---

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 20-F

|                                                                                                 
|-------------------------------------------------------------------------------------------------
|oREGISTRATION STATEMENT PURSUANT TO
  SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                                                 
|OR                                                                                               
|                                                                                                 
|xANNUAL REPORT PURSUANT TO SECTION 13 OR
  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934          
|                                                                                                 
|For the fiscal year ended December 31, 2007                                                      
|                                                                                                 
|OR                                                                                               
|                                                                                                 
|oTRANSITION REPORT PURSUANT TO SECTION
  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934      
|                                                                                                 
|OR                                                                                               
|                                                                                                 
|oSHELL 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

---

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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: 10,857,554_Ordinary
Shares, nominal value NIS 4.00 per share, as of December 31, 2007; and11,357,778Ordinary
Shares, nominal value NIS 4.00 per share, as of May 31, 2008.

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
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

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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                                                      |  | 16
|                                                                                        |  |   
|ITEM 4A: UNRESOLVED STAFF COMMENTS                                                      |  | 28
|                                                                                        |  |   
|ITEM 5: OPERATING AND FINANCIAL REVIEW AND
  PROSPECTS                                  |  | 28
|                                                                                        |  |   
|ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND
  EMPLOYEES                                    |  | 48
|                                                                                        |  |   
|ITEM 7: MAJOR SHAREHOLDERS AND RELATED
  PARTY TRANSACTIONS                             |  | 60
|                                                                                        |  |   
|ITEM 8: FINANCIAL INFORMATION                                                           |  | 63
|                                                                                        |  |   
|ITEM 9: THE OFFER AND LISTING                                                           |  | 64
|                                                                                        |  |   
|ITEM 10: ADDITIONAL INFORMATION                                                         |  | 66
|                                                                                        |  |   
|ITEM 11: QUANTITATIVE AND QUALITATIVE
  DISCLOSURE ABOUT MARKET RISK                    |  | 79
|                                                                                        |  |   
|ITEM 12: DESCRIPTION OF SECURITIES OTHER
  THAN EQUITY SECURITIES                       |  | 81
|                                                                                        |  |   
|PART II                                                                                 |  | 81
|                                                                                        |  |   
|ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND
  DELINQUENCIES                              |  | 81
|                                                                                        |  |   
|ITEM 14: MATERIAL MODIFICATIONS TO THE
  RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |  | 81
|                                                                                        |  |   
|ITEM 15: CONTROLS AND PROCEDURES                                                        |  | 81
|                                                                                        |  |   
|ITEM 16: [RESERVED]                                                                     |  | 82
|                                                                                        |  |   
|ITEM 16A: AUDIT COMMITTEE FINANCIAL EXPERT                                              |  | 82
|                                                                                        |  |   
|ITEM 16B: CODE OF ETHICS                                                                |  | 82
|                                                                                        |  |   
|ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND
  SERVICES                                      |  | 82

ii

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|                                                                                   |  |   
|---------------------------------------------------------------------------------- |  | --
|ITEM 16D: EXEMPTIONS FROM THE LISTING
  STANDARDS FOR AUDIT COMMITTEES             |  | 83
|                                                                                   |  |   
|ITEM 16E: PURCHASES OF EQUITY SECURITIES BY
  THE ISSUER AND AFFILIATED PURCHASERS |  | 83
|                                                                                   |  |   
|PART III                                                                           |  | 84
|                                                                                   |  |   
|ITEM 17: FINANCIAL STATEMENTS                                                      |  | 84
|                                                                                   |  |   
|ITEM 18: FINANCIAL STATEMENTS                                                      |  | 84
|                                                                                   |  |   
|ITEM 19: EXHIBITS                                                                  |  | 84
|                                                                                   |  |   
|SIGNATURES                                                                         |  | 86

iii

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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 B.O.S.

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 On-Line Solutions
Ltd. set forth below with respect to the years ended December 31, 2007, 2006
and 2005, and the consolidated balance sheet data as of December 31, 2007 and
2006, have been derived from the Consolidated Financial Statements listed in
Item 18, which have been prepared in accordance with generally accepted
accounting principles (GAAP) in
the United States. The consolidated statement of operations data set forth
below with respect to the years ended December 31, 2004 and 2003, and the
consolidated balance sheet data as of December 31, 2005, 2004 and 2003, 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, 2007, 2006, 2005, 2004 and 2003 were audited
by Kost Forer Gabbay & Kasierer, an independent registered public
accounting firm and a member of Ernst & Young Global. 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.

Following the
sale of the Communications segment in 2005, the Company has accounted for the
Communications segment as a discontinued operation. As such, the results of
operations, including revenues, cost of revenues, operating expenses and other
income and expenses related to the Communications segment for years 2006 and
2005, have been reclassified in the 2006 statements of operations and balance
sheet as discontinued operations.

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 -

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

|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|------------------------------------------------------------------------------------------ |  | ----------------------- | ------ | ---- | - | ------ | - | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                                           |  | Year Ended December 31, |       
|                                                                                           |  |                         |       
|                                                                                           |  | 2003                    |        | 2004 |   | 2005   |   | 2006 |        | 2007 |  
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |  
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Revenues                                                                                   |  |                         | 5,728  |      |   | 6,919  |   |      | 24,099 |      |   | 20,917 |   |   | 23,774 |  
|Cost of revenues                                                                           |  |                         | 1,455  |      |   | 3,659  |   |      | 17,854 |      |   | 16,200 |   |   | 19,099 |  
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Gross profit                                                                               |  |                         | 4,273  |      |   | 3,260  |   |      | 6,245  |      |   | 4,717  |   |   | 4,675  |  
|Operating expenses:                                                                        |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Research and development, net                                                              |  |                         | 1,846  |      |   | 669    |   |      | 893    |      |   | 486    |   |   | 636    |  
|In process Research and development                                                        |  |                         |       |      |   |       |   |      |       |      |   |       |   |   | 170    |  
|Sales and marketing                                                                        |  |                         | 2,178  |      |   | 1,015  |   |      | 2,425  |      |   | 2,019  |   |   | 3,811  |  
|General and administrative                                                                 |  |                         | 1,317  |      |   | 1,271  |   |      | 2,667  |      |   | 3,268  |   |   | 1,980  |  
|Restructuring and related costs                                                            |  |                         | 678    |      |   |       |   |      |       |      |   |        |   |   |       |  
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Total operating expenses                                                                   |  |                         | 6,019  |      |   | 2,955  |   |      | 5,985  |      |   | 5,773  |   |   | 6,597  |  
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Operating income (loss):                                                                   |  |                         | (1,746 | )    |   | 305    |   |      | 260    |      |   | (1,056 | ) |   | (1,922 | )
|Financial income (expense), net                                                            |  |                         | 109    |      |   | (158   | ) |      | (448   | )    |   | (626   | ) |   | (469   | )
|Other income (expenses), net                                                               |  |                         | 45     |      |   |       |   |      | 355    |      |   |       |   |   | (6,233 | )
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Income (loss) before tax on income                                                         |  |                         | (1,592 | )    |   | 147    |   |      | 167    |      |   | (1,682 | ) |   | (8,624 | )
|Tax benefit (taxes on income)                                                              |  |                         |       |      |   | (20    | ) |      | (204   | )    |   | 89     |   |   | (9     | )
|Equity in losses of an affiliated company                                                  |  |                         | (465   | )    |   | (308   | ) |      | (1,750 | )    |   |       |   |   |       |  
|Minority interest in earnings of a
  subsidiary                                            |  |                         |       |      |   | (17    | ) |      | (223   | )    |   |       |   |   |       |  
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Loss from continuing operations                                                            |  |                         | (2,057 | )    |   | (198   | ) |      | (2,010 | )    |   | (1,593 | ) |   | (8,633 | )
|Net income (loss) related to discontinued
  operations                                     |  |                         | 2,036  |      |   | (1,855 | ) |      | (1,595 | )    |   | 1,685  |   |   | 237    |  
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Net income (loss)                                                                          |  |                         | (21    | )    |   | (2,053 | ) |      | (3,605 | )    |   | 92     |   |   | (8,396 | )
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Basic and diluted net loss per share from
  continuing operations                          |  | $                       | (0.56  | )    | $ | (0.04  | ) | $    | (0.36  | )    | $ | (0.24  | ) | $ | (1.00  | )
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Basic and diluted net income (loss) per
  share from discontinued operations               |  | $                       | 0.55   |      | $ | 0.40   |   | $    | (0.28  | )    | $ | 0.25   |   | $ | 0.02   |  
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Basic and diluted net income (loss) per
  share                                            |  | $                       | (0.01  | )    | $ | (0.44  | ) | $    | (0.64  | )    | $ | 0.01   |   | $ | (0.97  | )
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Weighted average number of shares used in
  computing basic net earning (loss) per share   |  |                         | 3,683  |      |   | 4,631  |   |      | 5,616  |      |   | 6,675  |   |   | 8,651  |  
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Weighted average number of shares used in
  computing diluted net earning (loss) per share |  |                         | 3,683  |      |   | 4,631  |   |      | 5,616  |      |   | 6,793  |   |   | 11,783 |  
|                                                                                           |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |        |  

- 2 -

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|                                                                                            |  |                    |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ---- |  | ------ |  | ---- | ------ | ---- |  | ------ |  |  | ------ | 
|                                                                                            |  | As of December 31, |       
|                                                                                            |  |                    |       
|Balance
  Sheet Highlighted Data:                                                           |  | 2003               |        | 2004 |  | 2005   |  | 2006 |        | 2007 | 
|                                                                                            |  |                    |        |      |  |        |  |      |        |      | 
|                                                                                            |  |                    |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|Cash and Cash Equivalents                                                                   |  |                    | 3,872  |      |  | 2,304  |  |      | 2,232  |      |  | 2,033  |  |  | 4,271  | 
|                                                                                            |  |                    |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|Working Capital (*)                                                                         |  |                    | 5,082  |      |  | 5,195  |  |      | 4,162  |      |  | 3,046  |  |  | 10,407 | 
|                                                                                            |  |                    |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|Total Assets                                                                                |  |                    | 14,023 |      |  | 22,485 |  |      | 22,646 |      |  | 24,529 |  |  | 31,132 | 
|                                                                                            |  |                    |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|Short-term banks loan and current
  maturities of long-term bank loans and convertible note |  |                    |       |      |  | 1,997  |  |      | 2,625  |      |  | 4,088  |  |  | 5,028  | 
|                                                                                            |  |                    |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|Long-term liabilities                                                                       |  |                    | 951    |      |  | 3,380  |  |      | 2,517  |      |  | 2,686  |  |  | 4,450  | 
|                                                                                            |  |                    |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|Minority interest in a subsidiary                                                           |  |                    |       |      |  | 809    |  |      |       |      |  |       |  |  |       | 
|                                                                                            |  |                    |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|Share Capital                                                                               |  |                    | 4,309  |      |  | 4,823  |  |      | 6,432  |      |  | 6,571  |  |  | 10,628 | 
|                                                                                            |  |                    |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|Additional paid in Capital                                                                  |  |                    | 43,247 |      |  | 44,426 |  |      | 47,588 |      |  | 48,330 |  |  | 54,758 | 
|                                                                                            |  |                    |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|Shareholders equity                                                                        |  |                    | 10,541 |      |  | 10,048 |  |      | 11,266 |      |  | 12,349 |  |  | 14,438 | 
|                                                                                            |  |                    |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|(*)Working capital comprises of:                                                            |  |                    |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|                                                                                            |  |                    |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|Current assets                                                                              |  |                    | 7,239  |      |  | 12,581 |  |      | 12,233 |      |  | 12,540 |  |  | 22,651 | 
|                                                                                            |  |                    |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|Less: current liabilities                                                                   |  |                    | 2,157  |      |  | 7,386  |  |      | 8,071  |      |  | 9,494  |  |  | 12,244 | 
|                                                                                            |  |                    |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|                                                                                            |  |                    |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|                                                                                            |  |                    | 5,082  |      |  | 5,195  |  |      | 4,162  |      |  | 3,046  |  |  | 10,407 | 
|                                                                                            |  |                    |        |      |  |        |  |      |        |      |  |        |  |  |        | 

|                 |                                          
|---------------- | -----------------------------------------
|3B.              | Capitalization and Indebtedness          
|                 |                                          
|Not
  applicable
|                 |                                          
|3C.              | Reasons for the Offer and Use of proceeds
|                 |                                          
|Not
  applicable
|                 |                                          
|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.

- 3 -

---

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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:

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

As
of December 31, 2007, we had an accumulated deficit of $51 million. In 2007 we had a net
loss of $8.4 million, of which $5.6 million was due to impairment of investment in the
shares Qualmax Inc. (Pink Sheets: QMXI.PK) and its subsidiary New World Brands (OTC:
NWBD.OB) (see Section 4A. History and Development of the Company). Our ability
to maintain and improve future levels of sales and profitability depends on many factors,
which include:

| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | successful
  integration of Summit Radio Corp. (Summit) which was acquired in November
  2007 and of the assets of Dimex Systems (1988) Ltd., which were purchased in
  March 2008.
| |   |                                                                                                                                                                                      
| | · | 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 products to meet customer needs.                                                                                                                        
| |   |                                                                                                                                                                                      
| | · | penetrating
  into the RFID market.                                                                                                                                                  
| |   |                                                                                                                                                                                      
| | · | 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.

- 4 -

---

---



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 89% of our total sales in 2007 and in 2006, tends to
fluctuate. 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, 2008 we had $6,146,000 of short term bank loans drawn under a
revolving credit facility, $701,000 current maturities of long term loans and
long terms loans in the amount of $3,144,100. We depend mainly on our cash
generated by continuing operating activities to make payments on our debts. 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.

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 Section
5B. Liquidity and Capital Resources and 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.

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 Item 5. Operating and Financial Review and Prospects)

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. 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.

- 5 -

---

---



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.

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. (See Section 5B. Liquidity and Capital Resources) 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.

Risks related to our business:

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 recently we completed two major acquisitions, of the U.S.
based Summit, in November 2007, and of the assets of the Israeli Dimex Systems
(1988) Ltd., 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.                               

- 6 -

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There
can be no assurance that we will be able to successfully integrate and manage
our recent 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.

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
10% of our revenues in the first quarter of 2008, respectively. An interruption
in our business relationship with IAI or with the Strategic Customer would
result in a significant reduction in our revenues and 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 2008. In May 2008, we
announced that we finalized a contract for the sale of components to the
Strategic Customer. The contract, expected to be signed in the near future,
provides for a framework for orders potentially amounting to up to $25 million
during an initial five-year term (until 2012). The contract may be extended for
additional five-year terms. The contract may be extended for additional
five-year terms. Pursuant to the contract, we committed to a fixed components
sale price through 2010. 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 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 the 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.

- 7 -

---

---



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 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.

| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| | · | 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 Mobile and RFID Solutions segment depends on our ability to expand sales
abroad.

Our Mobile and RFID Solutions revenues that were generated from sales outside
of Israel amounted, in the first quarter of year 2008, to $626,000 or 35% of
the entire Mobile and RFID 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 the 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 the company. Violation of the ITAR can also lead to loss of
export privileges for up to four years.

- 8 -

---

---



The sales of the BOSâNOVA Suite Solution (one
of the products of Mobile and RFID Solutions segment) in the United States
depend on one key distributor. In the event that we cease working with the key
distributor, we may experience an interruption in sales until an alternative
source of distribution can be found, which may have a material adverse effect on
our business.

We
market BOSâNOVA Suite Solutions in
the United States through one key distributor. In 2007 and in 2006 our sales
though this distributor accounted for 4% and 7% of our total sales, respectively, and for approximately 18% and 21% of our gross profit, respectively. In the event that we cease
working with this key distributor, we may experience a reduction in our gross
profit until an alternative source of distribution can be found, which may have
a material adverse effect on our business

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

Pursuant
to the Dimex Asset Purchase Agreement we are required to pay to the sellers an
additional amount of approximately NIS 25 million (approximately $7.7 million,
based on May 31, 2008 currency exchange rate), in four installments. The first
installment of NIS 15 million is due in September 2008 and the remaining amount
is payable in three semi-annual installments through March 2010.

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 for the supply of our products.

Most
of our sales in our Supply Chain Solution segment rely on products of certain
main manufacturers, which we represent. One major manufacturer accounted for
11% of our Supply Chain Solutions segment purchases during 2007.

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

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.

We depend on key
personnel and need to be able to retain them and our other employees.

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.
Our success will depend, in part, on:

| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | our ability
  to retain the executive officers and key technical personnel who have been
  involved in the development of our two divisions;                              
| |   |                                                                                                                                                                           
| | · | our ability
  to attract and retain additional qualified personnel to provide technological
  depth and support to enhance existing products and develop new products; and
| |   |                                                                                                                                                                           
| | · | our ability
  to attract and retain highly skilled computer operating, marketing and
  financial personnel.                                                               

- 9 -

---

---



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.

In consideration of
our sale of our Communication segment we received shares of Qualmax Inc. and of
its subsidiary New World Brands Inc. We have already recorded a loss in respect
of these holdings and may need to record additional losses if the stock price
of New World Brand or Qualmax decreases.

On
December 31, 2005 we closed a transaction for the sale of our Communications
segment to IP Gear Ltd. (IP Gear),
a wholly owned subsidiary of Qualmax Inc. (Qualmax),
in consideration for common stock of Qualmax. In September 2006 Qualmax
transferred all of its assets and liabilities to World Brands Inc. (New World) in exchange for shares of
Preferred Stock of New World.

In
December, 2006, we closed a transaction with Qualmax and its subsidiaries, New
World and IP Gear, pursuant to which we converted approximately $1.5 million
payable to us by Qualmax and IP Gear into approximately 16.5 million shares of
New World common stock.

In
connection with the transaction, we agreed to grant New World, contingent upon
the satisfaction of certain conditions, a three-year option to purchase up to
30% of the New World shares held by us, at prices ranging from $0.12 to $0.24
per share of common stock.

In
addition, we agreed to enter into a lock up agreement, restricting the transfer
of our share holdings in Qualmax and in New World, for up to two years. New
World has a limited operating history on which to judge whether or not this
company will be successful. If New World is not successful in its business or
if New World and Qualmax share price is subject to a prolonged decline, we may
be required to record an impairment of the investment, which could materially
adversely affect our results of operation.

In
year 2007 we recorded a $5.6 million loss due to a decrease in the share price of
New World and Qualmax. In the first quarter of 2008, due to an increase in the
share price of New World, the book value of our investment increased by
$244,000, which was recorded against other comprehensive income (i.e. capital
fund) and did not affect our statement of operations.

The recent slowdown
in the financial markets and resulting expected economic slow down in the
industry and in technology markets may have an adverse impact on us and on the
value of our shares.

Our
Company, like other technology companies, has been and is subject to the
effects of market slowdowns in the technology industry. If general economic
conditions fail to improve, or if they deteriorate, our revenues, operating
results and financial condition would be adversely affected.

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 level are relatively
fixed, or require some time for adjustment. Hence, revenue levels below our
expectations will adversely affect our results of operations.

- 10 -

---

---



Foreign currency
fluctuations significantly impact on our business results.

The
vast majority of our sales are made in U.S. dollars and a significant part of
our expenses is in New Israel Shekels (NIS).
Our NIS related costs, as expressed in U.S. dollars, are influenced by the
exchange rate between the U.S. dollar and the NIS. In 2007, and until May 31,
2008, the U.S. dollar depreciated against the NIS by approximately 23.5%, which
resulted in a significant increase in the U.S. dollar cost of our NIS expenses.
We cannot predict any future trends in the rate of devaluation or appreciation
of the NIS against the U.S dollar. Further significant depreciation could have
an adverse effect on our results of operation and financial condition.

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
the rent for our facilities in Israel and salaries and related personnel
expenses 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 2005, 2006 and 2007,
the inflation adjusted NIS appreciated against the U.S. dollar, which raised
the 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 dollar cost of our
operations in Israel and harm our results of operations.

To
date, we have not engaged in hedging transactions. In the future, we may enter
into currency hedging transactions to decrease the risk of financial exposure
from fluctuations in the exchange rate of the U.S. dollar against the NIS. Even
if we perform hedging transactions, they may not adequately protect us from the
effects of inflation in Israel.

(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 33% of our total sales in 2007 and for 29% in
2006. 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.

- 11 -

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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 Latin
America and in Europe.

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), 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.

- 12 -

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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.

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 2006 through May 2008,
the daily closing price of our ordinary shares in NASDAQ has ranged from $1.45 to $2.97 per share and in the Tel Aviv Stock Exchange has ranged from
4.28 NIS to 14.58 NIS. We believe that these fluctuations have been in response
to a number of factors including the following, some of which are beyond our
control:

| |   |                                                                       
| | - | ----------------------------------------------------------------------
| | · | the acquisition of Summit
  and of the assets of Dimex Systems;       
| |   |                                                                       
| | · | actual or anticipated
  variations in our quarterly operating results;

- 13 -

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| |   |                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | announcements of
  technological innovations, new products, services or new pricing practices by
  us or our competitors;                                                                                                                        
| |   |                                                                                                                                                                                                                                                  
| | · | increased market share
  penetration by our competitors;                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                  
| | · | announcements by us or our
  competitors of significant acquisitions, strategic partnerships, joint
  ventures or capital commitments;                                                                                                           
| |   |                                                                                                                                                                                                                                                  
| | · | additions or departures of
  key personnel;                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                  
| | · | issuance of additional
  shares pursuant to the exercise of warrants granted to our investors in previous
  private placement;                                                                                                                   
| |   |                                                                                                                                                                                                                                                  
| | · | sales of additional
  ordinary shares; and                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                  
| | · | devaluation of the U.S.
  dollar against the NIS, which caused a corresponding decrease in the
  NIS-quoted share price in Tel Aviv Stock Exchange. From January 2006 through
  May 2008 the devaluation of the dollar against the NIS was 29.8%.

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.

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 NASDAQ Capital Market, of which there can be no assurance.

- 14 -

---

---



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. 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.

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. Also, due to significant economic reforms proposed by the Israeli
government, there have been several general strikes and work stoppages in 2003
and 2004, affecting all banks, airports and ports. Such strikes or work
stoppages have an adverse effect on the Israeli economy and on our business.
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.

- 15 -

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---



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.

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 1999 - 5759. Our
executive offices and engineering, development, testing, shipping and service
operations are located in Israel and the USA.

Our telephone number is
972-3-954-1000 and our website address is www.boscorporate.com. Our subsidiary
Odem maintains a website showcasing our services in the field of RFID. The
website address is www.yourfid.com. The information contained on, or linked
from, our websites is not a part of this report.

