDITED) (Cont.)

| | The
amendment further provides, that if the Company raises funds by way of a debt offering
meeting certain conditions, the last payment of approximately NIS 2.5 million shall be
converted into the same type of convertible debentures issued in the framework of such
offering,
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | In February 2009, in order to
strengthen the BOS brand-name and as part of the Company group integration process, the
Company decided to implement name changes in its wholly owned subsidiaries. Lynk USA, Inc,
changed its name to BOS  Supply Chain Solutions (Lynk) Inc. in March 2009 and the
following subsidiaries are in the process of the name change as follows:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Previous Name                          | New Name                                   
| | -------------------------------------- | -------------------------------------------
|
|
|
|
| | Dimex Solutions Ltd.                   | BOS - RFID Solutions (Dimex) Ltd.          
| | Odem Electronic Technologies 1992 Ltd. | BOS - Supply Chain Solutions (Odem) Ltd.   
| | Summit Radio Corp.                     | BOS - Supply Chain Solutions (Summit) Corp.

| | e. | On
February 11, 2009 the Company announced that it requested the Tel Aviv Stock
               Exchange (TASE) to delist its shares from trading in Tel Aviv.
Under                applicable Israeli law, the delisting will become effective in three
months from                the request, during such time the Companys ordinary
shares will continue                to trade on the TASE. The delisting of the Companys
ordinary shares from                trade on the TASE shall be effective on May 12, 2009.
The last day for trading                of the Companys ordinary shares on the TASE
is May 10, 2009. The delisting                of the ordinary shares from the TASE will
not affect the continued listing of                the ordinary shares on the Nasdaq
Global Market under the symbol BOSC. After the                delisting of the Companys
shares from the TASE, the Company will not be                subject to reporting
requirements in Israel.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | On March 23, 2009, the Company
and its Israeli subsidiaries executed revised loan documents, effective
December 31, 2008, governing the Companys and its Israeli subsidiaries
short term revolving credit line from Bank Leumi. In the revised and in the original
loan documents, the Company and its Israeli Subsidiaries undertook updated covenants
relating to, among other things, financial ratios of equity and EBIDTA, and
continue to provide Bank Leumi with various security interests and cross guarantees. 
The loan terms continue to restrict substantial asset sales, cash dividends, and
certain inter-company and shareholders payments. The Company anticipate that it will meet
the covenants for year 2009.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 54

---

---