- 16 -

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We operate our business
through two segments:

| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Supply Chain Solutions
  conducted through two wholly owned subsidiaries: Odem Electronic Technologies
  1992 Ltd. and Summit Radio Corp.                                                          
| |   |                                                                                                                                                                                                     
| | · | Mobile and RFID Solutions
   conducted through BOS and two wholly owned subsidiaries: Dimex Solutions
  Ltd. (previously named BOScom Ltd.) and its subsidiary Dimex Hagalil Projects
  (2008) Ltd.

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 July 2007,
the Company entered into an agreement with CYMS K.M.D Ltd., to purchase the
assets of CYMS for an aggregate consideration of $ 66,000, which was paid
by issuance of 5,594 shares of the Company and by a cash payment of $51,000.

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 (including $373,000
paid against undistributed net income for the first nine months of 2007 in
Summit). 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.

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 for acquiring the
business operation of Dimex was NIS 17.6 million (approximately $5,460,000 based
on the May 31, 2008 exchange rate) and for the inventory, accounts receivable
and fixed assets, the consideration was NIS 27 million (approximately
$8,377,000 based on the May 31, 2008 exchange rate). The consideration is
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 addition,
we have an interest in two companies:

(a) Surf
Communications Solutions Ltd. (Surf), in which as of December 31, 2007 we hold
6.94% of the issued and outstanding share capital. Established in 1996, Surf is
an Israeli privately held company, with offices in the United States and in
Europe. 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) most of the Surf shares held by
Catalyst as a result of which Catalyst 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.

- 17 -

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---



(b) Qualmax
Inc. (Pink Sheets: QMXI.PK) (Qualmax), in which as of December 31, 2007 we
hold 17.87% and its subsidiary New World Brands (OTC: NWBD.OB) (New World),
in which as of December 31, 2007 we hold 3.96%. 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.

Qualmax also
issued to the Company a five-year warrant for the purchase of up to 107,143
shares at the exercise price of $2.80 per share (Warrants). The Company
received certain piggy-back registration rights with respect to the Qualmax
shares and the shares underlying the Warrants. The Company does not have a
representative on the Board of Directors of Qualmax.

The Company
also granted a bridge loan to IP Gear in the amount of $1,000,000. The term of
the loan was three years and it bore interest equal to the Prime rate plus
2.5%, up to a maximum of 12%. In the first 18 months, IP Gear was to pay only
the interest accrued on the loan and monthly principal and interest payments were
to commence thereafter.

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. In connection with the
transaction, we agreed to grant New World, contingent upon the satisfaction of
certain conditions, a three-year option to purchase up to 30% of the New World
shares held by us, at prices ranging from $0.12 to $0.24 per share of Common
Stock.

- 18 -

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---



In addition,
we agreed to enter into a lock up agreement, restricting the transfer of our
share holdings in Qualmax and in New World, for up to two years.

On February
18, 2008 New World and Qualmax entered into an agreement and plan of merger,
pursuant to which Qualmax will be merged with and into the New World. Upon
completion of the merger, which is subject to certain conditions, BOS holdings
in Qualmax will be converted into holdings in 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.

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) 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 an exercise price of $2.76, exercisable for four years from
their date of issuance. For more details see Section 5B. Liquidity and Capital
Resources.

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

BOSs vision is to become a
worldwide leader in the field of comprehensive Mobile & RFID solutions for
enterprise logistics and organizational processes. Committed to this vision, in
2007, BOS effected a reorganization, which included replacement of its senior
management, relocation to the center of Israel - closer to the business centers
and the investment community, and the hiring of highly motivated skilled
employees.

BOS continues
to execute a growth strategy to strengthen its product offering and
distribution channels worldwide. BOS technological infrastructure and future
software products offering was upgraded in 2007 by workforce adjustments and
through the acquisition of new software technology in connection with the
acquisition of the assets of CYMS and Optimize IT.

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 its
Mobile and RFID 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.                                                        

- 19 -

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Continuing this momentum of
synergetic acquisitions, in January 30, 2008 we announced the acquisition of
the business of Dimex Systems (1988) Ltd., in a deal that transformed BOS into
the leading Israeli integrator of AIDC (Automatic Identification and Data
Collection) solutions based on Mobile & RFID and Barcode technology.

Dimex has:

| |       |                                                                                 
| | ----- | --------------------------------------------------------------------------------
| | (i)   | a well established
  reputation in the AIDC field;                              
| |       |                                                                                 
| | (ii)  | proven professional
  capabilities of offering unique, innovative solutions; and
| |       |                                                                                 
| | (iii) | Top Israeli customers.                                                          

BOS product offerings:

Turn Key solution
 Hardware
 Middleware
 SW Applications
 RFID Tags/Readers Mobile InfrastructureEdge Equip. Supply Chain Electronic Components
 RFID Server Mobile Server OptimizeIT Safe-T BOSaNOVA
 PointAct Platform:Supply Chain Logistics Process monitoring Healthcare Retail Environment
 Stand Alone
 Stand Alone
 Stand Alone


BOS manages its business in two
reportable segments, which consist of the Mobile and RFID Solutions segment  offered
through BOS and Dimex, and the Supply Chain Solutions segment offered through Summit and
Odem. These segments are complementary with strong synergy. A third segment, Communication
Solutions, existed until it was sold in the fourth quarter of 2005, and is presented in
the financial reports under discontinued operations.

Through our two business segments:
Supply Chain Solutions and Mobile and RFID Solutions, BOS offers 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 Hardware we
offer, among others, a Mobile infrastructure, edge equipment, RFID tags and
readers, supply chain components and electric components.

- 20 -

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Our Middleware product
offering consists, among others, of: OptimizeIT, Safe-T, RFID Server, Point,
BOSaNOVA, Mobile Server and Data Collection tools.

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

Hardware

RFID Tags and Readers

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
leader manufactures of Automatic
Identification and Data Collection equipment based on RFID and barcode
technology. Among the manufacturers we represent are Symbol Technologies Inc.,
Intermec Technologies UK Ltd. (Mobile terminal), Zebra Technologies Europe Ltd.
(barcode printers), Texas Instruments and 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.

Supply Chain Solutions

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.

Electronic Components

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.

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

- 21 -

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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 2008, our Supply Chain sales to the Israel Aircraft Industries,
and to a strategic Latin American customer, accounted for 11%, and 10% of
revenues, respectively. An interruption in our business relationship with
theses customers would materially adversely impact our financial results.

In 2007 and
2006, 94% and 90% of our sales, respectively, were attributed to sales of the
Supply Chain Solutions segment.

MiddlewareRFID 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.

Our RFID server 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.

Mobile solutions:

Enabling
workforce mobility solutions, allowing remote users to connect, access and
interact with enterprise applications and resources anywhere and anytime.

Field agents,
sales personnel, system administrators and other employees are increasingly on
the go, but the access to enterprise applications and data stored at their
headquarters computers, is not available to them. Our Mobile solutions are
ideal for the remote workforce, bringing desktop functionality and corporate
applications to the palm of their cell phones, PDAs and wireless terminals.

OptimizeIT

OptimizeIT is
a revolutionary automatic software utilization tool giving the organization the
ability to monitor the actual use of licenses by any number of stations and
respond, as necessary, by the transfer of software licenses from an idle
station to another that is awaiting the release of the license.

- 22 -

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Safe-T

Safe-T is a
server based solution that provides organizations with a holistic approach to
their file transfer needs. It delivers and manages secure file transfers for
enterprise customers. Safe-T uses compression technology that ensures fast
transmission of the data that is secured by encrypting the transmission channel
or the data itself. The recipient has no need for client software, thus
eliminating  costly support or
maintenance. Safe-T manages the file recipients and the way they are
authenticated and monitors and reports on all corporate file transfer activity
allowing accountability.

BOSâNOVA Suite Solution

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

PointAct
platform is an application development tool which was developed by BOS and is
also used by BOS to develop Mobile and RFID 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. Streamlined
  administration, cutting the time needed for critical tasks from hours to
  minutes.
| |    |                                                                                                                                                                           
| | b. | 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.

Mobile and RFID Solutions

In the United
States, we market our BOSâNOVA Suite solution through one key distributor,
Bosanova Inc., located in Phoenix, Arizona, which coordinates the midrange
connectivity-related marketing efforts of dozens of distributors and resellers,
and offers technical support and after-sales service. The sales to Bosanova
Inc. in the first quarter of 2008 accounted for 16% of the Mobile and RFID
Solutions revenues for that quarter. In the rest of the world we market our
solutions directly, through distributors and system integrators. In year 2008
we intend to increase our international sales force with new distributors,
system integrators, sales representatives and direct sales persons who specialize
in the Mobile and RFID solutions.

Supply Chain Solutions

We market our
Supply Chain Solutions in North and Latin America through our fully owned U.S.
subsidiaries Summit and Ruby-Tech Inc. In the rest of world we market our
products mainly through our headquarters in Israel. Our sales force is
comprised of direct sales teams and sales representatives.

- 23 -

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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 US$) from continuing operations,
by major geographic area, for the periods indicated below:

|                  |  |      |        |   |  |      |  |   |        |      |  |     |  |  |        |  |  |     | 
|----------------- |  | ---- | ------ | - |  | ---- |  | - | ------ | ---- |  | --- |  |  | ------ |  |  | --- | 
|                  |  | 2007 |        | % |  | 2006 |  | % |        | 2005 |  | %   | 
|                  |  |      |        |   |  |      |  |   |        |      |  |     | 
|                  |  |      |        |   |  |      |  |   |        |      |  |     |  |  |        |  |  |     | 
|America           |  |      | 5,420  |   |  | 23   |  |   | 2,848  |      |  | 14  |  |  | 3,439  |  |  | 14  | 
|                  |  |      |        |   |  |      |  |   |        |      |  |     |  |  |        |  |  |     | 
|Europe            |  |      | 1,511  |   |  | 6    |  |   | 1,173  |      |  | 6   |  |  | 1,171  |  |  | 5   | 
|                  |  |      |        |   |  |      |  |   |        |      |  |     |  |  |        |  |  |     | 
|Far East          |  |      | 964    |   |  | 4    |  |   | 2,019  |      |  | 10  |  |  | 6,083  |  |  | 25  | 
|                  |  |      |        |   |  |      |  |   |        |      |  |     |  |  |        |  |  |     | 
|Israel and others |  |      | 15,879 |   |  | 67   |  |   | 14,877 |      |  | 70  |  |  | 13,406 |  |  | 56  | 
|                  |  |      |        |   |  |      |  |   |        |      |  |     |  |  |        |  |  |     | 
|Total Revenues    |  |      | 23,774 |   |  | 100  |  |   | 20,917 |      |  | 100 |  |  | 24,099 |  |  | 100 | 
|                  |  |      |        |   |  |      |  |   |        |      |  |     |  |  |        |  |  |     | 

Sales by
divisions:

|                       |  |      |        |   |  |      |  |   |        |      |  |     |  |  |        |  |  |     | 
|---------------------- |  | ---- | ------ | - |  | ---- |  | - | ------ | ---- |  | --- |  |  | ------ |  |  | --- | 
|                       |  | 2007 |        | % |  | 2006 |  | % |        | 2005 |  | %   | 
|                       |  |      |        |   |  |      |  |   |        |      |  |     | 
|                       |  |      |        |   |  |      |  |   |        |      |  |     |  |  |        |  |  |     | 
|Mobile and RFID        |  |      | 2,673  |   |  | 11   |  |   | 2,344  |      |  | 11  |  |  | 3,993  |  |  | 17  | 
|                       |  |      |        |   |  |      |  |   |        |      |  |     |  |  |        |  |  |     | 
|Supply Chain Solutions |  |      | 21,101 |   |  | 89   |  |   | 18,573 |      |  | 89  |  |  | 20,106 |  |  | 83  | 
|                       |  |      |        |   |  |      |  |   |        |      |  |     |  |  |        |  |  |     | 
|Total Revenues         |  |      | 23,774 |   |  | 100  |  |   | 20,917 |      |  | 100 |  |  | 24,099 |  |  | 100 | 
|                       |  |      |        |   |  |      |  |   |        |      |  |     |  |  |        |  |  |     | 

Manufacturing

The products
of our subsidiary Dimex Solutions Ltd. and Dimex Hagalil Projects (2008) Ltd., 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.

Our Supply
Chain Solution segment products are manufactured by third party suppliers. Most
of our sales in our Supply Chain segment rely on products of certain main
manufacturers which we represent. One major manufacturer accounted for 11% of
our Supply Chain Solution segment purchases during 2007.

- 24 -

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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

Mobile and RFID Solutions:

The Mobile and
RFID 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 Mobile and RFID market are LogiTag system ltd, Galbital
RFID solutions Ltd., Dannet Advanced Technologies Ltd., L.X Mobile Systems
Ltd., Nortec AMI Ltd. and Netcode Ltd. In the global market our main
competitors are Aeroscout, RF Code and Tagsys. We see our advantage over the
competitors by our offering of comprehensive solutions which combine software
solutions and RFID peripheral equipment such as readers and tags

In the
Bosanova Suite solutions field, our main competitors include IBM, Perle,
Advanced Business Link, IGEL, CLI PowerTerm, NLynx, NetManage, Attachmate, and
Seagull, Adobe, Optio and Formscape.

- 25 -

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Supply Chain Solutions:

We hold
several representation agreements with major suppliers and manufacturers such
as: Texas Instruments, Sokymat SA, Amphenol, Eaton and Fenwall.

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.

In October
2005, our major supplier to the Far East market opened its own headquarters in
China, causing a substantial decrease in our sales to the Far East. The number
of instances in which territorial-based distribution agreements are challenged
by large foreign distributors, who receive a special discount on large volume
purchases from the suppliers and compete with the local distributor by selling
directly to its customers, is increasing. Still, despite inferiority in
pricing, local distributors have some advantages over such competition by
providing close and continuous technical support, large inventory, a wide
spectrum of products and short reaction time.

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, Avio.

Strategy

The Companys vision is to
become a worldwide leader in the field of comprehensive Mobile & RFID
solutions for enterprise logistics and organizational processes.

The key
elements of our strategy are as follows:

| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Continue to
  develop our range of Mobile and 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 Mobile and
  RFID solutions.
| |   |                                                                                                                                                                                             
| | · | Increase
  representations of manufacturers by our Supply Chain Solutions segment.                                                                                                          
| |   |                                                                                                                                                                                             
| | · | 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.

- 26 -

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

The Companys
wholly owned subsidiaries include:

In Israel:

1) Dimex
Solutions Ltd. (previously BOScom Ltd), which is part of the Mobile and RFID
segment, and its wholly owned subsidiary, Dimex Hagalil Projects (2008) Ltd.,
which was incorporated in January 2008;

(2) Odem
Electronic Technologies 1992 Ltd. (Odem), which we purchased on November 18,
2004 from Odems previous shareholders, and in which, by November 2005, our
holdings increased to 100%. Odem, an Israeli company, 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 Mobile and RFID solutions segment; and

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

In the United
States:

(1) Lynk USA
Inc., a Delaware Corporation, and its subsidiaries:

| |    |                                                                                                                                                                                                                                 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Summit Radio
  Corp. (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 aviation and aerospace 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.                               

(2) Ruby-Tech
Inc., a New York corporation and a wholly owned subsidiary of Odem.

(3) BOS
Delaware Inc. a Delaware corporation, whose operations ceased in 2002.

In Europe:

BOScom Ltd.
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.

The voting
power we (or our subsidiaries) have in all our subsidiaries, equates our
shareholdings.

The Company
also holds interests in:

|   |                                                                                                                                                                                                                                                                                                                                                                    
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | Surf Communication  Systems Ltd.  ("Surf"),  of which we held 6.94% as of December 31, 2007. (see "Section
        4A. History and Development of the Company")                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                    
|2. | Qualmax Inc., (QMXI.PK) which as of December 31, 2007 we held 17.87% and its
subsidiary New World Brands Inc. (OTC: NWBD.OB) which as of December 31, 2007 we held
3.96% The Companys holdings in Qualmax and New World were received as the
consideration for the sale of the communication segment. (see Section 4A. History
and Development of the Company)

- 27 -

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

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

|                  |  |                        |  |                     |                                      |                  |                                     
|----------------- |  | ---------------------- |  | ------------------- | ------------------------------------ | ---------------- | ------------------------------------
|Location          |  | Size (square
  meters) |  | End of lease period |                                      | Extension Option
|                  |  |                        |  |                     |                                      |                 
|                  |  |                        |  |                     |                                      |                  |                                     
|Israel:           |  |                        |  |                     |                                      |                  |                                     
|                  |  |                        |  |                     |                                      |                  |                                     
|Rishon Lezion*    |  | 1,092                  |  |                     | July 2009-
  through January 2012    |                  | January 31,
  2016                  
|                  |  |                        |  |                     |                                      |                  |                                     
|Tel Aviv          |  | 784                    |  |                     | October 27,
  2008                   |                  |                                     
|                  |  |                        |  |                     |                                      |                  |                                     
|Kibutz Dafna      |  | 578                    |  |                     | December 31,
  2008                  |                  |                                     
|                  |  |                        |  |                     |                                      |                  |                                     
|Yoqneam           |  | 390                    |  |                     | January
  2009- through January 2010 |                  | January
  2010- through January 2012
|                  |  |                        |  |                     |                                      |                  |                                     
|New Jersey,
  USA |  | 678                    |  |                     | January 31,
  2010                   |                  |                                     

* In addition,
our subsidiary, Odem, owns 302 square meters in the same building.

Our average
monthly rental fee in 2008 (up till May), for the year 2007 and for the year
2006 amounted to $14,000, $9,000 and $10,000,
respectively.

We plan to
concentrate all of our Israeli operation in one location, 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 (GAAP )
in the United States of America.

- 28 -

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Critical accounting policies

Use of Estimates

The
preparation of our financial statements required the Company to make
estimations and judgments, in accordance with U.S. GAAP, that affect the
reporting amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. The Company evaluates its
estimates, including those related to revenue recognition, bad debts,
inventories, and legal contingencies on an ongoing basis. The Company based its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis of making judgments about the values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

For a review
of the accounting policies that form the basis of the above-referenced
estimates and judgments that the Company made in preparing its consolidated
financial statements, please see Note 2 (Significant Accounting Policies) to
the Consolidated Financial Statements for the year ended December 31, 2007. The
following accounting policies had the most significant impact on the Financial
Statements for the year ended December 31, 2007.

Functional and Reporting Currency:

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.

Odems
functional currency as of December 31, 2004, was New Israeli Shekels (NIS) and
was translated into U.S. dollars. Beginning April 1, 2005, Odems functional
currency became the U.S. dollar, due to the following man factors:

|  |                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------
|· | Odems
  integration with BOS resulted in a transition of its budget planning and
  business performance measurement from NIS to U.S. dollars;
|  |                                                                                                                                               
|· | A majority
  of Odem revenues and expenses became permanently linked to or paid in U.S.
  dollars.                                            

In accordance
with FAS 52, Foreign Currency Translation and since Odems functional
currency changed to the BOS reporting currency, U.S. dollars, the pre-change
translation adjustments as of March 31, 2005 have not been removed from equity
and the pre-change translated amounts for non monetary assets as of March 31,
2005 became the accounting basis for those assets in the periods starting April
1, 2005.

The functional
currency of Summit, which was acquired in November 21, 2007, is the U.S.
dollar.

The functional
currency of Dimex, which as of March 2008 consolidated into BOS results, is the
NIS and its financial statements have been translated into U.S. dollars. All
balance sheet accounts were translated using the exchange rates in effect at
the balance sheet date. Statement of operations amounts were 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).

- 29 -

---

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Inventory

Inventories
are valued at the lower of cost or market value. Cost is determined as follows:
Raw and packaging materials - moving average cost method, Products in progress
and finished products - moving average cost method.

Inventory
write-offs are provided to cover risks arising from slow-moving items or
technological obsolescence. As of December 31, 2007 and 2006, inventory is
presented net of $358,000 and $100,000 respectively, for technological
obsolescence and slow moving items (see also Note 4 to the Consolidated
Financial Statements for the year ended December 31, 2007).

Investment in an affiliated company

An affiliate
is a company in which the Company is able to exercise significant influence,
but that is not a subsidiary and is accounted for by the equity method, net of
write-down for decrease in fair value, which is not of a temporary nature. The
Companys investment in Surf has been included as an affiliate until
September 30, 2005. In June 2006, following an investment round, the
Companys holdings in Surf decreased to 7.8% of Surfs issued and outstanding
shares. As a result, the Company ceased to have the ability to exercise
significant influence over Surf and, accordingly, the adjusted carrying amount
of the investment is accounted for based on the cost accounting method (see
Note 5to the Consolidated
Financial Statements for the year ended December 31, 2007).

The Companys
investment in this company 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 2005, an impairment of $1,385,000 has been recorded in equity in
losses of an affiliate in the statement of operations.

Investment in other companies

Investments in public
companies with restrictions of less than one year are classified as
available-for-sale under FAS 115 (Readily Determined Sales Price Currently
Available on a Security Exchange), and are adjusted to their fair market value
with unrealized gains and losses recorded as a component of accumulated other
comprehensive income (loss).

Our investment
in QMX and NWB is presented, commencing December 31, 2007 at the sales price on
the applicable securities market, in accordance with FAS 115 (See note 1d to
the Consolidated Financial Statements for the year ended December 31, 2007).

Management evaluates
investments in other companies for evidence of other than temporary declines in
value. Accordingly, during 2007 and 2006, an impairment loss, due to other than
temporary decline, of $5,588,000 and $39,000 has been recorded, respectively
and presented in other income (loss), net in the consolidated statements of
operations. During 2005, no impairment losses have been identified.

- 30 -

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Goodwill, Intangible Assets and Other
Long-Lived Assets

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 Solutions 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.

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 2007, 2006
and 2005, no impairment losses have been identified.

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 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 collectability is
reasonably assured.

Most of the
Companys revenues are generated from sale 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 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
collectability 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.

- 31 -

---

---



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 or for new arrangements, based upon the price that management will
determine to charge.

Income taxes:

The Company
accounts for income taxes in accordance with Statement of Financial Accounting
Standards No 109, Accounting for Income Taxes. This Statement prescribes the
use of the liability method whereby deferred tax assets and liability account
balances are determined based on 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 has provided valuation allowances, in respect of deferred
tax assets resulting from tax loss carry forward and other reserves and
allowances due to its history of operating losses and current uncertainty
concerning its ability to realize these deferred tax assets in the future.

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.

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.

- 32 -

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Stock 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. In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin 107 (SAB 107) relating to SFAS 123(R). The Company
has applied the provisions of 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. Prior to the adoption of SFAS 123(R), the Company accounted for
equity-based awards to employees and directors using the intrinsic value method
in accordance with APB 25 as allowed under Statement of Financial Accounting
Standards 123, Accounting for Share-based Compensation (SFAS 123).

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.

Prior to
January 1, 2006, the Company applied the intrinsic value method of accounting
for stock options as prescribed by APB 25, whereby compensation expense is
equal to the excess, if any, of the quoted market price of the stock over the
exercise price on the date of grant of the award.

The Company
recognizes compensation expenses for the value of its awards granted subsequent
to January 1, 2006 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
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 average of the options contractual life and the vesting period
in accordance with SAB 107 guidance. 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. (see Note 2 to the
Consolidated Financial Statements for the year ended December 31, 2007).

- 33 -

---

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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.

Impact of recently issued accounting
pronouncements

In September
2006, the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS 157) which defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. SFAS 157 applies to other accounting pronouncements that require
or permit fair value measurements and, accordingly, does not require any new
fair value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 for financial assets and liabilities, as well as for any
other assets and liabilities that are carried at fair value on a recurring
basis, and should be applied prospectively. The adoption of the provisions of
SFAS 157 related to financial assets and liabilities and other assets and
liabilities that are carried at fair value on a recurring basis is not
anticipated to materially impact the Companys consolidated financial position
and results of operations. Subsequently, the FASB provided for a one-year
deferral of the provisions of SFAS 157 for non-financial assets and liabilities
that are recognized or disclosed at fair value in the consolidated financial
statements on a non-recurring basis.

The Company is
currently evaluating the impact of adopting the provisions of SFAS 157 for
non-financial assets and liabilities that are recognized or disclosed on a
non-recurring basis.

In February
2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159).
Under this Standard, the Company may elect to report financial instruments and
certain other items at fair value on a contract-by-contract basis with changes
in value reported in earnings. This election is irrevocable. SFAS 159 provides
an opportunity to mitigate volatility in reported earnings that is caused by
measuring hedged assets and liabilities that were previously required to use a
different accounting method than the related hedging contracts when the complex
provisions of SFAS 133 hedge accounting are not met. SFAS 159 is effective for
years beginning after November 15, 2007. There is no impact of adopting SFAS
159 on its financial position, cash flows, and results of operations of the Company.

In December
2007, the FASB issued Statement of Financial Accounting Standards No. 141
(Revised 2007) (SFAS 141R), Business Combinations. SFAS 141R will change the
accounting for business combinations. Under SFAS 141R, an acquiring entity will
be required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited exceptions. SFAS
141R will change the accounting treatment and disclosure for certain specific
items in a business combination. SFAS 141R 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. SFAS
141R will have an impact on accounting for future business combinations once
adopted and not on prior acquisitions. The Company is currently evaluating the
impact of adopting the provisions of SFAS 141R.

- 34 -

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In December
2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (SFAS 160). SFAS 160 establishes 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 reporting requirements
that provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. This standard is effective for fiscal years beginning after December
15, 2008 and should be applied prospectively. However, the presentation and
disclosure requirements of the statement shall be applied retrospectively for
all periods presented. The adoption of the provisions of Statement No. 160
is not anticipated to materially impact the Companys consolidated financial
position and results of operations. The Company is currently evaluating the
impact of adopting the provisions of SFAS 160.

In December
2007, the U.S. Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 110 (SAB No. 110) to amend the SECs views discussed in
Staff Accounting Bulletin 107 (SAB No. 107) regarding the use of the
simplified method in developing an estimate of expected life of share options
in accordance with SFAS No. 123(R). SAB No. 110 is effective for the company
beginning in the first quarter of fiscal year 2008. The Company expects to
continue using the simplified method. As a result, the Company does not expect
the adoption of SAB No. 110 will have a significant impact on its consolidated
financial statements.

Discontinued
operations

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., a wholly owned
subsidiary of Qualmax.

The results of
operations, including revenues, cost of revenues, operating expenses, and other
income and expenses of the discontinued operations have been reclassified in
the statements of operations as discontinued operations. The Companys balance
sheet reflects the net assets and liabilities of the discontinued operations as
assets and liabilities related to discontinued operations.

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

Comparison of 2007 and 2006

In the beginning of 2007,
BOS adopted a new strategic vision of becoming a worldwide leader in the field
of comprehensive Mobile & RFID solutions for enterprise logistics and
organizational processes. Committed to this vision, BOS, replaced its senior
management, relocated to the center of Israel  closer to the business centers
and the investment community and hired highly motivated, skilled employees.

BOS continues
to execute a growth strategy to strengthen its product offering and
distribution channels worldwide. BOS technological infrastructure and future
software products offering was upgraded in 2007 by workforce adjustments and
through the acquisition of new software technology in connection with the
acquisitions of the assets of CYMS and Optimize IT.

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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 Mobile and RFID 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 $23,774,000 compared to $20,917,000 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 $4,675,000 (gross
margin of 20%), compared to $4,717,000 (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 $3,811,000 compared to $2,019,000 in 2006, an
increase of $1,792,000.

General and
administrative expenses for 2007 were $1,980,000 compared to $3,268,000 in the
year 2006, a decrease of $1,288,000

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 $1,444,000 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.

As a result of the above, operating loss in year 2007 amounted to
$1,922,000 compared to operating loss of $1,056,000 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.

The acquisitions we consummated in
2007 and in the first quarter of 2008 will increase our use of loans in order to finance
the working capital needs and partly finance the acquisitions (see Section 5B.
Liquidity and Capital Resources). As a result, we expect our financial expenses in
2008 to be higher than in 2007.

- 36 -

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Other expenses
in year 2007 amounted to $6,233,000 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 $ 2,223,000 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. In the first quarter of 2008, due to an increase in the share
price of New World, the book value of our investment increased by $244,000
which was recorded against other comprehensive income (i.e capital fund) and
did not affect our statement of operations. (See note 1d to the Consolidated
Financial Statements for the year ended December 31, 2007)Tax on income in 2007
amounted to $9,000 compared to taxes benefit of $89,000 in 2006. We may record
income tax benefit in year 2008 as a result of usage of carry forward losses by
our subsidiaries, Summit and Dimex.

Loss from
continuing operations in 2007 amounted to $8,633,000 compared to a loss of
$1,593,000 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.

Comparison of 2006 and 2005

Revenues of
2006 were $20,917,000 compared to $24,099,000 in 2005. The decrease is
attributed to: (a) our strategic decision to stop offering our Supply Chain
Solutions in the Far East markets due to increased competition; as a result,
our 2006 revenues to the Far East were reduced by $4,100,000 as compared to
year 2005; and (b) software revenues decreased from $3,926,009 in year 2005 to
$2,058,000 in year 2006 as a result of continued weakness in the sales of
BOSâNOVA Suite Solution to IBM System i environment and (c) year 2005 revenues
included revenues of $864,000 attributed to non profitable product lines that
were sold during that year.

Excluding the
effect of the revenues attributed to the Far East and to the sold product
lines, 2006 revenues reflected a 10% increase over the revenues of 2005.

Gross
profit for 2006 was $4,717,000 (gross margin of 23%) compared to $6,245,000
(gross margin of 26%) for 2005. The decrease in gross margin results from a
decrease in software revenues, which have a relatively high gross margin.
Software revenues decreased from $3,926,000 (gross margin of 62%) in 2005 to
$2,058,000 (gross margin of 65%) in 2006.

Research and
development expenses for 2006 were $486,000 compared to $893,000 for 2005. The
decrease in research and development expenses results from the sale of the
Software Utilities product line during 2005, with respect to which research and
development expenses in 2005 were $378,000.

- 37 -

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Selling and
marketing expenses for 2006 were $2,019,000 compared to $2,425,000 in 2005. The
decrease in selling and marketing expenses results primarily from the sale of
the Software Utilities product line during 2005, with respect to which selling
and marketing expenses in the year 2005 were $226,000.

General and
administrative expenses for 2006 were $3,268,000 compared to $2,667,000 in the
year 2005. General and administrative expenses for 2006 includes shares based
compensation cost in the amount of $727,000 compared to $348,000 in 2005.

As a
result of the above, operating loss in year 2006 amounted to $1,056,000
compared to operating income of $260,000 in year 2005. Financial expenses for
2006 were $626,000 compared to $448,000 in 2005. The increase is attributed
mainly to the issuance of an additional convertible note in principal amount of
$1,500,000 to Laurus Master Fund Ltd. (Laurus) in August 2006.

Tax benefit in
2006 amounted to $89,000 compared to taxes on income of $204,000 in 2005. The
tax benefit and tax on income are related to the taxable income of our
subsidiary, Odem.

Equity losses
of an affiliated company in 2005, refers to our investment in Surf. In
September 2005, Surf completed a private placement that diluted the Companys
holdings to 8.7% of Surfs issued and outstanding share capital. As a result,
the Company ceased to have the ability to exercise significant influence over
Surf and, accordingly, the adjusted carrying amount of the investment is
accounted for based on the cost accounting method.

In June 2006,
as part of an investment round, the Company invested $300,000 in Surf,
following which it holds 7.8% of Surfs issued and outstanding share capital as
of December 31, 2006.

Minority
interest in earnings of a subsidiary in 2005 refers to the Companys investment
in Odem, which as of November 1, 2005, became a wholly-owned subsidiary of the
Company.

Loss from
continuing operations in 2006 amounted to $1,593,000 compared to a loss of
$2,010,000 in 2005. On a per share basis, the basic and diluted loss per share
from continuing operations in 2006 was $0.24, compared to $0.36 in 2005.

Income (loss)
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 2006 was $0.25,
compared to loss $0.28 in 2005.

Basic and
diluted net earning per share in 2006 was $0.01, compared to net loss of $0.64
in 2005.

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.

- 38 -

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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.

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

In the years
ended December 31, 2007, 2006, 2005, 2004, 2003 the inflation rate in Israel as
adjusted for the devaluation of the Israeli currency in relation to the Dollar
was 8.6%, 8.1%, (4.5)% 2.8% and 5.7%, respectively. The closing representative
exchange rate of the Dollar at the end of each such period, as reported by the
Bank of Israel, was NIS 3.846, NIS 4.225, NIS 4.44, NIS 4.603, NIS 4.308 and
NIS 4.379, respectively. As a result, the Company experienced increases in the
Dollar costs of operations in Israel in 2007, 2006, 2004, 2003 and decreases in
2005.

Effective Corporate Tax Rate

Israeli companies are
generally subject to income tax at the declining corporate rate of 29% in 2007,
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, 2007, in the amount of approximately $36,132. 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.

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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.

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 (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.

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As of December
31, 2007, the Company has an outstanding contingent obligation to pay royalties
in respect of OCS grants, in the amount of approximately $3,462,000, compared
to $3,430,000 as of December 31, 2006.

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 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, 2007, the Company has an outstanding contingent obligation to pay royalties
of $83,000 with respect to these grants, compared to $89,000 on December 31,
2006.

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.

- 41 -

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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.

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 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 addition, due to significant economic measures proposed by the
Israeli Government, there have been several general strikes and work stoppages
in 2003 and 2004, affecting all banks, airports and ports. These strikes have
had an adverse effect on the Israeli economy and on business, including our
ability to deliver products to our customers. 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 New Israeli Shekels (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, 2007, the Companys long and short term credit, amounted to $8,314,000, of
which $5,864,000 is credit from Israeli banks and the remainder is from Bank
Leumi New York. (See notes 9 and 11 to the Consolidated Financial Statements
for the year ended December 31, 2007)

As of December
31, 2007, the Companys short term credit, amounted to $5,028,000, long term
loans amounted to $3,286,000 and cash and cash equivalents amounted to
$4,271,000.

- 42 -

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In connection
with the Dimex acquisition in March 2008, we established and used a short term
revolving credit line from Bank Leumi LeIsrael, in order to fund a portion of
the Dimex purchase price, in the amount of NIS 10.5 million (approximately $3.2
million based on May 31,2008 currency exchange rate). The revolving credit line
bears interest at prime plus 1.75%, which is payable monthly. An additional
three year loans in the amount of NIS 6.9 million (approximately $2.1 million based
on May 31, 2008 currency exchange rate), will be used to make four additional
semi-annual installments for payment of part of the consideration in the Dimex
acquisition through March 2010. The three-year loan bears interest at prime
plus 2%, which is payable monthly.

The company loans are
secured by:

| |   |                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | first ranking fixed
  charges on the goodwill of BOS and its subsidiaries, on our shareholdings in
  the subsidiaries and on certain bank accounts of Odem; and                                                                                                  
|
| | · | floating charges on all of
  the assets of BOS and its subsidiaries, owned now or in the future. BOS also
  guarantees the liabilities of Dimex Solutions to the bank and each of Dimex
  Solutions and Odem technologies guarantee BOS liabilities to the bank.

In addition, the loan
agreements contain various covenants which require, among other things, that we
maintain certain financial ratios related to our shareholders equity. The loan
terms also restrict substantial asset sales, cash dividends, certain
inter-company and shareholders payments.

Pursuant to the Dimex Asset
Purchase Agreement, as of May 31, 2008 we are required to pay to the sellers an
additional approximately NIS 25 million (approximately $7.7 million based on
May 31, 2008 currency exchange rate), in four installments. The first installment
of NIS 15 million is due in September 2008 and the remaining amount is payable
in three semi-annual installments through March 2010.

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

Net cash used
in operating activities from continuing operations in 2007 was $4,595,000
compared to $1,953,000 in 2006, an increase of $2.6 million. The increase is
attributed to an increase in working capital needs as a result of growth in
revenues in year 2007 as compared to year 2006, and to an increase in year 2007
losses as compared to year 2006.

During 2007,
cash used in investing activities from continuing operations amounted to
$4,731,000 as compared to cash provided by investing activities in the amount
of $631,000 in 2006. In year 2007 we used $4.5 million in acquisitions while in
year 2006 we had net proceeds of $655,000 from redemption of marketable
securities. The cash provided by investing activities results mainly from
redemption of marketable securities.

Net cash
provided by financing activities in 2007 amounted to $11,564,000, which relates
mainly to proceeds from share issuance and bank loans. Net cash provided by
financing activities amounted to $1,676,000 in 2006, attributed to proceeds
from bank loans and convertible notes.

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.

- 43 -

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---



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, 2007,
our average trade receivables and trade payables aging days are 85 and 68
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. In year 2007 we raised equity of $6.6 million and $4.8
million net loans. In March 2008 we established a short term revolving credit
line from Bank Leumi LeIsrael in the amount of $3.2 million. An additional three
year loan in the amount of $2.1 million, will be used for payment of part of
the consideration in the Dimex acquisition in four semi-annual installments
through March 2010. The three year loan bears interest at prime plus 2%, which
is payable monthly. 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,
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.

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.

- 44 -

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---



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.

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.

- 45 -

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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. The Company also entered into a Registration Rights
Agreement granting the investor certain incidental registration rights.

In December
2007, the Company entered into a Share Purchase Agreement with Catalyst Fund
L.P. and three subsidiaries of D.S. Apex Holdings Ltd., 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 18 to the
Consolidated Financial Statements for the year ended December 31, 2007). 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.

|    |                         
|--- | ------------------------
|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 Mobile & RFID 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.

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

In the
beginning of 2007, BOS adopted a new strategic vision of becoming a worldwide
leader in the field of comprehensive Mobile & RFID solutions for enterprise
logistics and organizational processes. In light of this vision, BOS effected a
reorganization which included replacement of its senior management, relocation
to the center of Israel - closer to the business centers and the investment
community, and the hiring of highly motivated skilled employees.

BOS continues
to execute a growth strategy to strengthen its product offering and
distribution channels worldwide. BOS technological infrastructure and future
software products offering was upgraded in 2007 by workforce adjustments and
through the acquisition of new software technology in connection with the
acquisition of the assets of CYMS and of Optimize IT.

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 its
Mobile and RFID solutions a gateway to the U.S. markets.

- 46 -

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---



In January 2008,
we announced the acquisition of the business of Dimex Systems (1992) Ltd.
(Dimex), in a deal that transformed BOS into the leading Israeli integrator
of AIDC (Automatic Identification and Data Collection) solutions based on
Mobile & RFID and Barcode technology.

We believe
that these acquisitions will increase our revenues to $55 million in year 2008,
compared to $24 million in year 2007. However, we do not expect our gross
profit margin to change as compared to year 2007. In addition, our 2008 revenues
could be adversely affected by the recent slowdown in the financial markets and
its impact on the industry and technology markets.

The year 2008
is a year of synergy and integration of our acquisitions. Hence, we expect our
2008 operating expenses to increase as compared to 2007, with the
cost-reduction results of synergy and integration to be fully reflected in
2009.

The vast
majority of our sales are made in U.S. dollars and significant portion of our
expenses is in New Israel Shekels (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 dollar. In 2007, and until May 31, 2008, the dollar devaluated
against the NIS by approximately 23.5%, 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.

Our recent
acquisitions required us to increase our credit facilities in order to finance
part of the acquisition and our working capital needs. As a result, we expect
our financial expenses in year 2008 to be higher than in year 2007. The
acquisitions also generated intangible assets that will cause an increase in
the amortization of intangible assets expenses in year 2008 as compared to year
2007.

Our recently
acquired subsidiaries, Summit and Dimex have carry forward losses, and a result
we may record an income tax benefit in year 2008.

|    |                               
|--- | ------------------------------
|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 thru December 2008.

In May 2008,
we announced that we finalized a contract for the sale of components to the
strategic Latin American customer. The contract, expected to be signed in the
near future, provides for a framework for orders potentially amounting to up to
$25 million during an initial five-year term (until 2012). The contract may be
extended for additional five-year terms. Pursuant to the contract, we committed
to a fixed components sale price through 2010, which is partly covered by
manufacturers obligation for fix 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.

- 47 -

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As of December
31, 2007 we had no write down of write off of inventory that related to this
agreement.

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

The following
table of our material contractual obligations as of December 31, 2007,
summarizes the aggregate effect that these obligations are expected to have on
our cash flows in the periods indicated:

|                                                |  |                       |  |                  |           |           |  |           |  |                   |        |  |  |         | 
|----------------------------------------------- |  | --------------------- |  | ---------------- | --------- | --------- |  | --------- |  | ----------------- | ------ |  |  | ------- | 
|                                                |  | Payment due by period
|                                                |  |                      
|                                                |  | Total                 |  | Less than 1 year |           | 1-3 years |  | 3-5 years |  | More than 5 years
|                                                |  |                       |  |                  |           |           |  |           |  |                  
|                                                |  |                       |  |                  |           |           |  |           |  |                   |        |  |  |         | 
|Long-term loans (1)                             |  | 3,929,000             |  |                  | 643,000   |           |  | 3,278,000 |  |                   | 8,000  |  |  |         | 
|Accrued severance pay (2)                       |  | 798,000               |  |                  |          |           |  |          |  |                   |       |  |  | 798,000 | 
|Operating lease - cars                          |  | 549,592               |  |                  | 276,545   |           |  | 273,047   |  |                   |       |  |  |        | 
|Purchase obligation for service
  and inventory |  | 5,579,407             |  |                  | 5,579,407 |           |  |          |  |                   |       |  |  |        | 
|Facilities lease                                |  | 410,357               |  |                  | 163,283   |           |  | 243,046   |  |                   | 4,028  |  |  |         | 
|                                                |  |                       |  |                  |           |           |  |           |  |                   |        |  |  |         | 
|Total                                           |  | 11,266,356            |  |                  | 6,662,235 |           |  | 3,794,093 |  |                   | 12,028 |  |  | 798,000 | 
|                                                |  |                       |  |                  |           |           |  |           |  |                   |        |  |  |         | 

|    |                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Does not
  include interest.                                                                                                                                                                         
|    |                                                                                                                                                                                                      
|(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).

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 |  |  | 43  |  |  | Chairman of the Board of
Directors                 
|                       |  |  |     |  |  |                                                    
|Mr. Shmuel Koren       |  |  | 38  |  |  | President and Chief
  Executive Officer            
|                       |  |  |     |  |  |                                                    
|Mr. Eyal Cohen         |  |  | 39  |  |  | Chief Financial Officer                            
|                       |  |  |     |  |  |                                                    
|Mr. Joel Adler         |  |  | 54  |  |  | Director                                           
|                       |  |  |     |  |  |                                                    
|Mr. Amir Ohad          |  |  | 44  |  |  | Director                                           
|                       |  |  |     |  |  |                                                    
|Mr. Joshua Zoller      |  |  | 58  |  |  | Director                                           
|                       |  |  |     |  |  |                                                    
|Mr. Dan Hoz            |  |  | 37  |  |  | Director                                           
|                       |  |  |     |  |  |                                                    
|Mr. Gérard
  Limat     |  |  | 67  |  |  | Director                                           
|                       |  |  |     |  |  |                                                    
|Mr. Ronen Zavlik       |  |  | 47  |  |  | Director                                           
|                       |  |  |     |  |  |                                                    
|Dr. Yael Ilan          |  |  | 59  |  |  | External Director                                  
|                       |  |  |     |  |  |                                                    
|Prof. Adi Raveh        |  |  | 60  |  |  | External Director                                  
|                       |  |  |     |  |  |                                                    
|Mr. Avidan Zelicovsky1 |  |  | 38  |  |  | Head of
  Supply Chain Solutions, Israel and Europe
|                       |  |  |     |  |  |                                                    
|Mr. Yuval
  Viner      |  |  | 45  |  |  | Head of
  Mobile and RFID Infrastructure           
|                       |  |  |     |  |  |                                                    
|Mr. Andrew
  Levi      |  |  | 45  |  |  | Head of
  Supply Chain Solutions, the Americas     
|                       |  |  |     |  |  |                                                    
|Mr. Shai Sadeh         |  |  | 54  |  |  | Head of
  Mobile and RFID Software                 
|                       |  |  |     |  |  |                                                    
|Ms. Sari Ellenberg     |  |  | 50  |  |  | Vice President, Resources                          



---

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


- 48 -

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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 Investments and Chairman of
Cukierman & Co. Investment House. Since 1993, Cukierman & Co.,
Investment House realized  2.7 billion of Corporate Finance transactions. Mr.
Cukierman is a former Board member of Orex, MTI Wireless and other technology
companies. He was the President and CEO of the Astra Fund. He served as a Board
member of Otto Capital, a Singapore based VC fund. He was the former President
of the Supervisory Board of Citec-Environment and Services in Paris. He is
currently a Board member of Lamina Technologies in Switzerland. He is also on
the Board of Sar-El, an Israeli Defense Forces volunteer organization. He
serves as an Officer of the IDF Spokesman Unit, and is 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. Shmuel Koren has been serving as the
Companys President and CEO Since November 2006. From 1999 to 2006 Mr. Koren
served as the Chief Financial Officer of Visonic Ltd. (LSE: VSC.L; TASE:
VSC.TA). Prior to joining Visonic, Mr. Koren worked at Oren and Horowitz (an
Israeli CPA firm), where he served for five years as a senior manager
specializing in public companies and Israeli IPOs. Mr. Koren is a certified
public accountant in Israel. He holds a B.A. degree in Business and Accounting
from the Tel Aviv College of Business, an International M.B.A degree from the
Herriot-Watt University Business School and a Masters degree in Law (LL.M.) from
Bar Ilan University.

Mr. Eyal Cohen was appointed the Companys
Chief Financial Officer on 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.

- 49 -

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Mr. Joel Adlerhas 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. Joel 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. Amir Ohad, has been the CEO and
President of Kafrit Industries Ltd. in Israel and its subsidiaries in the UK
and Germany, since 2005 and until January 2007. Kafrit is traded on the
Tel-Aviv Stock Exchange and produces additives and master batches to the
plastic industry. Previously, between the years 2000-2005, Mr. Ohad served as
the CFO of Scitex Vision Ltd., that was sold to Hewlett-Packard in 2005 and as
a member of the Executive Committee of a subsidiary of a corporation traded in
NASDAQ. From 1997-2000, Mr. Ohad served as CFO of Giltek Telecommunications
Ltd., a company traded on the Tel-Aviv Stock Exchange. Mr. Ohad holds a B.A. in
Business Administration and Economics, an MBA in Finance and an M.A. in
Economics (Public Economics), all from the Hebrew University in Jerusalem.

Mr. Joshua Zoller, has been serving as
Finance Manager of Federman & Sons (Holdings) Ltd., an importer and
marketer of coffee and manufacturer and marketer of Liquid fertilizer for the
last twenty years. Mr. Zoller currently serves as a director in Ubank Funds
Management Ltd., Yachad Physicians and Consumer Club Ltd. Mr. Zoller holds a
B.A. in Accounting and Economics from the University of Haifa.

Mr. Dan Hoz, has been serving as the CFO of
Valor Computerized System Ltd., a provider of vertically integrated
manufacturing productivity solutions to the PCB industry since 2002.
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 CEO 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.

- 50 -

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Dr. Yael Ilan Dr. Yael Ilan has been an
external director since November 2002. Dr. Ilan is the president of Yedatel
Ltd., an economic consulting company, and serves as a director of CI Systems in
the technology sector. Until 1998, she served on the board of Bezeq - Israels
Telecommunication Company in which she headed the committee of technological
policy and infrastructure and was a member of the audit committee and the
committee for strategic planning and investment. From 1998 through 2000 she
served as an external director of Elron Industries. In 2000-01 she founded and
managed Optichrom, an optical component start-up. From 1995 through 2000 Dr.
Ilan served as the head of program of the Broad Band Communication, a
consortium of MAGNET  the Israeli Government hi-tech cooperation initiative.
From 2002, Dr. Ilan serves as the industrial coordinator in the Electrical
Engineering Department of the Technion. In addition, from 2008, she serves as
Ismart, MAGNET consortium, program manager. Dr. Ilan holds a Ph.D. in
industrial engineering from Stanford University, a Ph.D. in physical chemistry
from the Hebrew University and a Masters degree in business administration from
the Hebrew University.

Prof. Adi Raveh has been an external
director since February 2003. Prof. Raveh is a professor and head of the B.A.
Program at the School of Business Administration, Hebrew University, Jerusalem.
Since 1998 he serves as an external director at Clal Insurance Company Ltd.
Since 2002 he serves as the Chairman of the Board of Jerusalem Capital Markets
Underwriting limited. He also serves as a director of Meitav - a Mutual Funds
Management company (since 1995), and as a director of Peilim  a Portfolio
Management company  part of Bank Hapoalim Group (since 1996). Since 1992 he is
a director who represents the Hebrew University at Hi-Tech  a Technology
Entrepreneurship located at Har-Hahotzvim, Jerusalem. Prof. Raveh also serves
as a director of two start-up companies: A.D.M (Advanced Dialysis Methods Ltd.)
and Virtouch Ltd. Between 1994-1999 he served as a director and a member of the
executive committee of the Bank of Jerusalem, Ltd. Between 1996-1998 he served
as a member of an ad-hoc committee of the Council of Higher Education. In 1999
he served as a member of the Budget Committee for Research at the Israel
Science Foundation. Prof. Raveh holds a Ph.D. from the Hebrew University. He is
the author of about 50 professional publications, was a visiting professor at
Stanford University, Columbia University and Baruch College, N.Y., and has
received a number of grants and honors.

Mr. Avidan Zelicovsky is the head of the
Supply Chain Solutions Israel and Europe. Mr. Zelicovsky first joined our
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 Mobile and
RFID Infrastructure. Mr. Viner joined Dimex Systems (1988) Ltd. in 1993 and was
appointed as Dimex Systems CEO in 2000. Mr. Viner joined BOS as part of the
Dimex acquisition. Mr. Viner is a graduate of the Practical Engineering Academy
of Tel Aviv.

Mr. Andrew Levi is the head of Supply Chain
Solutions, the Americas. Mr. Levi was appointed President of Summit Radio Corp.
in the year 1984. Mr. Levi joined BOS as part of the Summit acquisition. Mr.
Levi holds a Bachelor of Science from the Syracuse University in New York.

- 51 -

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Mr. Shai Sadeh has been Senior VP,
Connectivity Segment since April 2004. Previously, from 1994 to 2004 he served
in several executive capacities at Sintec/Formula Group; he was the founder and
CEO of Tochna Veod, a Formula Group company; Manager of IBM iSeries (AS/400)
Technical Support team; and founder of the Sintec Group Professional Services
Division. Mr. Sadeh has a BA in Social Sciences from Tel Aviv University and is
studying towards an M.B.A at the Hebrew University in Jerusalem.

Ms. Sari Ellenberg
joined the Company as VP Resources in February 2007. From March 2005 through
February 2007, Mrs. Ellenberg held the position of the assistant to the CFO of
Visonic Ltd. (LSE:VSC.L; VSC.T). Prior to joining Visonic, Mrs. Ellenberg
worked for two years at Elbit Medical Imaging Ltd. (NasdaqGM: EMITF) where she
held the position of Deputy Legal Counsel. Prior to joining Elbit, Mrs.
Ellenberg was an attorney with the Israeli law firm of Efrati, Galili & Co.
Mrs. Ellenberg holds a B.A. in English Linguistics from the Tel-Aviv
University, an LL.B. from the Tel-Aviv University School of Law, and an MBA
from the Ono Academic College.

|    |                                 
|--- | --------------------------------
|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. Investment House
Ltd. (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 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 Cukierman as a director.
(see Section 7B. Related Party Transactions).

The
current rates for all of our directors, are an annual fee of approximately $6,649 and a
participation fee in meetings of approximately $344. 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,
2007:

|                                                          |  |                                                                  |           |                                          |   |         | 
|--------------------------------------------------------- |  | ---------------------------------------------------------------- | --------- | ---------------------------------------- | - | ------- | 
|                                                          |  | Salaries, Directors fees, Service fees,
  Commissions and Bonus |           | Pension, Retirement and Similar benefits |  
|                                                          |  |                                                                  |           |                                          |  
|                                                          |  |                                                                  |           |                                          |   |         | 
|All directors and officers as a group (then
  16 persons) |  | $                                                                | 1,551,790 |                                          | $ | 108,907 | 

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.

- 52 -

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---



In
2005 and in 2006, we received CFO services from Mocha Global Managerial
Services Ltd., with the services provided by Mr. Nehemia Kaufman. Commencing
January 2007, these services are no longer provided and the Company has
appointed Mr. Eyal Cohen as its CFO. In 2005 and through October 31, 2006 we
received managerial/CEO services from Signum Ltd., with the services provided
by Mr. Adiv Baruch. Mr. Baruch was replaced by Mr. Shmuel Koren on November 1,
2006. On May 30, 2007, Mr. Baruch resigned from the Companys Board of
Directors. Figure also includes consulting and other fees paid to Cukierman
& Co. Investment House Ltd., of which Mr. Edouard Cukierman, the Companys
Chairman, is (indirectly) a controlling shareholder.

|    |                
|--- | ---------------
|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 Companies Law
1999, 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.

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

Under
the 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.

- 53 -

---

---



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 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.

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 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 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 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.

- 54 -

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---



Audit Committee:

The
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.

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 recently 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).

- 55 -

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---



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, 2006, we employed 53
employees. As of December 31, 2007, we employed 93 employees, of which 61 are
employed in Israel and the rest are employed in the United States. Of these 93
employees: 7 employees are in administration, 61 employees in marketing and
sales, 9 employees in research and development, and 16 employees in
manufacturing and related activities. The increase in the numbers of employees
is attributed mainly to the acquisition of Summit in November 2007. In
addition, as a result of the acquisition of Dimex in March 2008, we increased
the number of our employees by 56 employees. 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.

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
comprehensive 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.

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

As of May 31, 2008, out of
our directors and officers, then consisting of 16 persons, shares held by our
officers and directors are as follows:

|                               |  |  |                                                     |  |  |         |  |  |          |        |  |         |  |         | 
|------------------------------ |  |  | --------------------------------------------------- |  |  | ------- |  |  | -------- | ------ |  | ------- |  | ------- | 
|Name                           |  |  | Position                                            |  |  | Shares  |  |  | Warrants |        |  | Options
|                               |  |  |                                                     |  |  |         |  |  |          |        |  |        
|Mr. Edouard Cukierman1         |  |  | Chairman of the Board of
  Directors                |  |  | 40,690  |  |  |          |       |  |         |  | 648,876 | 
|                               |  |  |                                                     |  |  |         |  |  |          |        |  |        
|Mr. Joel Adler2                |  |  | Director                                            |  |  | 140,925 |  |  |          | 65,217 |  |         |  | 7,500   | 
|                               |  |  |                                                     |  |  |         |  |  |          |        |  |        
|Mr. Avidan Zelicovsky          |  |  | Head of
  Supply Chain Solutions, Israel and Europe |  |  | 73,000  |  |  |          |        |  |         |  | 450,100 | 
|                               |  |  |                                                     |  |  |         |  |  |          |        |  |        
|Mr. Andrew Levi                |  |  | Head of
  Supply Chain Solutions, the Americas      |  |  | 180,000 |  |  |          |       |  |         |  |        | 
|                               |  |  |                                                     |  |  |         |  |  |          |        |  |        
|Other directors and
  officers |  |  |                                                     |  |  |         |  |  |          |        |  |         |  | 475,261 | 
|                               |  |  |                                                     |  |  |         |  |  |          |        |  |        

|  |                                                                                                                                                                                                                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|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 and 65,217 warrants with an exercise price of $3.03 per share, which
  will expire by June 30, 2008. Mr. Joel Adler holds 7,500 options, which he
  received as a director.

- 56 -

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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 following 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. Investment House Ltd. (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)

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.

- 57 -

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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 and to 2.6 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.

- 58 -

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As
of May 31, 2008 we had 1,896,366 options outstanding under this plan (of which
795,622 are vested) with the exercise prices as set forth below:

| |                            |      |             |           |         | 
| | -------------------------- | ---- | ----------- | --------- | ------- | 
| | Exercise Price Per Share $ |      | Outstanding |          
| |                            |      |             |          
|
| | Less than $0.01            |      | 73,000      |          
| | $                          | 1.55 |             |           | 7,500   | 
| | $                          | 1.68 |             |           | 100,000 | 
| | $                          | 1.84 |             |           | 30,000  | 
| | $                          | 2.00 |             |           | 2,929   | 
| | $                          | 2.28 |             |           | 7,500   | 
| | $                          | 2.40 |             |           | 400,000 | 
| | $                          | 2.5  |             |           | 7,500   | 
| | $                          | 2.52 |             |           | 676,700 | 
| |                            |      |             |           |         | 
| | $                          | 2.57 |             |           | 22,500  | 
| | $                          | 2.58 |             |           | 67,261  | 
| | $                          | 2.63 |             |           | 7,500   | 
| | $                          | 2.68 |             |           | 420,976 | 
| | $                          | 2.70 |             |           | 15,000  | 
| | $                          | 3.00 |             |           | 48,000  | 
| | $                          | 3.08 |             |           | 10,000  | 
| |                            |      |             |           |         | 
| | Total                      |      |             | 1,896,366 |        
| |                            |      |             |           |         | 

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, 2008, we had 79,408 options outstanding under this
plan, 75,000 at an exercise price of 4.00 per share and 4,408 at an exercise
price of $6.80 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, 2008, 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, we adopted the following plans: (i) the Stock Option Plan
(Incentive and Restricted Share Options) (the ISO/RSO Plan), which provides
for the grant of incentive and restricted stock options and (ii) the Section
102 Stock Option/Stock Purchase Plan (the Section 102 Plan and together with
the ISO/RSO Plan, the 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, 2008, 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.

- 59 -

---

---



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 April 30, 2008, 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
11,357,778 shares outstanding as of May 31, 2008.

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

|                                               |  |                             |           |         |      |          |  |  |         | 
|---------------------------------------------- |  | --------------------------- | --------- | ------- | ---- | -------- |  |  | ------- | 
|                                               |  | Shares
  Beneficially Owned |           |         |      |         
|                                               |  |                             |           |         |     
|Name and Address                               |  | Number                      |           | Percent |      | Warrants | 
|                                               |  |                             |           |         |      |          | 
|                                               |  |                             |           |         |      |          |  |  |         | 
|Catalyst Fund, LP(1)                           |  |                             | 2,117,252 |         | 18.6 | %        |  |  | 477,907 | 
|                                              
|3 Daniel Frisch Street, Tel-Aviv 64731, Israel |  |                             |           |         |      |          |  |  |         | 
|                                               |  |                             |           |         |      |          |  |  |         | 
|D.S Apex Holdings Ltd. (2)                     |  |                             | 1,347,692 |         | 11.9 | %        |  |  | 270,907 | 
|                                              
|Discount Tower, 23 Yehuda Halevi st. Tel Aviv  |  |                             |           |         |      |          |  |  |         | 
|                                               |  |                             |           |         |      |          |  |  |         | 
|SITA S.A.                                      |  |                             | 878,670   |         | 7.7  | %        |  |  |        | 

27, RTE DE GY 1252 
Meinier, Geneva 
Switzerland

(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 L.P. Mr. Edouard Cukierman may be deemed
to have sole voting and dispositive power with respect to the shares held by
Catalyst. 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.

(2) Refers to
the holdings of D.S Apex Holdings Ltd. and its affiliates.

- 60 -

---

---



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,
  2005 |           | December 31,
  2006 |  | December 31,
  2007 |  | May 31,
  2008 |          
|                       |  |                     |           |                     |  |                     |  |                |          
|                      
|Catalyst
  Fund, LP    |  |                     | 1,292,275 |                     |  | 1,292,275           |  |                | 2,117,252 |  |  | 2,117,252 | 
|                       |  |                     |           |                     |  |                     |  |                |           |  |  |           | 
|D.S Apex Holdings Ltd. |  |                     |           |                     |  |                     |  |                | 1,338,885 |  |  | 1,347,692 | 
|                       |  |                     |           |                     |  |                     |  |                |           |  |  |           | 
|SITA                   |  |                     |           |                     |  |                     |  |                | 878,670   |  |  | 878,670   | 

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,
2008, there were 40 record holders of ordinary shares, of which 10 were
registered with addresses in the United States, representing approximately 60 %
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).

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 Cukierman as a director.

- 61 -

---

---



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.

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.

In 2003, 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, 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 placement. 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 2007 see
Note 18 to the Consolidated Financial Statements for the year ended December
31, 2007).

Management Agreement with Signum Ltd.

The Companys
audit committee, Board of Directors and shareholders had approved an agreement
with Signum Ltd. to provide management services to the Company (exclusively
through Adiv Baruch who served in the capacity of President and Chief Executive
Officer of the Company), effective January 1, 2004. Mr. Adiv Baruch is one of
the controlling shareholders of Signum.

Signum was
entitled to a monthly gross management fee of NIS 79,698 and was granted
options to purchase 216,282 ordinary shares of the Company (equal to five
percent (5%) of the Companys issued and outstanding share capital, on a fully
diluted and as converted basis, on November 23, 2003). On June 29, 2005, the
shareholders approved the grant of 20,000 options to purchase ordinary shares
of the Company under the 2003 Israeli Share Option Plan, to Signum, as a bonus
for year 2004, at an exercise price of $3.08 per share, vesting over 24 months from
the date of grant in 24 equal parts, 1/24 per month, exercisable until June
2010.

On May 18,
2006, the shareholders approved (i) the grant to Mr. Adiv Baruch of 65,000
ordinary shares (for no consideration) and (ii) the grant to Signum of options
to purchase 187,100 ordinary shares of the Company, pursuant to the Companys
2003 Israeli Share Option Plan, at an exercise price of $2.68. On September 27,
2006, Mr. Baruch notified the Board that he shall be leaving the Company at the
end of 2006 at which time the Management Agreement expired. The abovementioned
options granted to Signum expired as well. On May 30, 2007 Mr. Baruch resigned
from the Companys Board of Directors.

- 62 -

---

---



December 2007 Private Placement

In December
2007, the Company entered into a Share Purchase Agreement with two of its
shareholders, 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). 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
paid 3% placement fees in cash to Apex and 6% in ordinary shares to Catalyst
(see note 18 to the Consolidated Financial Statements for the year ended
December 31, 2007).

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.

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 (two and
a half million dollars). 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 Companies Law.

|    |                                 
|--- | --------------------------------
|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
|     |  |                 |            |                  
|    
|2007 |  | $               | 6,328,000  |                   | 27 | %
|    
|2006 |  | $               | 6,040,000  |                   | 29 | %
|    
|2005 |  | $               | 10,693,000 |                   | 44 | %

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

- 63 -

---

---



Legal Proceedings

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. This claim followed a previous motion for temporary injunctive
relief that was filed against the Companys new French distributor, said motion
ultimately denied by French Trade Tribunal. On September 18, 2007, the French Trade
Tribunal rejected the Companys assertion that jurisdiction is with the Israeli
courts, and the Company has appealed this decision. In February 2008, the Companys
subsidiary, Boscom Ltd. (now Dimex Solutions Ltd.) filed against BOSâNOVA EURL a
claim in Israel, for the recovery of a NIS 231,861 debt for purchased products.

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 agreed to pay BOSâNOVA an amount of $20,000 and offer it a rebate of $40,000
on future purchases. The Companys financial statements include a provision in this
respect.

In January
2008, Mr. Edward Forlander, a former employee of BOScom Ltd., filed a claim
against the Company and BOScom 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. The Company is unable to assess the claims
chance of success, as the case is in preliminary stages. The Companys
financial statements 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, under the symbol BOSC, pursuant
to the dual-listing regulations of the Israeli Securities Authority.

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.

- 64 -

---

---



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.

Under the
Israeli Companies Law 1999, 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 both in the United States and in Israel. 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 1999 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 and the TASE 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   |      | TASE    | 
|       |  |  |                |  |          |      |         | 
|       |  |  |                |  | High ($) |      | Low ($) |  | High (NIS) |  | Low (NIS) | 
|       |  |  |                |  |          |      |         |  |            |  |           |  |  |       |  | 
|2003   |  |  | Annual         |  |          | 3.97 |         |  | 1.67       |  | 17.42     |  |  | 8.00  |  | 
|2004   |  |  | Annual         |  |          | 4.00 |         |  | 1.62       |  | 14.98     |  |  | 8.89  |  | 
|2005   |  |  | Annual         |  |          | 3.74 |         |  | 2.15       |  | 16.33     |  |  | 9.00  |  | 
|       |  |  |                |  |          |      |         |  |            |  |           |  |  |       |  | 
|2006   |  |  | Annual         |  |          | 2.97 |         |  | 2.11       |  | 14.58     |  |  | 9.64  |  | 
|       |  |  | First Quarter  |  |          | 2.97 |         |  | 2.39       |  | 14.58     |  |  | 10.87 |  | 
|       |  |  | Second Quarter |  |          | 2.84 |         |  | 2.55       |  | 13.08     |  |  | 11.27 |  | 
|       |  |  | Third Quarter  |  |          | 2.84 |         |  | 2.11       |  | 12.85     |  |  | 9.64  |  | 
|       |  |  | Fourth Quarter |  |          | 2.73 |         |  | 2.40       |  | 11.98     |  |  | 10.23 |  | 
|       |  |  |                |  |          |      |         |  |            |  |           |  |  |       |  | 
|2007   |  |  | Annual         |  |          | 2.90 |         |  | 1.90       |  | 12.48     |  |  | 7.01  |  | 
|       |  |  | First Quarter  |  |          | 2.63 |         |  | 2.50       |  | 12.48     |  |  | 10.60 |  | 
|       |  |  | Second Quarter |  |          | 2.90 |         |  | 2.55       |  | 11.60     |  |  | 10.25 |  | 
|       |  |  | Third Quarter  |  |          | 2.74 |         |  | 2.30       |  | 11.85     |  |  | 9.50  |  | 
|       |  |  | Fourth Quarter |  |          | 2.49 |         |  | 1.90       |  | 10.90     |  |  | 7.01  |  | 
|       |  |  | December       |  |          | 2.27 |         |  | 1.90       |  | 10.50     |  |  | 7.01  |  | 
|       |  |  |                |  |          |      |         |  |            |  |           |  |  |       |  | 
|2008   |  |  | January        |  |          | 2.05 |         |  | 1.77       |  | 7.52      |  |  | 6.50  |  | 
|       |  |  | February       |  |          | 1.92 |         |  | 1.78       |  | 7.75      |  |  | 7.43  |  | 
|       |  |  | March          |  |          | 1.92 |         |  | 1.48       |  | 7.75      |  |  | 7.75  |  | 
|       |  |  | April          |  |          | 1.69 |         |  | 1.46       |  | 6.58      |  |  | 6.58  |  | 
|       |  |  | May            |  |          | 1.63 |         |  | 1.45       |  | 6.58      |  |  | 4.28  |  | 

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

Not
applicable.

- 65 -

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

Our securities
are traded on the NASDAQ Stock Exchange (symbol BOSC) and the Tel-Aviv 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, 1999. 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 Companies Law:

We are subject
to the provisions of the Israeli Companies Law 1999, which became effective on
February 1, 2000.

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

- 66 -

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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
Companies 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
Companies Law or the articles may be exercised by the Board of Directors.

- 67 -

---

---



(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 Companies Law or the Companys Articles of Association
(Article 14.3).

- 68 -

---

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(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 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, 1999.

(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.

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|   |                                                           
|-- | ----------------------------------------------------------
|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 331⁄3% 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 Companies Law or in the Articles (Article 14.3).

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|   |                                            
|-- | -------------------------------------------
|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
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 Companies Law of 1999, 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 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 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
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 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.

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|   |                           
|-- | --------------------------
|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.

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.

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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, or 25% tax rate if such
individual shareholder holds more than 10% interest in the company. 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.

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.

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%. 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.

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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

BOS and its Israeli
subsidiaries are taxed under the Income Tax Law (Inflationary Adjustments),
1985, generally referred to as the Inflationary Adjustments Law. The
Inflationary Adjustments Law is highly complex and represents an attempt to
overcome the problems presented to a traditional tax system by an economy
undergoing rapid inflation. Its features, which are material to us, are
summarized as follows:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Where a companys equity,
  as calculated under the Inflationary Adjustments Law, exceeds the depreciated
  cost of its fixed assets (as defined in the Inflationary Adjustments Law), a
  deduction from taxable income is permitted equal to the excess multiplied by
  the applicable annual rate of inflation. The maximum deduction permitted in
  any single tax year is 70% of taxable income, with the unused portion
  permitted to be carried forward, linked to the Israeli consumer price index.
  The unused portion that was carried forward may be deductible in full in the
  following year.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | · | Where a companys
  depreciated cost of fixed assets exceeds its equity, then the excess
  multiplied by the applicable annual rate of inflation is added to taxable
  income. (hereinafter: Inflation supplement). Note, the inflation supplement
  will only be added to the corporate income but not to other incomes such as
  capital gains.                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | · | Subject to specified
  limitations, depreciation deductions on fixed assets and losses carried
  forward are adjusted for inflation based on the change in the consumer price
  index.                                                                                                                                                                                                                                                                                                                                                                                                                       

The Minister of Finance may,
with the approval of the Knesset Finance Committee, determine by decree, during
a certain fiscal year (or until February 28th of the following year)
in which the rate of increase of the Israeli consumer price index would not
exceed or did not exceed, as applicable, 3.0%, that some or all of the
provisions of the Inflationary Adjustments Law shall not apply with respect to
such fiscal year, or that the rate of increase of the Israeli consumer price
index relating to such fiscal year shall be deemed to be 0%, and to make the
adjustments required to be made as a result of such determination.

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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.

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.

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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 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.

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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 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 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 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.

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We believe that we were not a PFIC for our 2007 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.

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.

- 78 -

---

---



|     |                            
|---- | ---------------------------
|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

Currency Exchange Rate Risk Management

The Companys functional
currency is the U.S. Dollar. Since the Company operates in Israel and Europe it
manages assets and liabilities in currencies other than U.S. Dollar such as New
Israeli Shekel and Euro.

The balance of monetary
assets in comparison to liabilities in non-dollar currencies in the Balance
Sheet as of December 31, 2007 and December 31, 2006 (Balance Sheet Exposure)
is presented in the table below.

The data is presented in
U.S. Dollars (in thousands):

|                                                                      |  |                      |       |                           |  |                      |  |                           |       |   |  |     | 
|--------------------------------------------------------------------- |  | -------------------- | ----- | ------------------------- |  | -------------------- |  | ------------------------- | ----- | - |  | --- | 
|                                                                      |  | December 31, 2007    |       | December 31, 2006         | 
|                                                                      |  |                      |       |                           | 
|                                                                      |  | Israeli currency (1) |       | Non-dollar Currencies (2) |  | Israeli currency (1) |  | non-dollar Currencies (2) |      
|                                                                      |  |                      |       |                           |  |                      |  |                           |      
|                                                                      |  | U.S.$                |       | U.S.$                     |  | U.S.$                |  | U.S.$                     |      
|                                                                      |  |                      |       |                           |  |                      |  |                           |      
|                                                                      |  |                      |       |                           |  |                      |  |                           |       |   |  |     | 
|Current assets:                                                       |  |                      |       |                           |  |                      |  |                           |       |   |  |     | 
|Cash and cash equivalents                                             |  |                      | 113   |                           |  | 83                   |  |                           | 653   |   |  | 213 | 
|Trade receivables                                                     |  |                      | 3,738 |                           |  | 979                  |  |                           | 2,399 |   |  |    | 
|Other accounts receivable                                             |  |                      | 383   |                           |  |                     |  |                           | 402   |   |  | 144 | 
|                                                                      |  |                      |       |                           |  |                      |  |                           |       |   |  |     | 
|                                                                      |  |                      | 4,234 |                           |  | 1,062                |  |                           | 3,454 |   |  | 357 | 
|                                                                      |  |                      |       |                           |  |                      |  |                           |       |   |  |     | 
|Long term assets                                                      |  |                      | 568   |                           |  |                     |  |                           | 768   |   |  |    | 
|                                                                      |  |                      |       |                           |  |                      |  |                           |       |   |  |     | 
|Total assets                                                          |  |                      | 4,802 |                           |  | 1,062                |  |                           | 4,222 |   |  | 357 | 
|                                                                      |  |                      |       |                           |  |                      |  |                           |       |   |  |     | 
|                                                                     
|Current liabilities:                                                  |  |                      |       |                           |  |                      |  |                           |       |   |  |     | 
|Short term loans from banks and current maturities of long term loans |  |                      | 2,023 |                           |  | 592                  |  |                           | 1,925 |   |  |    | 
|Trade payables                                                        |  |                      | 1,461 |                           |  | 189                  |  |                           | 1,549 |   |  | 200 | 
|Other accounts payable                                                |  |                      | 660   |                           |  |                     |  |                           | 582   |   |  |    | 
|                                                                      |  |                      |       |                           |  |                      |  |                           |       |   |  |     | 
|                                                                      |  |                      |       |                           |  |                      |  |                           |       |   |  |     | 
|                                                                      |  |                      | 4,144 |                           |  | 781                  |  |                           | 4,056 |   |  | 200 | 
|                                                                      |  |                      |       |                           |  |                      |  |                           |       |   |  |     | 
|                                                                      | 
|Long term liabilities                                                 |  |                      | 1,417 |                           |  |                     |  |                           | 915   |   |  |    | 
|                                                                      |  |                      |       |                           |  |                      |  |                           |       |   |  |     | 
|Total liabilities                                                     |  |                      | 5,561 |                           |  | 781                  |  |                           | 4,971 |   |  | 200 | 
|                                                                      |  |                      |       |                           |  |                      |  |                           |       |   |  |     | 
|Net assets (liabilities)                                              |  |                      | (759  | )                         |  | 281                  |  |                           | (749  | ) |  | 157 | 
|                                                                      |  |                      |       |                           |  |                      |  |                           |       |   |  |     | 

| |     |                                                                                     
| | --- | ------------------------------------------------------------------------------------
| | (1) | The above does not include
  balances in Israeli currency linked to the U.S. dollar.
|
| | (2) | Primarily Euro.                                                                     

- 79 -

---

---



The Company does not use
financial instruments and derivatives, but manages the risk of Balance Sheet
Exposure by attempting to maintain a similar balance of assets and liabilities
in New Israeli Shekels and the USD currencies. The purchases and salary
expenses in Israel are paid in the local currency, New Israeli Shekels.

A material change in
currency exchange rate of the NIS or Euro compared to the U.S. Dollar may have
an effect on the Companys financial results and cash flow.

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.

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, 2007 and
December 31, 2006:

|                  |  |             |           |      |   |           | 
|----------------- |  | ----------- | --------- | ---- | - | --------- | 
|                  |  | December 31 |          
|                  |  |             |          
|                  |  | 2007        |           | 2006 |  
|                  |  |             |           |      |  
|                  |  |             |           |      |   |           | 
|America           |  | $           | 1,820,000 |      | $ | 561,000   | 
|Europe            |  |             | 1,667,000 |      |   | 345,000   | 
|Far East          |  |             | 43,000    |      |   | 51,000    | 
|Israel and others |  |             | 5,584,000 |      |   | 4,675,000 | 
|                  |  |             |           |      |   |           | 
|                  |  |             |           |      |   |           | 
|                  |  | $           | 9,114,000 |      | $ | 5,632,000 | 
|                  |  |             |           |      |   |           | 

- 80 -

---

---



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 and in high level marketable securities.

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. A 100 basis point increase in
interest rates would have increased our net interest expense for 2007 by
approximately $61,000.

Bank Risk

The Company
invests and manages the majority of its funds in Bank Leumi LeIsrael, Bank
Leumi U.S.A. and JPMorgan Chase Bank, N.A..

Item 12: Description of Securities Other
than Equity Securities

Not
applicable.

PART II

Item 13: Defaults, Dividend Arrearages and
Delinquencies

Not
applicable.

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.

- 81 -

---

---



(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, 2007. 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, 2007, 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, 2007, that
have materially affected or are reasonably likely to materially affect these
controls.

(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 Prof. Adi Raveh and Mr. Ronen Zavlik,
both 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. Both 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 2006 and 2007 were Kost Forer Gabbay & Kasierer,
a member of Ernst & Young Global.

- 82 -

---

---



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
2006 and 2007:

|                       |  |                              |         |                              |  |        |   |            |        |  |  |     |  
|---------------------- |  | ---------------------------- | ------- | ---------------------------- |  | ------ | - | ---------- | ------ |  |  | --- | -
|                       |  | Year Ended December 31, 2007 |         | Year Ended December 31, 2006 | 
|                       |  |                              |         |                              | 
|                       |  | Amount                       |         | Percentage                   |  | Amount |   | Percentage |       
|                       |  |                              |         |                              |  |        |   |            |       
|                       |  |                              |         |                              |  |        |   |            |        |  |  |     |  
|Audit Fees             |  |                              | 134,200 |                              |  | 94     | % |            | 62,000 |  |  | 76  | %
|Audit-Related Fees (1) |  |                              |        |                              |  |       |   |            | 20,000 |  |  | 24  | %
|Tax Fees (2)           |  |                              | 8,500   |                              |  | 6      | % |            |       |  |  |    |  
|                       |  |                              |         |                              |  |        |   |            |        |  |  |     |  
|Total                  |  |                              | 142,700 |                              |  | 100    | % |            | 82,000 |  |  | 100 | %
|                       |  |                              |         |                              |  |        |   |            |        |  |  |     |  

|    |                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Audit-related fees are
  fees related to assurance and associated services that traditionally are
  performed by the independent auditor, including consultation concerning
  reporting standards.                                                  
|    |                                                                                                                                                                                                                                                       
|(2) | 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.

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 2007.

- 83 -

---

---



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-55

The audited
financial statements filed as part of this Form 20-F are identical to the
audited financial statements that were filed as part of the Form 6-K on March
31, 2008.

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., BOScom 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., BOScom Ltd. and the Registrant (incorporated
  by reference to the Companys Annual Report on Form 20-F filed on June 27,
  2005).                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                       
|4.4 | Securities
  Purchase Agreement and Master Security Agreement, dated as of August 16,
  2006, by and between Laurus Master Fund Ltd. and the Registrant (the Secured
  Convertible Term Note, Ordinary Shares Purchase Warrant and Registration
  Rights Agreement are incorporated by reference to the Companys Registration
  Statement on Form F-3 no. 333-137153)
|    |                                                                                                                                                                                                                                                                                                                                                                       
|4.5 | Distribution
  Agreement, dated as of January 15, 2003, by and between BOScom Ltd. and
  BOSaNOVA Inc. (incorporated by reference to the Companys Annual Report on
  Form 20-F/A filed on January 6, 2005).                                                                                                                                                          

- 84 -

---

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|     |                                                                                                                                                                                                                                                                                                                                                       
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.6  | Letter
  agreement among New World Brands, Inc., Qualmax, Inc., IP Gear, Ltd., P&S
  Spirit, LLC and B.O.S Better Online Solutions Ltd., dated December 31, 2006
  (incorporated by reference to Exhibit 10.17 to the Companys Registration
  Statement on Form F-1/A filed with the SEC on February 12, 2007).                                      
|     |                                                                                                                                                                                                                                                                                                                                                       
|4.7  | The
  Registrants Israeli 2003 Share Option Plan (incorporated by reference to the
  Companys Registration Statement on Form S-8 No. 333-11650).                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                       
|4.8  | Share
  Purchase Agreement dated as of the October 30, 2007 by and between Donald
  Levi and Andrew Levi, Summit Radio Corp. and the Registrant.                                                                                                                                                                                                      
|     |                                                                                                                                                                                                                                                                                                                                                       
|4.9  | 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.
|     |                                                                                                                                                                                                                                                                                                                                                       
|4.10 | Asset
  Purchase Agreement dated as of the January 29, 2008 by and between Dimex
  Systems (1988) Ltd., Dimex Hagalil Ltd., and the Registrant.                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                       
|4.11 | 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).                                                                                                                             
|     |                                                                                                                                                                                                                                                                                                                                                       
|4.12 | Promissory  Note for the amount of  $2,500,000  made by Summit  Radio  Corp.  to the order of
Bank Leumi USA.                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                       
|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                                                                                                                                                                                                                                                                                                             

- 85 -

---

---



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/ Shmuel Koren                        |  | /s/ Eyal Cohen          | 
|                                        |  |                         | 
|Shmuel Koren                            |  | Eyal Cohen              | 
|President and Chief
  Executive Officer |  | Chief Financial Officer | 
|                                        |  |                         | 
|Date: June
  30, 2008                   |  |                         | 

- 86 -

---

---

B.O.S. BETTER ONLINE SOLUTIONS LTD.

AND
SUBSIDIARIES

CONSOLIDATED
FINANCIAL STATEMENTS

AS OF
DECEMBER 31, 2007

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-55

---

---



|                     |   |                                                                       |   |                                          
|-------------------- | - | --------------------------------------------------------------------- | - | -----------------------------------------
|(ERNST & YOUNG LOGO) | n | Kost Forer Gabbay
  & Kasierer3 Aminadav St.
  Tel-Aviv 67067, Israel | n | Phone: 972-3-6232525
  Fax: 972-3-5622555
|                     |   |                                                                       |   |                                          

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, 2007 and 2006, 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,
2007. 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 14% in 2007 and total revenues constituting
7% in 2007 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 consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of the Company and its subsidiaries at December 31,
2007 and 2006, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2007,
in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2s to the consolidated
financial statements, effective January 1, 2006, the Company adopted the provision
of Statement of Financial Accounting Standard No. 123(R), Shared-Based
Payment.

|                 |                                 
|---------------- | --------------------------------
|                 |                                 
|Tel-Aviv, Israel | KOST FORER
  GABBAY & KASIERER  
|March 31,
  2008 | A Member of Ernst & Young Global

F-2

---

---



ARIK ESHEL, CPA & ASSOC., PCCertified Public Accountants and Consultants

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders ofLynk USA,
Inc.

We have
audited the accompanying consolidated balance sheet of Lynk USA, Inc. (the
Company) and its subsidiary as of December 31, 2007, and the related
consolidated statement of operation, statement of changes in shareholders
equity (deficit) and cash flows for the year then ended. 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 conducted
our audit 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. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our
opinion, the 2007 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lynk USA, Inc. and
its subsidiary at December 31, 2007, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.

ARIK ESHEL,
CPA & ASSOC., PC
March 31, 2008

F-3

---

---



|                                                      
|------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.
  AND SUBSIDIARIES
|CONSOLIDATED BALANCE SHEETS                           
|                                                      
|U.S. dollars in thousands                             

|                                                                                                                           |  |              |        |      |   |        | 
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---- | - | ------ | 
|                                                                                                                           |  | December 31, |       
|                                                                                                                           |  |              |       
|                                                                                                                           |  | 2007         |        | 2006 |  
|                                                                                                                           |  |              |        |      |  
|                                                                                                                           |  |              |        |      |  
|ASSETS                                                                                                                     |  |              |        |      |   |        | 
|                                                                                                                           |  |              |        |      |   |        | 
|CURRENT ASSETS:                                                                                                            |  |              |        |      |   |        | 
|Cash and cash equivalents                                                                                                  |  | $            | 4,271  |      | $ | 2,033  | 
|Trade receivables (net of
  allowance for doubtful accounts of $122 and $23 at December 31, 2007 and
  2006, respectively) |  |              | 9,114  |      |   | 5,632  | 
|Other accounts receivable and
  prepaid expenses (Note 3)                                                                  |  |              | 945    |      |   | 858    | 
|Inventories (Note 4)                                                                                                       |  |              | 8,321  |      |   | 4,017  | 
|                                                                                                                           |  |              |        |      |   |        | 
|                                                                                                                           |  |              |        |      |   |        | 
|Total
  current assets                                                                                                     |  |              | 22,651 |      |   | 12,540 | 
|                                                                                                                           |  |              |        |      |   |        | 
|                                                                                                                           |  |              |        |      |   |        | 
|LONG-TERM ASSETS:                                                                                                          |  |              |        |      |   |        | 
|Severance pay fund                                                                                                         |  |              | 687    |      |   | 741    | 
|Investment in other companies
  (Note 5)                                                                                   |  |              | 2,494  |      |   | 8,082  | 
|Other assets                                                                                                               |  |              | 42     |      |   | 65     | 
|                                                                                                                           |  |              |        |      |   |        | 
|                                                                                                                           |  |              |        |      |   |        | 
|Total long-term assets                                                                                                     |  |              | 3,223  |      |   | 8,888  | 
|                                                                                                                           |  |              |        |      |   |        | 
|                                                                                                                           |  |              |        |      |   |        | 
|                                                                                                                           |  |              |        |      |   |        | 
|PROPERTY, PLANT AND EQUIPMENT,
  NET (Note 6)                                                                              |  |              | 719    |      |   | 520    | 
|                                                                                                                           |  |              |        |      |   |        | 
|                                                                                                                           |  |              |        |      |   |        | 
|GOODWILL (Note 8)                                                                                                          |  |              | 2,861  |      |   | 952    | 
|                                                                                                                           |  |              |        |      |   |        | 
|                                                                                                                           |  |              |        |      |   |        | 
|OTHER INTANGIBLE ASSETS, NET (Note 7)                                                                                      |  |              | 1,678  |      |   | 1,629  | 
|                                                                                                                           |  |              |        |      |   |        | 
|                                                                                                                           |  |              |        |      |   |        | 
|                                                                                                                           |  | $            | 31,132 |      | $ | 24,529 | 
|                                                                                                                           |  |              |        |      |   |        | 

F-4

---

---



|                                                      
|------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.
  AND SUBSIDIARIES
|CONSOLIDATED BALANCE SHEETS                           
|                                                      
|U.S. dollars in thousands                             

|                                                                                                                                                                                                             |  |              |         |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | ---- | - | ------- | -
|                                                                                                                                                                                                             |  | December 31, |        
|                                                                                                                                                                                                             |  |              |        
|                                                                                                                                                                                                             |  | 2007         |         | 2006 |  
|                                                                                                                                                                                                             |  |              |         |      |  
|                                                                                                                                                                                                             |  |              |         |      |  
|CURRENT LIABILITIES:                                                                                                                                                                                         |  |              |         |      |   |         |  
|Short-term bank loans and
  current maturities (Note 9)                                                                                                                                                      |  | $            | 5,028   |      | $ | 2,949   |  
|Current maturities of
  convertible note                                                                                                                                                                     |  |              | -       |      |   | 1,139   |  
|Trade payables                                                                                                                                                                                               |  |              | 5,258   |      |   | 3,844   |  
|Employees and payroll accruals                                                                                                                                                                               |  |              | 552     |      |   | 460     |  
|Deferred revenues                                                                                                                                                                                            |  |              | 116     |      |   | 103     |  
|Accrued expenses and other
  liabilities (Note 10)                                                                                                                                                           |  |              | 1,290   |      |   | 999     |  
|                                                                                                                                                                                                             |  |              |         |      |   |         |  
|                                                                                                                                                                                                             |  |              |         |      |   |         |  
|Total
  current liabilities                                                                                                                                                                                  |  |              | 12,244  |      |   | 9,494   |  
|                                                                                                                                                                                                             |  |              |         |      |   |         |  
|                                                                                                                                                                                                             |  |              |         |      |   |         |  
|LONG-TERM LIABILITIES:                                                                                                                                                                                       |  |              |         |      |   |         |  
|Long-term bank loans, net of
  current maturities (Note 11)                                                                                                                                                  |  |              | 3,286   |      |   | -       |  
|Convertible note, net of
  current maturities (Note 12)                                                                                                                                                      |  |              | -       |      |   | 1,171   |  
|Deferred taxes                                                                                                                                                                                               |  |              | 366     |      |   | 362     |  
|Accrued severance pay                                                                                                                                                                                        |  |              | 798     |      |   | 916     |  
|Other long-term liabilities                                                                                                                                                                                  |  |              | -       |      |   | 237     |  
|                                                                                                                                                                                                             |  |              |         |      |   |         |  
|                                                                                                                                                                                                             |  |              |         |      |   |         |  
|Total long-term liabilities                                                                                                                                                                                  |  |              | 4,450   |      |   | 2,686   |  
|                                                                                                                                                                                                             |  |              |         |      |   |         |  
|                                                                                                                                                                                                             |  |              |         |      |   |         |  
|COMMITMENTS AND CONTINGENT
  LIABILITIES (Note 13)                                                                                                                                                           |  |              |         |      |   |         |  
|                                                                                                                                                                                                             |  |              |         |      |   |         |  
|SHAREHOLDERS EQUITY (Note
  14):                                                                                                                                                                            |  |              |         |      |   |         |  
|Share capital                                                                                                                                                                                                |  |              |         |      |   |         |  
|Ordinary shares of NIS 4.00 par value:
  Authorized: 35,000,000 shares at December 31, 2007 and 2006; Issued and outstanding: 10,857,554 and
  6,744,798 shares at December 31, 2007 and 2006, respectively; |  |              | 10,628  |      |   | 6,571   |  
|Additional paid-in capital                                                                                                                                                                                   |  |              | 54,758  |      |   | 48,330  |  
|Accumulated other comprehensive
  income                                                                                                                                                                     |  |              | 19      |      |   | 19      |  
|Accumulated deficit                                                                                                                                                                                          |  |              | (50,967 | )    |   | (42,571 | )
|                                                                                                                                                                                                             |  |              |         |      |   |         |  
|                                                                                                                                                                                                             |  |              |         |      |   |         |  
|Total
  shareholders equity                                                                                                                                                                                 |  |              | 14,438  |      |   | 12,349  |  
|                                                                                                                                                                                                             |  |              |         |      |   |         |  
|                                                                                                                                                                                                             |  |              |         |      |   |         |  
|Total liabilities
  and shareholders equity                                                                                                                                                                 |  | $            | 31,132  |      | $ | 24,529  |  
|                                                                                                                                                                                                             |  |              |         |      |   |         |  

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, |       
|                                                                                        |  |                         |       
|                                                                                        |  | 2007                    |        | 2006 |   | 2005   |  
|                                                                                        |  |                         |        |      |   |        |  
|                                                                                        |  |                         |        |      |   |        |  
|Revenues                                                                                |  | $                       | 23,774 |      | $ | 20,917 |   | $ | 24,099 |  
|Cost of revenues                                                                        |  |                         | 19,099 |      |   | 16,200 |   |   | 17,854 |  
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Gross profit                                                                            |  |                         | 4,675  |      |   | 4,717  |   |   | 6,245  |  
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Operating costs and expenses:                                                           |  |                         |        |      |   |        |   |   |        |  
|Research and development                                                                |  |                         | 636    |      |   | 486    |   |   | 893    |  
|In process Research and Development                                                     |  |                         | 170    |      |   | -      |   |   | -      |  
|Sales and marketing                                                                     |  |                         | 3,811  |      |   | 2,019  |   |   | 2,425  |  
|General and administrative                                                              |  |                         | 1,980  |      |   | 3,268  |   |   | 2,667  |  
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Total
  operating costs and expenses                                                    |  |                         | 6,597  |      |   | 5,773  |   |   | 5,985  |  
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Operating income (loss)                                                                 |  |                         | (1,922 | )    |   | (1,056 | ) |   | 260    |  
|Financial expenses, net (Note
  16a)                                                    |  |                         | (469   | )    |   | (626   | ) |   | (448   | )
|Other income (expenses), net
  (Note 1d)                                                |  |                         | (6,233 | )    |   | -      |   |   | 355    |  
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Income (loss) before taxes on
  income                                                  |  |                         | (8,624 | )    |   | (1,682 | ) |   | 167    |  
|Taxes on income (tax benefit) (Note
  15)                                               |  |                         | 9      |      |   | (89    | ) |   | 204    |  
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Net loss after taxes on income                                                          |  |                         | (8,633 | )    |   | (1,593 | ) |   | (37    | )
|Equity in losses of an
  affiliate                                                      |  |                         | -      |      |   | -      |   |   | (1,750 | )
|Minority interest in earnings
  of a subsidiary                                         |  |                         | -      |      |   | -      |   |   | (223   | )
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Loss from continuing
  operations                                                       |  |                         | (8,633 | )    |   | (1,593 | ) |   | (2,010 | )
|Income (loss) from discontinued
  operations (Note 1d)                                  |  |                         | 237    |      |   | 1,685  |   |   | (1,595 | )
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Net income (loss)                                                                       |  | $                       | (8,396 | )    | $ | 92     |   | $ | (3,605 | )
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Basic and diluted net loss per
  share from continuing operations (Note 16b)            |  | $                       | (1.00  | )    | $ | (0.24  | ) | $ | (0.36  | )
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Basic and diluted net earnings (loss) per share from discontinued operations (Note 16b) |  | $                       | 0.02   |      | $ | 0.25   |   | $ | (0.28  | )
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Basic and diluted net earnings
  (loss) per share (Note 16b)                            |  | $                       | (0.97  | )    | $ | 0.01   |   | $ | (0.64  | )
|                                                                                        |  |                         |        |      |   |        |   |   |        |  

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

F-6

---

---



|                                               
|-----------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.            
|AND ITS
  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, 2005                                                 |  |                   | 4,737,658  |                 | $ | 4,823                        |  | $                                   | 44,426 |                                          | $ | (174                  | ) | $                          | 31 |                              | $ | (39,058 | ) |   |        |   | $ | 10,048 |  
|Amortization of deferred share-based
  compensation                        |  |                   | -          |                 |   | -                            |  |                                     | -      |                                          |   | 62                    |   |                            | -  |                              |   | -       |   |   |        |   |   | 62     |  
|Conversion of convertible note                                             |  |                   | 640,293    |                 |   | 570                          |  |                                     | 1,046  |                                          |   | -                     |   |                            | -  |                              |   | -       |   |   |        |   |   | 1,616  |  
|Issuance of shares related to acquisition of
  Odem, net                   |  |                   | 232,603    |                 |   | 202                          |  |                                     | 330    |                                          |   | -                     |   |                            | -  |                              |   | -       |   |   |        |   |   | 532    |  
|Issuance of shares related to the private
  placement, net                 |  |                   | 953,743    |                 |   | 815                          |  |                                     | 1,225  |                                          |   | -                     |   |                            | -  |                              |   | -       |   |   |        |   |   | 2,040  |  
|Issuance of Ordinary shares for options
  exercised                        |  |                   | 25,088     |                 |   | 22                           |  |                                     | 28     |                                          |   | -                     |   |                            | -  |                              |   | -       |   |   |        |   |   | 50     |  
|Share-based compensation related to warrants
  issued to service providers |  |                   | -          |                 |   | -                            |  |                                     | 348    |                                          |   | -                     |   |                            | -  |                              |   | -       |   |   |        |   |   | 348    |  
|Warrants related to a convertible note
  issued to lenders                 |  |                   | -          |                 |   | -                            |  |                                     | 185    |                                          |   | -                     |   |                            | -  |                              |   | -       |   |   |        |   |   | 185    |  
|Other comprehensive loss:                                                  |  |                   |            |                 |   |                              |  |                                     |        |                                          |   |                       |   |                            |    |                              |   |         |   |   |        |   |   |        |  
|Net loss                                                                   |  |                   | -          |                 |   | -                            |  |                                     | -      |                                          |   | -                     |   |                            | -  |                              |   | (3,605  | ) | $ | (3,605 | ) |   | (3,605 | )
|Loss on available-for-sale marketable
  securities                         |  |                   | -          |                 |   | -                            |  |                                     | -      |                                          |   | -                     |   |                            | (4 | )                            |   | -       |   |   | (4     | ) |   | (4     | )
|Foreign currency translation adjustments                                   |  |                   | -          |                 |   | -                            |  |                                     | -      |                                          |   | -                     |   |                            | (6 | )                            |   | -       |   |   | (6     | ) |   | (6     | )
|                                                                           |  |                   |            |                 |   |                              |  |                                     |        |                                          |   |                       |   |                            |    |                              |   |         |   |   |        |   |   |        |  
|Total comprehensive loss                                                   |  |                   |            |                 |   |                              |  |                                     |        |                                          |   |                       |   |                            |    |                              |   |         |   | $ | (3,615 | ) |   |        |  
|                                                                           |  |                   |            |                 |   |                              |  |                                     |        |                                          |   |                       |   |                            |    |                              |   |         |   |   |        |   |   |        |  
|                                                                           |  |                   |            |                 |   |                              |  |                                     |        |                                          |   |                       |   |                            |    |                              |   |         |   |   |        |   |   |        |  
|Balance at December 31, 2005                                               |  |                   | 6,589,385  |                 |   | 6,432                        |  |                                     | 47,588 |                                          |   | (112                  | ) |                            | 21 |                              |   | (42,663 | ) |   |        |   |   | 11,266 |  
|Reversal of deferred share-based compensation                              |  |                   | -          |                 |   | -                            |  |                                     | (112   | )                                        |   | 112                   |   |                            | -  |                              |   | -       |   |   |        |   |   | -      |  
|Issuance of Ordinary shares for options
  exercised                        |  |                   | 68,747     |                 |   | 61                           |  |                                     | 74     |                                          |   | -                     |   |                            | -  |                              |   | -       |   |   |        |   |   | 135    |  
|Share-based compensation expense                                           |  |                   | 21,666     |                 |   | 20                           |  |                                     | 411    |                                          |   | -                     |   |                            | -  |                              |   | -       |   |   |        |   |   | 431    |  
|Share-based compensation related to warrants
  issued to service providers |  |                   | 65,000     |                 |   | 58                           |  |                                     | 238    |                                          |   | -                     |   |                            | -  |                              |   | -       |   |   |        |   |   | 296    |  
|Warrants related to a convertible note
  issued to lenders                 |  |                   | -          |                 |   | -                            |  |                                     | 131    |                                          |   | -                     |   |                            | -  |                              |   | -       |   |   |        |   |   | 131    |  
|Other comprehensive income:                                                |  |                   |            |                 |   |                              |  |                                     |        |                                          |   |                       |   |                            |    |                              |   |         |   |   |        |   |   |        |  
|Net income                                                                 |  |                   | -          |                 |   | -                            |  |                                     | -      |                                          |   | -                     |   |                            | -  |                              |   | 92      |   | $ | 92     |   |   | 92     |  
|Loss on available-for-sale marketable
  securities                         |  |                   | -          |                 |   | -                            |  |                                     | -      |                                          |   | -                     |   |                            | (2 | )                            |   | -       |   |   | (2     | ) |   | (2     | )
|                                                                           |  |                   |            |                 |   |                              |  |                                     |        |                                          |   |                       |   |                            |    |                              |   |         |   |   |        |   |   |        |  
|Total comprehensive income                                                 |  |                   |            |                 |   |                              |  |                                     |        |                                          |   |                       |   |                            |    |                              |   |         |   | $ | 90     |   |   |        |  
|                                                                           |  |                   |            |                 |   |                              |  |                                     |        |                                          |   |                       |   |                            |    |                              |   |         |   |   |        |   |   |        |  
|                                                                           |  |                   |            |                 |   |                              |  |                                     |        |                                          |   |                       |   |                            |    |                              |   |         |   |   |        |   |   |        |  
|Balance at December 31, 2006                                               |  |                   | 6,744,798  |                 |   | 6,571                        |  |                                     | 48,330 |                                          |   | -                     |   |                            | 19 |                              |   | (42,571 | ) |   |        |   |   | 12,349 |  
|Issuance of Ordinary shares for options
  exercised                        |  |                   | 23,498     |                 |   | 23                           |  |                                     | 23     |                                          |   |                       |   |                            |    |                              |   |         |   |   |        |   |   | 46     |  
|Issuance of shares related to the private
  placement net                  |  |                   | 1,471,176  |                 |   | 1,483                        |  |                                     | 1,983  |                                          |   |                       |   |                            |    |                              |   |         |   |   |        |   |   | 3,466  |  
|Issuance of shares related to rights
  offering, net                       |  |                   | 1,739,398  |                 |   | 1,720                        |  |                                     | 2,229  |                                          |   |                       |   |                            |    |                              |   |         |   |   |        |   |   | 3,949  |  
|Issuance of shares related to conversion of
  convertible note             |  |                   | 878,670    |                 |   | 831                          |  |                                     | 1,066  |                                          |   |                       |   |                            |    |                              |   |         |   |   |        |   |   | 1,897  |  
|Share-based compensation expense                                           |  |                   | -          |                 |   | -                            |  |                                     | 516    |                                          |   | -                     |   |                            | -  |                              |   | -       |   |   |        |   |   | 516    |  
|Warrants related to a convertible note
  issued to lenders                 |  |                   | -          |                 |   | -                            |  |                                     | 611    |                                          |   | -                     |   |                            | -  |                              |   | -       |   |   |        |   |   | 611    |  
|Other comprehensive income:                                                |  |                   |            |                 |   |                              |  |                                     |        |                                          |   |                       |   |                            |    |                              |   |         |   |   |        |   |   |        |  
|Net loss                                                                   |  |                   | -          |                 |   | -                            |  |                                     | -      |                                          |   | -                     |   |                            | -  |                              |   | (8,396  | ) | $ | (8396  | ) |   | (8,396 | )
|                                                                           |  |                   |            |                 |   |                              |  |                                     |        |                                          |   |                       |   |                            |    |                              |   |         |   |   |        |   |   |        |  
|Total comprehensive loss                                                   |  |                   |            |                 |   |                              |  |                                     |        |                                          |   |                       |   |                            |    |                              |   |         |   | $ | (8,396 | ) |   |        |  
|                                                                           |  |                   |            |                 |   |                              |  |                                     |        |                                          |   |                       |   |                            |    |                              |   |         |   |   |        |   |   |        |  
|                                                                           |  |                   |            |                 |   |                              |  |                                     |        |                                          |   |                       |   |                            |    |                              |   |         |   |   |        |   |   |        |  
|Balance at December 31, 2007                                               |  |                   | 10,857,540 |                 | $ | 10,628                       |  | $                                   | 54,758 |                                          | $ | -                     |   | $                          | 19 |                              | $ | (50,967 | ) |   |        |   | $ | 14,438 |  
|                                                                           |  |                   |            |                 |   |                              |  |                                     |        |                                          |   |                       |   |                            |    |                              |   |         |   |   |        |   |   |        |  

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

F-7

---

---



|                                       
|---------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.    
|AND ITS
  SUBSIDIARIES                 
|CONSOLIDATED
  STATEMENTS OF CASH FLOWS
|                                       
|U.S. dollars in thousands              

|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                                                        |  | Year ended December 31, |       
|                                                                                                        |  |                         |       
|                                                                                                        |  | 2007                    |        | 2006 |   | 2005   |  
|                                                                                                        |  |                         |        |      |   |        |  
|                                                                                                        |  |                         |        |      |   |        |  
|Cash flows from operating activities:                                                                   |  |                         |        |      |   |        |   |   |        |  
|Net income (loss)                                                                                       |  | $                       | (8,396 | )    | $ | 92     |   | $ | (3,605 | )
|Adjustments to reconcile net income (loss) to net cash used in
  operating activities:                  |  |                         |        |      |   |        |   |   |        |  
|Loss (income) from discontinued operations                                                              |  |                         | (237   | )    |   | (1,685 | ) |   | 1,595  |  
|Depreciation and amortization                                                                           |  |                         | 588    |      |   | 378    |   |   | 474    |  
|Amortization of premium and accretion of accrued interest on
  available-for-sale marketable securities |  |                         | -      |      |   | -      |   |   | 35     |  
|Impairment of investments                                                                               |  |                         | 5,588  |      |   | 39     |   |   | -      |  
|Severance pay, net                                                                                      |  |                         | (64    | )    |   | (75    | ) |   | (75    | )
|Equity in losses of an affiliate                                                                        |  |                         | -      |      |   | -      |   |   | 1,750  |  
|Minority interest in earnings of a subsidiary                                                           |  |                         | -      |      |   | -      |   |   | 223    |  
|Share-based compensation related to warrants issued to service
  providers                              |  |                         | -      |      |   | 296    |   |   | 59     |  
|Capital gain from sale of product line                                                                  |  |                         | -      |      |   | -      |   |   | (273   | )
|Net loss from decrease in value of Put options                                                          |  |                         | -      |      |   | -      |   |   | 8      |  
|Capital loss from sale of property and equipment                                                        |  |                         | (19    | )    |   | -      |   |   | 3      |  
|Share-based compensation related to employees                                                           |  |                         | 516    |      |   | 431    |   |   | 244    |  
|Financial expenses in connection with long-term convertible
note                                        |  |                         | 710    |      |   | 162    |   |   | 120    |  
|Increase in trade receivables                                                                           |  |                         | (687   | )    |   | (788   | ) |   | (547   | )
|Decrease in deferred taxes, net                                                                         |  |                         | (118   | )    |   | (70    | ) |   | (88    | )
|Decrease (increase) in other accounts receivable and prepaid
expenses                                   |  |                         | (121   | )    |   | (595   | ) |   | 86     |  
|Increase in inventories                                                                                 |  |                         | (1,209 | )    |   | (697   | ) |   | (1,971 | )
|Increase (decrease) in trade payables                                                                   |  |                         | (1,135 | )    |   | 790    |   |   | (172   | )
|Decrease in employees and payroll accruals, deferred revenues,
accrued
  expenses and other liabilities |  |                         | (11    | )    |   | (231   | ) |   | (123   | )
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Net cash used in operating activities
  from continuing operations                                      |  |                         | (4,595 | )    |   | (1,953 | ) |   | (2,257 | )
|Net cash used in operating activities
  from discontinued operations                                    |  |                         | -      |      |   | (446   | ) |   | (1,647 | )
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Net cash used in operating activities                                                                   |  |                         | (4,595 | )    |   | (2,399 | ) |   | (3,904 | )
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Cash flows from investing activities:                                                                   |  |                         |        |      |   |        |   |   |        |  
|Purchase of property and equipment                                                                      |  |                         | (214   | )    |   | (24    | ) |   | (245   | )
|Proceeds from sale of property and equipment                                                            |  |                         | 31     |      |   | -      |   |   | 13     |  
|Proceeds from sale of product line                                                                      |  |                         | -      |      |   | -      |   |   | 257    |  
|Investment in long-term marketable securities                                                           |  |                         | -      |      |   | -      |   |   | (607   | )
|Proceeds from redemption of marketable securities                                                       |  |                         | -      |      |   | 1,331  |   |   | 2,316  |  
|Investment in other companies                                                                           |  |                         | -      |      |   | (676   | ) |   | -      |  
|Acquisitions, net of cash acquired (a,b,c,d)                                                            |  |                         | (4,548 | )    |   | -      |   |   | (1,124 | )
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Net cash provided by (used in) investing activities from
  continuing operations                        |  |                         | (4,731 | )    |   | 631    |   |   | 610    |  
|Net cash used in investing activities from discontinued
operations                                      |  |                         | -      |      |   | (221   | ) |   | (1,087 | )
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Net cash provided by (used in) investing activities                                                     |  |                         | (4,731 | )    |   | 410    |   |   | (477   | )
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Cash flows from financing activities:                                                                   |  |                         |        |      |   |        |   |   |        |  
|Proceeds from shares issuance, net                                                                      |  |                         | 6,625  |      |   | -      |   |   | -      |  
|Repayment of short-term and long-term bank loans                                                        |  |                         | (293   | )    |   | (26    | ) |   | (55    | )
|Proceeds from short-term bank loans                                                                     |  |                         | 1,454  |      |   | 686    |   |   | 933    |  
|Proceeds from long-term bank loans                                                                      |  |                         | 4,203  |      |   | -      |   |   | -      |  
|Proceeds (payments) from long-term convertible note and warrants, net
  of issuance expenses            |  |                         | (120   | )    |   | 1,319  |   |   | 1,246  |  
|Payment of long-term convertible note                                                                   |  |                         | (351   | )    |   | (438   | ) |   | (55    | )
|Proceeds from exercise of options                                                                       |  |                         | 46     |      |   | 135    |   |   | 2,090  |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Net cash provided by financing activities                                                               |  |                         | 11,564 |      |   | 1,676  |   |   | 4,159  |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Increase (decrease) in cash and cash equivalents                                                        |  |                         | 2,238  |      |   | (313   | ) |   | (222   | )
|Increase in cash and cash equivalents
  from discontinued operations                                    |  |                         | -      |      |   | 114    |   |   | 163    |  
|Effect of exchange rate changes on cash and cash
equivalents                                            |  |                         | -      |      |   | -      |   |   | (13    | )
|Cash and cash equivalents at the beginning of the year                                                  |  |                         | 2,033  |      |   | 2,232  |   |   | 2,304  |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Cash and cash equivalents at the end of the year                                                        |  | $                       | 4,271  |      | $ | 2,033  |   | $ | 2,232  |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  

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

F-8

---

---



|                                       
|---------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.    
|AND ITS
  SUBSIDIARIES                 
|CONSOLIDATED
  STATEMENTS OF CASH FLOWS
|                                       
|U.S. dollars in thousands              

|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|-------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- | - | - | ------ | -
|                                                   |                                                                                                                                  |  | Year ended December 31, |      
|                                                   |                                                                                                                                  |  |                         |      
|                                                   |                                                                                                                                  |  | 2007                    |       | 2006 |   | 2005  |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |  
|Supplemental disclosure of cash flow
  activities: |                                                                                                                                  |  |                         |       |      |   |       |   |   |       
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |       
|(i)                                                | Net cash paid during the year for:                                                                                               |  |                         |       |      |   |       |   |   |        |  
|                                                   | Interest                                                                                                                         |  | $                       | 336   |      | $ | 532   |   | $ | 126    |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   | Income tax                                                                                                                       |  | $                       | 38    |      | $ | 180   |   | $ | 309    |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|(ii)                                               | Non-cash activities:                                                                                                             |  |                         |       |      |   |       |   |   |        |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   | Conversion of convertible note into shares                                                                                       |  | $                       | 2,017 |      | $ | -     |   | $ | 1,614  |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   | Sale of the communication segment in
  consideration for shares in Qualmax                                                       |  | $                       | -     |      | $ | 958   |   | $ | 4,690  |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   | Conversion of Qualmaxs debt into New World
  Brands shares                                                                     |  | $                       | -     |      | $ | 1,480 |   | $ | -      |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   | Sale of PrintBOS:                                                                                                                |  |                         |       |      |   |       |   |   |        |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   | Consideration, net                                                                                                               |  | $                       | -     |      | $ | -     |   | $ | 275    |  
|                                                   | Disposal of fixed assets                                                                                                         |  |                         | -     |      |   | -     |   |   | (28    | )
|                                                   | Disposal of liability                                                                                                            |  |                         | -     |      |   | -     |   |   | 100    |  
|                                                   | Related expenses                                                                                                                 |  |                         | -     |      |   | -     |   |   | (74    | )
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   | Capital gain                                                                                                                     |  | $                       | -     |      | $ | -     |   | $ | 273    |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   | Sale of the communication segment:                                                                                               |  |                         |       |      |   |       |   |   |        |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   | Consideration, net                                                                                                               |  | $                       | -     |      | $ | 2,437 |   | $ | 3,690  |  
|                                                   | Disposal of tangible and intangible assets                                                                                       |  |                         | -     |      |   | (752  | ) |   | (2,425 | )
|                                                   | Related expenses                                                                                                                 |  |                         | -     |      |   | -     |   |   | (486   | )
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   | Capital gain                                                                                                                     |  | $                       | -     |      | $ | 1,685 |   | $ | 779    |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|(a)                                                | Acquisition of Odem:                                                                                                             |  |                         |       |      |   |       |   |   |        |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   | Fair value of net tangible assets acquired
  (excluding cash and cash equivalents) and liabilities assumed at acquisition
  date |  | $                       | -     |      | $ | -     |   | $ | 1,020  |  
|                                                   | Fair value of net intangible assets
  acquired at acquisition date                                                               |  |                         | -     |      |   | -     |   |   | 718    |  
|                                                   | Less -                                                                                                                           |  |                         | -     |      |   | -     |   |   |        |  
|                                                   | Amount acquired by issuance of shares                                                                                            |  |                         | -     |      |   | -     |   |   | 532    |  
|                                                   | Payables                                                                                                                         |  |                         | -     |      |   | -     |   |   | 219    |  
|                                                   | Add-                                                                                                                             |  |                         | -     |      |   | -     |   |   |        |  
|                                                   | Cancellation of Put and Call options                                                                                             |  |                         | -     |      |   | -     |   |   | 137    |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  
|                                                   |                                                                                                                                  |  | $                       | -     |      | $ | -     |   | $ | 1,124  |  
|                                                   |                                                                                                                                  |  |                         |       |      |   |       |   |   |        |  

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

F-9

---

---



|                                       
|---------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.    
|AND ITS
  SUBSIDIARIES                 
|CONSOLIDATED
  STATEMENTS OF CASH FLOWS
|                                       
|U.S. dollars in thousands              

|    |                                                                                                                                  |  |                         |       |      |   |      |  |   |   | 
|--- | -------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ---- |  | - | - | 
|    |                                                                                                                                  |  | Year ended December 31, |      
|    |                                                                                                                                  |  |                         |      
|    |                                                                                                                                  |  | 2007                    |       | 2006 |   | 2005 | 
|    |                                                                                                                                  |  |                         |       |      |   |      | 
|    |                                                                                                                                  |  |                         |       |      |   |      | 
|(b) | Acquisition
  of Summit                                                                                                          |  |                         |       |      |   |      |  |   |   | 
|    |                                                                                                                                  |  |                         |       |      |   |      |  |   |   | 
|    | Fair value of net tangible assets acquired
  (excluding cash and cash equivalents) and liabilities assumed at acquisition
  date |  | $                       | 3,192 |      | $ | -    |  | $ | - | 
|    | Fair value
  of net intangible assets acquired at acquisition date                                                               |  |                         | 2,058 |      |   | -    |  |   | - | 
|    | Less - Amount acquired by issuance of
  shares                                                                                   |  |                         | (903  | )    |   | -    |  |   | - | 
|    |                                                                                                                                  |  |                         |       |      |   |      |  |   |   | 
|    |                                                                                                                                  |  |                         |       |      |   |      |  |   |   | 
|    |                                                                                                                                  |  |                         |       |      |   |      |  |   |   | 
|    |                                                                                                                                  |  | $                       | 4,347 |      | $ | -    |  | $ | - | 
|    |                                                                                                                                  |  |                         |       |      |   |      |  |   |   | 
|    |                                                                                                                                  |  |                         |       |      |   |      |  |   |   | 
|    |                                                                                                                                  |  |                         |       |      |   |      |  |   |   | 
|(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 |  | $                       | 11    |      | $ | -    |  | $ | - | 
|    | Fair value of net intangible assets
  acquired at acquisition date                                                               |  |                         | 55    |      |   | -    |  |   | - | 
|    | Less amount acquired by issuance of shares                                                                                       |  |                         | (15   | )    |   | -    |  |   | - | 
|    |                                                                                                                                  |  |                         |       |      |   |      |  |   |   | 
|    |                                                                                                                                  |  |                         |       |      |   |      |  |   |   | 
|    |                                                                                                                                  |  |                         |       |      |   |      |  |   |   | 
|    |                                                                                                                                  |  | $                       | 51    |      | $ | -    |  | $ | - | 
|    |                                                                                                                                  |  |                         |       |      |   |      |  |   |   | 
|(d) | Acquisition of OptimizeIT assets and
  liabilities                                                                               |  |                         |       |      |   |      |  |   |   | 
|    |                                                                                                                                  |  |                         |       |      |   |      |  |   |   | 
|    | Fair value of net intangible assets
  acquired at acquisition date                                                               |  | $                       | 170   |      |   | -    |  |   | - | 
|    | Less amount acquired by issuance of shares                                                                                       |  |                         | (20   | )    |   | -    |  |   | - | 
|    |                                                                                                                                  |  |                         |       |      |   |      |  |   |   | 
|    |                                                                                                                                  |  |                         |       |      |   |      |  |   |   | 
|    |                                                                                                                                  |  | $                       | 150   |      | $ | -    |  | $ | - | 
|    |                                                                                                                                  |  |                         |       |      |   |      |  |   |   | 
|    |                                                                                                                                  |  |                         |       |      |   |      |  |   |   | 

F-10

---

---



|                                                            
|------------------------------------------------------------
|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 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)                                                                                                                       | BOScom Ltd,
  part of the Mobile and RFID segment. In
  January 2008 BOScom changed its name to Dimex Solutions Ltd. and its subsidiary Dimex Hagalil
  Projects (2008) Ltd., which was incorporated in January 2008. (see note 19);                                                                                                                                                                                                            
| |    |                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                         
| |    | (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 both the Mobile
  and RFID and the Supply Chain segments; and
| |    |                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                         
| |    | (3)                                                                                                                       | Quasar
  Telecom Ltd., which obtained the assets BOS acquired in September 2004 from
  Quasar Communication Systems Ltd. The assets of Quasar Telecom were sold to
  IP Gear Ltd., a subsidiary of Qualmax Inc. as part of the sale of the
  Communications Segment in the fourth quarter of 2005.                                                                                                                                               
| |    |                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                         
| |    | 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 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 previous 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 were ceased in 2002.                                                                                                                                                                                                                                                                                                                                                               

F-11

---

---



|                                                            
|------------------------------------------------------------
|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 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, the subsidiaries are no longer
  active.                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| |    | BOS
  communication segment (the communication segment) included: BOScoms
  business of communication solutions which provides multi-path, intelligent
  routing voice over IP gateways and the Companys wholly-owned subsidiary
  Quasar Telecom (2004) Ltd. (Quasar), which provides communication solutions
  based on cellular technology. The assets and liabilities of this segment have
  been sold as part of the disposal of the communication segment in December
  2005 (see d).                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| |    | In addition, the Company
  holds shares in two other companies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| |    | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Surf
  Communication Systems Ltd. (Surf), a developer and supplier of access and
  network convergence software solutions to the wire line and wireless
  telecommunications and data communications industries. In June 2006, the
  Company invested $300, following which, the Company holds 6.94% of Surfs
  issued and outstanding shares (see Note 5).                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| |    | 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 3.96%
  of the issued and outstanding shares of NWB. The Companys holdings in
  Qualmax and NWB were received as the consideration for the sale of the
  communication segment (see d).
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | b. | Business
  combination:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| |    | Acquisition
  of Odem:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| |    | On November
  18, 2004, the Company purchased 63.8% of the outstanding shares of Odem, from
  Odems existing shareholders. In consideration for Odems shares the Company
  (i) issued 290,532 of the Companys Ordinary shares subject to lock-up
  periods of 2 to 4 years and (ii) paid an amount of $1,971 in cash.                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| |    | On September
  29, 2005 and November 1, 2005, the Company purchased an additional 23.9% and
  12.3% of the outstanding shares of Odem, respectively, from Odems minority
  shareholders. Following these purchases, the Company owns 100% of Odem. In
  consideration for the 12.3% of Odems shares purchased in November 2005 the
  Company paid $554, in cash and for the 23.9% of Odems shares purchase in
  September 2005 the Company (i) issued 232,603 of the Companys Ordinary
  shares and (ii) paid an amount of $716 in cash.

F-12

---

---



|                                                            
|------------------------------------------------------------
|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 1:- | GENERAL (Cont.)

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 Company
  has allocated the total cost of Odem acquisition in 2005 as follows:                                                                                                                                                                                                                                                                                                                                                           

|                               |  |                    |     |                      |   |       |   |                         |       |   |  |           | 
|------------------------------ |  | ------------------ | --- | -------------------- | - | ----- | - | ----------------------- | ----- | - |  | --------- | 
|Allocation
  of purchase price |  | November 1,
  2005 |     | September 29,
  2005 |   | Total |   | Estimated
  useful life |      
|                               |  |                    |     |                      |   |       |   |                         |      
|                               |  |                    |     |                      |   |       |   |                         |       |   |  |           | 
|Tangible assets                |  | $                  | 340 |                      | $ | 681   |   | $                       | 1,021 |   |  |           | 
|Customer list (1)              |  |                    | 85  |                      |   | 509   |   |                         | 594   |   |  | 9
  years | 
|Deferred tax liability         |  |                    | (23 | )                    |   | (136  | ) |                         | (159  | ) |  |           | 
|Goodwill                       |  |                    | 138 |                      |   | 144   |   |                         | 282   |   |  |           | 
|                               |  |                    |     |                      |   |       |   |                         |       |   |  |           | 
|                               |  |                    |     |                      |   |       |   |                         |       |   |  |           | 
|Total purchase price           |  | $                  | 540 |                      | $ | 1,198 |   | $                       | 1,738 |   |  |           | 
|                               |  |                    |     |                      |   |       |   |                         |       |   |  |           | 

| |  |     |                                                                                                                                                                     
| |  | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (1) | The
  Companys allocation of purchase price valued the acquired customer list by
  calculating cash flow benefit as a direct result of the customer
  relationship.

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Acquisition
  of Summit:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | On November
  21, 2007 the Company purchased 100% of the outstanding shares of Summit, from
  Summits existing 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
  (including $373 against undistributed net income for the first nine months of
  2007 in Summit). In addition, Summits selling shareholders will receive
  contingent consideration up to $500, based on performance in the years 2008
  and 2009.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | The
  Companys consolidated financial statements reflect the purchase price
  determined as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                                                                   |  |                      |       | 
|------------------------------------------------------------------ |  | -------------------- | ----- | 
|                                                                   |  | November 21, 
  2007 |      
|                                                                   |  |                      |       | 
|                                                                   |  |                      |       | 
|Issuance of
  shares (1)                                           |  | $                    | 874   | 
|Cash
  consideration                                               |  |                      | 4,472 | 
|Transaction
  costs (includes issuance costs in the amount of $29) |  |                      | 355   | 
|                                                                   |  |                      |       | 
|                                                                   |  |                      |       | 
|Total
  purchase price                                             |  | $                    | 5,701 | 
|                                                                   |  |                      |       | 

| |  |     |                                                                                                                                                                                                                                        
| |  | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (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-13

---

---



|                                                          
|----------------------------------------------------------
|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 1:- | GENERAL (Cont.)
|         |                 |  |                                                                  | 
|         |                 |  | The Company
  has allocated the total purchase price as follows:

|                               |  |        |       |                       |  |          |  | 
|------------------------------ |  | ------ | ----- | --------------------- |  | -------- |  | 
|Allocation
  of purchase price |  | Summit |       | Estimated useful life | 
|                               |  |        |       |                       | 
|                               |  |        |       |                       |  |          |  | 
|Cash                           |  | $      | 451   |                       |  |          |  | 
|Tangible
  assets (1)          |  |        | 3,192 |                       |  |          |  | 
|Backlog (2)                    |  |        | 55    |                       |  |          |  | 
|Customer
  list (3)            |  |        | 167   |                       |  | 12 years |  | 
|Non-competing
  rights (4)     |  |        | 40    |                       |  | 6 years  |  | 
|Deferred tax
  liability       |  |        | (113  | )                     |  |          |  | 
|Goodwill                       |  |        | 1,909 |                       |  |          |  | 
|                               |  |        |       |                       |  |          |  | 
|                               |  |        |       |                       |  |          |  | 
|Total
  purchase price         |  | $      | 5,701 |                       |  |          |  | 
|                               |  |        |       |                       |  |          |  | 

| |  |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |  | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | (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 as a direct result of the
  customer relationship.                                                                                                                                                                                                                               
| |  |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |  | (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 results of operations of
  Summit 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.                                                                                                                                                                                                                                                                                    
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | 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 at the beginning of each of the following periods:                                       

F-14

---

---



|                                                          
|----------------------------------------------------------
|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 1:- | GENERAL (Cont.)

|                               |  |                           |        |      |   |        | 
|------------------------------ |  | ------------------------- | ------ | ---- | - | ------ | 
|                               |  | Year Ended
  December 31, |       
|                               |  | 2007                      |        | 2006 |  
|                               |  | (unaudited)               |       
|                               |  |                           |        |      |   |        | 
|Revenues                       |  | $                         | 39,110 |      | $ | 36,436 | 
|Net income (loss)              |  | $                         | (8,669 | )    | $ | 309    | 
|Net income per share  basic   |  | $                         | (1.00  | )    | $ | 0.05   | 
|Net income per share  diluted |  | $                         | (1.00  | )    | $ | 0.05   | 

| |  |                                                                                                                                                                                                                                                                                                                                                    |  | 
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  | Acquisition
  of Cyms Ltd. assets and Liabilities:                                                                                                                                                                                                                                                                                                
| |  |                                                                                                                                                                                                                                                                                                                                                   
| |  | On July 1,
  2007, the Company entered into an agreement with Cyms Ltd., 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 Ltd. were transferred into the Company on July 1, 2007 (the
  closing date).
| |  |                                                                                                                                                                                                                                                                                                                                                   
| |  | The
  Companys consolidated financial statements reflect the purchase price
  determined as follows:                                                                                                                                                                                                                                             

|                       |  |                |    | 
|---------------------- |  | -------------- | -- | 
|                       |  | November
  21, |   
|                       |  | 2007           |   
|                       |  |                |   
|                       |  |                |    | 
|Issuance of shares (1) |  | $              | 15 | 
|Cash consideration     |  |                | 51 | 
|                       |  |                |    | 
|                       |  |                |    | 
|Total purchase price   |  | $              | 66 | 
|                       |  |                |    | 

| |  |                                                                  |                                                                                                                                                                                                                                         | 
| |  | ---------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | (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.
| |  |                                                                  |                                                                                                                                                                                                                                        
| |  | The Company
  has allocated the total purchase price as follows:

|                               |  |      |    |                       |  |         |  | 
|------------------------------ |  | ---- | -- | --------------------- |  | ------- |  | 
|Allocation
  of purchase price |  | Cyms |    | Estimated useful life | 
|                               |  |      |    |                       | 
|                               |  |      |    |                       |  |         |  | 
|Tangible assets                |  | $    | 11 |                       |  |         |  | 
|Technology (1)                 |  |      | 55 |                       |  | 6 years |  | 
|                               |  |      |    |                       |  |         |  | 
|                               |  |      |    |                       |  |         |  | 
|Total purchase price           |  | $    | 66 |                       |  |         |  | 
|                               |  |      |    |                       |  |         |  | 

| |  |     |                                                                                                                                                     
| |  | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (1) | The
  Companys allocation of purchase price valued the acquired technology by
  calculating cash flow benefit as a direct result of the technology.

F-15

---

---



|                                                          
|----------------------------------------------------------
|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 1:- | GENERAL (Cont.)

| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Summit
  acquisition has 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.                    
| |                                                                                                                                                                                                                                                                                                                      
| | Acquisition
  of OptimizeIT, a partnership organized under the laws of the State of Israel,
  assets and liabilities:                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                      
| | 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
| |                                                                                                                                                                                                                                                                                                                      
| | The
  Companys consolidated financial statements reflect the purchase price
  determined as follows:                                                                                                                                                                                                                

|                         |  |                       |     | 
|------------------------ |  | --------------------- | --- | 
|                         |  | November
  21,
  2007 |    
|                         |  |                       |    
|                         |  |                       |     | 
|Issuance of
  shares (1) |  | $                     | 20  | 
|Cash
  consideration     |  |                       | 150 | 
|                         |  |                       |     | 
|                         |  |                       |     | 
|Total
  purchase price   |  | $                     | 170 | 
|                         |  |                       |     | 

| |                                                                 
| | ----------------------------------------------------------------
| | The Company
  has allocated the total purchase price as follows:

|                                    |  |            |     |                       |  |    | 
|----------------------------------- |  | ---------- | --- | --------------------- |  | -- | 
|Allocation
  of purchase price      |  | OptimizeIT |     | Estimated useful life | 
|                                    |  |            |     |                       | 
|                                    |  |            |     |                       |  |    | 
|Research and development in process |  | $          | 170 |                       |  | NA | 
|                                    |  |            |     |                       |  |    | 
|                                    |  |            |     |                       |  |    | 
|Total
  purchase price              |  | $          | 170 |                       |  |    | 
|                                    |  |            |     |                       |  |    | 

| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                                                                                                      

F-16

---

---



|                                                          
|----------------------------------------------------------
|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 1:- | GENERAL (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c. | Sale of
  product line:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | On July 18,
  2005, BOScom signed an asset purchase agreement with Consist Technologies
  Ltd. and Consist International Inc. (collectively, Consist), for the sale
  of its PrintBOS product line in consideration of $500 and a contingent
  payment in each of the next three years equal to 6%-10% of future revenues
  exceeding $1,000 per year, Consist will generate from the PrintBOS product
  line. The Company has recognized a gain of $273 in 2005 with respect of this
  sale. As of December 31, 2005, the Company has received $375 and the
  remaining $125 has been placed in an escrow for a period of three years,
  pending repayment of royalties to the Office of the Chief Scientist (OCS)
  on sales of PrintBOS products. For the years ended December 31, 2006 and
  2007, total revenues generated by Consist from the PrintBOS products in each
  year were less than $1,000 and, therefore, the Company did not receive any
  royalties in 2006 and 2007.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | d. | Discontinued
  operations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 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. Additional shares may be issued to the Company at the end of four
  consecutive fiscal quarters following the closing of the transaction,
  contingent upon IP Gear generating by then a certain level of revenues from
  the disposed segment (Earn Out Shares). The maximum number of Earn Out
  Shares that may further be issued to the Company is approximately 1 million,
  constituting an additional 5% of Qualmax outstanding shares. 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. In accordance with the
  Outsourcing Agreement, the first three months of services were provided for
  no charge. 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-17

---

---



|                                                          
|----------------------------------------------------------
|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 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%. In the first 18 months, IP Gear shall pay only
  the interest accrued on the loan and monthly principal and interest payments
  shall commence thereafter. The loan granted to IP Gear is secured by a first
  priority floating charge, which may be subordinated to a charge in favor of a
  major financial institution in the event such charge is recorded. In
  addition, repayment is guaranteed by Qualmax Inc.                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The loan
  agreement provides that if the disposed segment would incur losses that
  exceed $250 in the first quarter of 2006, the principal amount to be repaid
  under the loan shall be reduced by the excess losses. In such event, Qualmax
  shall issue to the Company additional shares of Common stock against such
  reduction, valued at a predetermined price of $1.43 per share. Pursuant to
  this provision, 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. In June 2006,
  Qualmax issued BOS an additional 174,825 shares, reducing the principal
  amount of the loan to $400. As of December 31, 2007 the company holds 17.87%
  of the issued and outstanding Common stock of QMX.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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 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 of 5.506652 shares of series A Convertible Preferred stock of NWB
  which are convertible into approximately 16,446,544 shares of NWB                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Common
  stock, reflecting a conversion rate of $0.09 per one share of Common stock.
  During 2007 NWB converted its series A Preferred stock into Common stock and
  as a result the company holds as of December 31, 2007, 3.96% of the issued
  and outstanding Common stock 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, 2007 the conditions have not been met, hence the
  option has not been granted and the fair value of the option is $0.                                                                                                                                                                                                                                                                                                       

F-18

---

---



|                                                          
|----------------------------------------------------------
|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 1:- | GENERAL (Cont.)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of
  December 31, 2007, the restriction on the shares held in Qualmax and NWB
  terminates within one year 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. Unrealized gains and losses, net of the related tax
  effect as of December 31, 2007, are included in other comprehensive income. As a result of the decrease in the
  share prices of these companies as of December 31, 2007, the Company recorded
  loss of $5,588. On
  February 18, 2008, New World Brands and Qualmax, entered into an agreement
  and plan of merger (see note 19), pursuant to which Qualmax will be merged
  with and into NWB. Upon completion of the merger, which is subject to
  completion of certain conditions, BOS holding in Qualmax will be converted
  into holding in New World Brands. These holdings were the consideration for selling the communication
  division in years 2005 and 2006.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | For the
  years ended December 31, 2006 and 2005, 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, |      
|                                                                        |  |                         |      
|                                                                        |  | 2006                    |       | 2005 |  
|                                                                        |  |                         |       |      |  
|                                                                        |  |                         |       |      |   |        |  
|Consideration:                                                          |  |                         |       |      |   |        |  
|Ordinary
  shares of Qualmax (1)                                        |  | $                       | 957   |      | $ | 4,586  |  
|107,143
  warrants (2)                                                  |  |                         | -     |      |   | 104    |  
|5.50652
  series A Preferred stock of NWB (3)                           |  |                         | 1,480 |      |   | -      |  
|Debt conversion
  (loan granted to IP Gear)                             |  |                         | -     |      |   | (1,000 | )
|                                                                        |  |                         |       |      |   |        |  
|                                                                        |  |                         |       |      |   |        |  
|Total
  consideration                                                   |  |                         | 2,437 |      |   | 3,690  |  
|                                                                        |  |                         |       |      |   |        |  
|                                                                        |  |                         |       |      |   |        |  
|Cost:                                                                   |  |                         |       |      |   |        |  
|Disposal of
  assets (liabilities) related to the communication segment |  |                         | 752   |      |   | 2,425  |  
|Transactions
  related costs                                            |  |                         | -     |      |   | 486    |  
|                                                                        |  |                         |       |      |   |        |  
|                                                                        |  |                         |       |      |   |        |  
|Total cost                                                              |  |                         | 752   |      |   | 2,911  |  
|                                                                        |  |                         |       |      |   |        |  
|                                                                        |  |                         |       |      |   |        |  
|Capital gain                                                            |  | $                       | 1,685 |      | $ | 779    |  
|                                                                        |  |                         |       |      |   |        |  

| |                                    |                                                                                                                                                           
| | ---------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | There was no capital gain in 2007.
| |                                   
| | (1)                                | Valued at $1.43 per share.                                                                                                                                
| |                                   
| | (2)                                | Valued at $0.97 per warrant.                                                                                                                              
| |                                   
| | (3)                                | 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-19

---

---



|                                                          
|----------------------------------------------------------
|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 1:- | GENERAL (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Following
  the agreement, signed in December 2006, the Company has accounted for the
  communication segment as a 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 of the communication segment for 2005, have been
  reclassified in the accompanying statements of operations as discontinued
  operations.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | As of
  December 31, 2007, Qualmax share price is $0.21 and NWB share price is $0.04.
  The Company recorded a loss in the amount of $5,588 as the decrease was other
  than temporary.                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 2. | Discontinued
  product line:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | During the
  fourth quarter of 2002, PacInfo ceased its operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | The results
  of operations, including revenues, cost of revenues, operating expenses and
  other income and expenses of the communication segment and PacInfos
  operations for 2007, 2006 and 2005, 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.                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Summarized
  selected financial information and cash flows of the discontinued operations
  are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                                                        |  |                         |     |      |   |       |   |   |        |  
|------------------------------------------------------- |  | ----------------------- | --- | ---- | - | ----- | - | - | ------ | -
|                                                        |  | Year ended December 31, |    
|                                                        |  |                         |    
|                                                        |  | 2007                    |     | 2006 |   | 2005  |  
|                                                        |  |                         |     |      |   |       |  
|                                                        |  |                         |     |      |   |       |   |   |        |  
|Revenues                                                |  | $                       | -   |      | $ | -     |   | $ | 2,954  |  
|Cost of revenues                                        |  |                         | -   |      |   | -     |   |   | 2,171  |  
|Operating expenses                                      |  |                         | -   |      |   | 752   |   |   | 3,157  |  
|                                                        |  |                         |     |      |   |       |   |   |        |  
|                                                        |  |                         |     |      |   |       |   |   |        |  
|Operating loss                                          |  |                         | -   |      |   | (752  | ) |   | (2,374 | )
|Gain derived from sale of the
  discontinued operations |  |                         | 237 |      |   | 2,437 |   |   | 779    |  
|                                                        |  |                         |     |      |   |       |   |   |        |  
|                                                        |  |                         |     |      |   |       |   |   |        |  
|Net income (loss)                                       |  | $                       | 237 |      | $ | 1,685 |   | $ | (1,595 | )
|                                                        |  |                         |     |      |   |       |   |   |        |  

F-20

---

---



|                                                            
|------------------------------------------------------------
|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 1:- | GENERAL
(Cont.)

|                                                             |  |                         |      |      |   |        |   |   |        |  
|------------------------------------------------------------ |  | ----------------------- | ---- | ---- | - | ------ | - | - | ------ | -
|                                                             |  | Year ended December 31, |     
|                                                             |  |                         |     
|                                                             |  | 2007                    |      | 2006 |   | 2005   |  
|                                                             |  |                         |      |      |   |        |  
|                                                             |  |                         |      |      |   |        |   |   |        |  
|Cash
  flows from operating activities                       |  |                         |      |      |   |        |   |   |        |  
|Gain
  (loss) from discontinued operations                   |  | $                       | 237  |      | $ | 1,685  |   | $ | (1,595 | )
|Depreciation
  and amortization of equipment and intangibles |  |                         | -    |      |   | -      |   |   | 107    |  
|Capital
  gain                                               |  |                         | -    |      |   | (2,052 | ) |   | (779   | )
|Adjustments
  due to changes in working capital              |  |                         | (237 | )    |   | (79    | ) |   | 620    |  
|                                                             |  |                         |      |      |   |        |   |   |        |  
|                                                             |  |                         |      |      |   |        |   |   |        |  
|Net
  cash flows used in operating activities                |  | $                       | -    |      | $ | (446   | ) | $ | (1,647 | )
|                                                             |  |                         |      |      |   |        |   |   |        |  
|                                                             |  |                         |      |      |   |        |   |   |        |  
|Cash
  flows from investing activities                       |  |                         |      |      |   |        |   |   |        |  
|Communication
  sales costs                                  |  | $                       | -    |      | $ | (221   | ) | $ | -      |  
|Purchase
  of property and equipment                         |  |                         | -    |      |   | -      |   |   | (27    | )
|Payment
  on account of sale of Communication Segment        |  |                         | -    |      |   | -      |   |   | (1,060 | )
|Investment
  in Company                                      |  |                         | -    |      |   | -      |   |   | -      |  
|                                                             |  |                         |      |      |   |        |   |   |        |  
|                                                             |  |                         |      |      |   |        |   |   |        |  
|Net
  cash flows used in investing activities                |  | $                       | -    |      | $ | (221   | ) | $ | (1,087 | )
|                                                             |  |                         |      |      |   |        |   |   |        |  

|         |                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                       
|         |                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                
|         | 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.

F-21

---

---



|                                                            
|------------------------------------------------------------
|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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                         | 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 Odem, a subsidiary, whose functional currency as of
  December 31, 2004, was other than dollar have been translated into
  dollars, but on April 1, 2005, due to significant changes in
  circumstances initiated by management, like transition of Odems majority of
  sales, expenses and budget from New Israeli Shekels (NIS) to dollars,
  indicate a functional currency change. Since the functional currency changed
  from a foreign currency to the reporting currency, dollars, as of March 31,
  2005, the translation adjustments for non-monetary assets prior to the
  change, became the accounting basis for the periods starting April 1,
  2005.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         | 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 originally purchased with maturities of less than three
  months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         | e.                                      | Inventories:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                         | Inventory
  write-offs are provided to cover risks arising from slow-moving items or
  technological obsolescence. As of December 31, 2007 and 2006, inventory is
  presented net of $358 and $100, respectively, for technological obsolescence
  and slow moving items (see also Note 4).                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                         | Inventories
  are valued at the lower of cost or market value. Cost is determined as
  follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                         | Raw and
  packaging materials - moving average cost method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                         | Products in
  progress and finished products - moving average cost method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         | 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.                                                                                                                                                                                                                                                                                                                            

F-22

---

---



|                                                            
|------------------------------------------------------------
|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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | During 2005, the Company received a royalty-bearing grant from the Chief
  Scientist of the Ministry of Industry and Trade in Israel, in the amount of $296, for its participation in
  the discontinued operations. There were no grants in 2007 and 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | g.                                      | Investment
  in an affiliate:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | An affiliate
  is a company in which the Company is able to exercise significant influence,
  but that is not a subsidiary and is accounted for by the equity method, net
  of write-down for decrease in fair value which is not of a temporary nature.
  The Companys investment in Surf has been included as an affiliate until
  September 30, 2005. In June 2006, following an investment round, the
  Company holding in Surf decreased to 7.8% of Surfs issued and outstanding
  shares. As a result, the Company ceased to have the ability to exercise
  significant influence over Surf and, accordingly, the adjusted carrying
  amount of the investment is accounted for based on the cost accounting method
  (see Note 5).
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | The
  Companys investment in this company 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 2005, an impairment of $1,385 has been recorded in
  equity in losses of an affiliate in the statement of operations.                                                                                                                                                                                                                                                                
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | h.                                      | Investment
  in other companies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | Investments
  in public companies with restrictions of less than one year are classified as
  available-for-sale under FAS 115 (Readily Determined Sales Price Currently
  Available on a Security Exchange), and are adjusted to their fair market
  value with unrealized gains and losses recorded as a component of accumulated
  other comprehensive income (loss).                                                                                                                                                                                                                                                                                                                                                                 
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | Investment
  in QMX and NWB presented, commencing December 31, 2007 at the sales price on
  the applicable Security Exchange, respectively to FAS 115 (See note 1d).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | Management
  evaluates investments in other companies for evidence of other than temporary
  declines in value. Accordingly, during 2007 and 2006, an impairment loss, due
  to other than temporary decline, of $5,588 and $39 has been recorded,
  accordingly and presented in other income (loss), net in the consolidated
  statements of operations. During 2005, no impairment losses have been
  identified.                                                                                                                                                                                                                                                                                                                       
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | i.                                      | 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-23

---

---



|                                                            
|------------------------------------------------------------
|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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

|                               |  |  |         |  |  |                                                                             | 
|------------------------------ |  |  | ------- |  |  | --------------------------------------------------------------------------- | 
|                               |  |  | %       |  |  |                                                                             | 
|                               |  |  |         |  |  |                                                                             | 
|                               |  |  |         |  |  |                                                                             | 
|Computers and software         |  |  | 20 - 33 |  |  | (mainly 33%)                                                                | 
|Office furniture and equipment |  |  | 6 - 15  |  |  | (mainly 10%)                                                                | 
|Leasehold improvements         |  |  | 10      |  |  | (over the shorter of
  the period
  of the lease or the life of the assets) | 
|Vehicles                       |  |  | 15      |  |  |                                                                             | 
|Plant                          |  |  | 4       |  |  |                                                                             | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | j. | 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 2007, 2006 and 2005, no impairment losses have been identified.                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | k. | 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,
  Summit and Odem which comprise 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 2007, 2006 and
  2005, no impairment losses have been identified.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | l. | 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 participation of 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.                                                                                                                                                                                                                                                                                                                                                      

F-24

---

---



|                                                            
|------------------------------------------------------------
|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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | m. | 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.                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | Severance
  expenses for 2007, 2006 and 2005 amounted to $275, $298 and $256,
  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | n. | 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 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 generates from sale 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 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.                                   

F-25

---

---



|                                                            
|------------------------------------------------------------
|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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 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 or for new
  arrangements, based upon the price that management will determine to charge.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | o. | Warranty:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | BOScom
  provides a warranty of between 3 to 36 months at no extra charge, whereby
  defective hardware covered by the warranty should be sent back to the
  company. The Company estimates the costs that may be incurred under its
  warranty and records a liability in the amount of such costs at the time
  product revenue is recognized. Factors that affect the Companys warranty
  liability include the number of installed units, historical and anticipated
  rates of warranty claims, and cost per claim. The Company periodically
  assesses the adequacy of its recorded warranty liabilities and adjusts the
  amounts as necessary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | During 2007 and 2006, the Companys Provision for warranty was $20
  and $73, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | p. | Income
  taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | The Company
  accounts for income taxes in accordance with Statement of Financial Accounting
  Standards No 109, Accounting for Income Taxes. This Statement prescribes
  the use of the liability method whereby deferred tax assets and liability
  account balances are determined based on 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 has provided valuation allowances, in
  respect of deferred tax assets resulting from tax loss carryforward and other
  reserves and allowances due to its history of operating losses and current
  uncertainty concerning its ability to realize these deferred tax assets in
  the future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-26

---

---



|                                                            
|------------------------------------------------------------
|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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | q. | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | r. | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | 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 3,305,333, 1,386,424 and 1,506,803
  for the years ended December 31, 2007, 2006 and 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | s. | 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. In March 2005, the
  Securities and Exchange Commission issued Staff Accounting Bulletin 107
  (SAB 107) relating to SFAS 123(R). The Company has applied the provisions
  of SAB 107 in its adoption of SFAS 123(R).                                                                                                                                                                     

F-27

---

---



|                                                            
|------------------------------------------------------------
|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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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. Prior to the adoption of SFAS 123(R), the Company accounted for
  equity-based awards to employees and directors using the intrinsic value
  method in accordance with APB 25 as allowed under Statement of Financial
  Accounting Standards 123, Accounting for Share-based Compensation
  (SFAS 123).                                                                                                                                                           
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | 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.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | As a result
  of adopting SFAS 123(R) on January 1, 2006, the Companys income before
  income taxes for the year ended December 31, 2006 was $370, lower than if it
  had continued to account for stock-based compensation under APB 25. Basic and
  diluted net earnings per share for the year ended December 31, 2006, are
  $0.06 and $0.05, respectively, lower than if the Company had continued to
  account for share-based compensation under APB 25.                                                                                                                                                                                                                                                                                                                                                             
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Prior to
  January 1, 2006, the Company applied the intrinsic value method of accounting
  for stock options as prescribed by APB 25, whereby compensation expense is
  equal to the excess, if any, of the quoted market price of the stock over the
  exercise price on the date of grant of the award.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-28

---

---



|                                                            
|------------------------------------------------------------
|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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |  |                                                                                                                                                                                                                                                                         
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The
  pro-forma table below reflects the Companys stock based compensation
  expense, net loss and basic and diluted net loss per share for the year ended
  December 31, 2005 had the Company applied the fair value recognition
  provisions of SFAS 123, as follows:

|                                                                                                                                                       |  |                     |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------- | ------ | -
|                                                                                                                                                       |  | December 31,
  2005 |       
|                                                                                                                                                       |  |                     |       
|                                                                                                                                                       |  |                     |        |  
|Net loss from continuing
  operations, as reported                                                                                                     |  | $                   | (2,010 | )
|Add: share-based compensation expenses
  related to employee stock options determined under intrinsic value method included in the
  reported net loss |  |                     | 62     |  
|Deduct: share-based compensation expense
  related to employee stock options determined under fair value method for all awards                         |  |                     | (246   | )
|                                                                                                                                                       |  |                     |        |  
|                                                                                                                                                       |  |                     |        |  
|Pro forma net loss from
  continuing operations                                                                                                        |  |                     | (2,194 | )
|Pro forma net loss from
  discontinued operations                                                                                                      |  |                     | (1,595 | )
|                                                                                                                                                       |  |                     |        |  
|                                                                                                                                                       |  |                     |        |  
|Pro forma net loss                                                                                                                                     |  | $                   | (3,789 | )
|                                                                                                                                                       |  |                     |        |  
|                                                                                                                                                       |  |                     |        |  
|Basic and diluted net loss
  per share from continuing operations, as reported                                                                         |  | $                   | (0.36  | )
|                                                                                                                                                       |  |                     |        |  
|                                                                                                                                                       |  |                     |        |  
|Basic and diluted net loss
  per share from discontinued operations, as reported                                                                       |  | $                   | (0.28  | )
|                                                                                                                                                       |  |                     |        |  
|                                                                                                                                                       |  |                     |        |  
|Basic and diluted net loss
  per share, as reported                                                                                                    |  | $                   | (0.64  | )
|                                                                                                                                                       |  |                     |        |  
|                                                                                                                                                       |  |                     |        |  
|Basic and diluted net loss
  per share, including the effect of share-based compensation expense                                                       |  | $                   | (0.67  | )
|                                                                                                                                                       |  |                     |        |  

F-29

---

---



|                                                            
|------------------------------------------------------------
|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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The fair value
for options granted in 2005 is amortized over their vesting period and
estimated at the date of grant using the Black-Scholes-Merton options pricing
model with the following weighted average assumptions:

|                      |  |                         |         | 
|--------------------- |  | ----------------------- | ------- | 
|                      |  | Year ended December 31, |        
|                      |  |                         |        
|                      |  | 2005                    |        
|                      |  |                         |        
|                      |  |                         |         | 
|Risk free interest    |  |                         | 4.00%   | 
|Dividend yields       |  |                         | 0%      | 
|Volatility            |  |                         | 120%    | 
|Average Expected life |  |                         | 3 years | 

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Pro-forma
  compensation expense under SFAS 123, among other computational differences,
  does not consider potential pre-vesting forfeitures. Because of these
  differences, the pro-forma stock based compensation expense presented above
  for the prior year ended December 31, 2005 under SFAS 123 and the stock based
  compensation expense recognized during the years ended December 31, 2007
  and 2006 under SFAS 123(R) are not directly comparable.                                                                                                                                                                                                                                                                                                                                                                         
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | The Company
  recognizes compensation expenses for the value of its awards granted
  subsequent to January 1, 2006 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
  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 average of the options contractual life
  and the vesting period in accordance with SAB 107 guidance. 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 2007 and 2006 is estimated on the date of grant
  using a Black-Scholes options pricing model with the following weighted
  average assumptions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                     |  |      |            |      |  |            | 
|-------------------- |  | ---- | ---------- | ---- |  | ---------- | 
|                     |  |      |            |      | 
|                     |  | 2007 |            | 2006 | 
|                     |  |      |            |      | 
|                     |  |      |            |      |  |            | 
|Risk free interest   |  |      | 4.62%      |      |  | 4.91%      | 
|Dividend yields      |  |      | 0%         |      |  | 0%         | 
|Volatility           |  |      | 58%        |      |  | 78%        | 
|Expected option term |  |      | 5.68 years |      |  | 3.44 years | 
|Forfeiture rate      |  |      | 15%        |      |  | 0%         | 

F-30

---

---



|                                                            
|------------------------------------------------------------
|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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |  |                                                                                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During 2007
  and 2006, the Company recognized stock-based compensation expense related to
  employee stock options in the amount of $516 and $727 respectively as
  follows:

|                                         |  |                         |     |      |   |     | 
|---------------------------------------- |  | ----------------------- | --- | ---- | - | --- | 
|                                         |  | Year ended December 31, |    
|                                         |  |                         |    
|                                         |  | 2007                    |     | 2006 |  
|                                         |  |                         |     |      |  
|                                         |  |                         |     |      |   |     | 
|Selling and marketing                    |  | $                       | 296 |      | $ | 152 | 
|General and administrative               |  |                         | 220 |      |   | 575 | 
|                                         |  |                         |     |      |   |     | 
|                                         |  |                         |     |      |   |     | 
|Total Stock-based
  compensation expense |  | $                       | 516 |      | $ | 727 | 
|                                         |  |                         |     |      |   |     | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | During the
  year ended December 31 2005, the Company recognized general and
  administrative, stock-based compensation expense in the amount of $112.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | t. | 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. The fair value for marketable securities is based
  on quoted market prices. The
  fair value of investments in other companies is based on independent
  third-party evaluations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | u. | Impact of recently issued accounting
  pronouncements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | In September
  2006, the FASB issued Statement of Financial Accounting Standards No. 157,
  Fair Value Measurements (SFAS 157) which defines fair value, establishes a
  framework for measuring fair value, and expands disclosures about fair value
  measurements. SFAS 157 applies to other accounting pronouncements that
  require or permit fair value measurements and, accordingly, does not require
  any new fair value measurements. SFAS 157 is effective for fiscal years beginning
  after November 15, 2007 for financial assets and liabilities, as well as for
  any other assets and liabilities that are carried at fair value on a
  recurring basis, and should be applied prospectively. The adoption of the
  provisions of SFAS 157 related to financial assets and liabilities and other
  assets and liabilities that are carried at fair value on a recurring basis is
  not anticipated to materially impact the Companys consolidated financial
  position and results of operations. Subsequently, the FASB provided for a
  one-year deferral of the provisions of SFAS 157 for non-financial assets and
  liabilities that are recognized or disclosed at fair value in the
  consolidated financial statements on a non-recurring basis.

F-31

---

---



|                                                            
|------------------------------------------------------------
|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 2:- | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company
  is currently evaluating the impact of adopting the provisions of SFAS 157 for
  non-financial assets and liabilities that are recognized or disclosed on a
  non-recurring basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | In February
  2007, the FASB issued Statement of Financial Accounting Standards No. 159,
  The Fair Value Option for Financial Assets and Financial Liabilities (SFAS
  159). Under this Standard, the Company may elect to report financial
  instruments and certain other items at fair value on a contract-by-contract
  basis with changes in value reported in earnings. This election is
  irrevocable. SFAS 159 provides an opportunity to mitigate volatility in
  reported earnings that is caused by measuring hedged assets and liabilities
  that were previously required to use a different accounting method than the
  related hedging contracts when the complex provisions of SFAS 133 hedge
  accounting are not met.  SFAS 159 is
  effective for years beginning after November 15, 2007. There is no impact of
  adopting SFAS 159 on its financial position, cash flows, and results of
  operations of the Company.                                                                                                                                                                                                                                                                                                                                            
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | In December
  2007, the FASB issued Statement of Financial Accounting Standards No. 141
  (Revised 2007) (SFAS 141R), Business Combinations. SFAS 141R will change the
  accounting for business combinations. Under SFAS 141R, an acquiring entity
  will be required to recognize all the assets acquired and liabilities assumed
  in a transaction at the acquisition-date fair value with limited exceptions.
  SFAS 141R will change the accounting treatment and disclosure for certain
  specific items in a business combination. SFAS 141R 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. SFAS 141R will have an impact on accounting for future business
  combinations once adopted and not on prior acquisitions. The Company is
  currently evaluating the impact of adopting the provisions of SFAS 141R.                                                                                                                                                                                                                                                                                                                  
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | In December
  2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
  Financial Statements (SFAS 160). SFAS 160 establishes 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
  reporting requirements that provide sufficient disclosures that clearly
  identify and distinguish between the interests of the parent and the
  interests of the noncontrolling owners. This standard is effective for fiscal
  years beginning after December 15, 2008 and should be applied
  prospectively. However, the presentation and disclosure requirements of the
  statement shall be applied retrospectively for all periods presented. The
  adoption of the provisions of Statement No. 160 is not anticipated to
  materially impact the Companys consolidated financial position and results
  of operations. The Company is currently evaluating the impact of adopting the
  provisions of SFAS 160.

F-32

---

---



|                                                          
|----------------------------------------------------------
|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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)       
|         |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                                | In December
  2007, the U.S. Securities and Exchange Commission (SEC) issued Staff
  Accounting Bulletin 110 (SAB No. 110) to amend the SECs views discussed in
  Staff Accounting Bulletin 107 (SAB No. 107) regarding the use of the
  simplified method in developing an estimate of expected life of share options
  in accordance with SFAS No. 123(R). SAB No. 110 is effective for the company
  beginning in the first quarter of fiscal year 2008. The Company expects to
  continue using the simplified method. As a result, the Company does
  not expect the adoption of SAB No. 110 will have a significant impact on its
  consolidated financial statements.
|         |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|NOTE 3:- | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

|                                                         |  |              |     |      |   |     | 
|-------------------------------------------------------- |  | ------------ | --- | ---- | - | --- | 
|                                                         |  | December 31, |    
|                                                         |  |              |    
|                                                         |  | 2007         |     | 2006 |  
|                                                         |  |              |     |      |  
|                                                         |  |              |     |      |  
|Government authorities  Income tax advances and
  V.A.T |  | $            | 363 |      | $ | 279 | 
|Advances to suppliers                                    |  |              | 405 |      |   | 296 | 
|Prepaid expenses                                         |  |              | 129 |      |   | 201 | 
|Other                                                    |  |              | 48  |      |   | 82  | 
|                                                         |  |              |     |      |   |     | 
|                                                         |  |              |     |      |   |     | 
|                                                         |  | $            | 945 |      | $ | 858 | 
|                                                         |  |              |     |      |   |     | 

|         |            
|-------- | -----------
|NOTE 4:- | INVENTORIES

|                                                                         |  |   |       |  |   |       | 
|------------------------------------------------------------------------ |  | - | ----- |  | - | ----- | 
|Raw materials (including packaging materials and
  Products in progress) |  | $ | 260   |  | $ | 120   | 
|Finished products                                                        |  |   | 8,061 |  |   | 3,897 | 
|                                                                         |  |   |       |  |   |       | 
|                                                                         |  |   |       |  |   |       | 
|                                                                         |  | $ | 8,321 |  | $ | 4,017 | 
|                                                                         |  |   |       |  |   |       | 

|         |                                                                                                                                                                            |                                                 
|-------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------
|         | The
  inventories are presented net of write-off for technological obsolescence and
  slow moving items of $358 and $100 as of December 31, 2007 and 2006,
  respectively.
|         |                                                                                                                                                                           
|NOTE 5:- | INVESTMENT IN OTHER COMPANIES                                                                                                                                             
|         |                                                                                                                                                                           
|         | a.                                                                                                                                                                         | Investment
  in Surf Communication Systems Ltd.:

F-33

---

---



|                                                          
|----------------------------------------------------------
|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 5:- | INVESTMENT IN OTHER COMPANIES (Cont.)
|         |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                       | In September
  2005, Surf entered into a private placement that is considered an event of
  change in circumstances having a significant adverse effect on the fair value of the investment. Therefore,
  the Company has evaluated its investment in Surf and determined that it
  amounts to $722 as of December 31, 2005 based on managements analysis
  (supported by an independent third-party valuation). As a result, the Company
  has recorded an impairment of $1,385, which has been included in the equity
  in losses of an affiliate in the statement of operations for the year
  December 31, 2005.
|         |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                       | In June
  2006, as part of the investment round, the Company invested $300 in Surf,
  following which, the Company holds 7.8% of Surfs issued and outstanding
  shares. As a result, the Company ceased to have the ability to exercise
  significant influence over Surf and, accordingly, the adjusted carrying amount
  of the investment of $722 is accounted for based on the cost accounting
  method, which resulted in impairment of $39. As of December 31, 2007 the
  Company holds 6.94% of Surfs issued and outstanding shares.                                                                        
|         |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                       | Summarized
  combined financial information of Surf for the years in which the investment
  was accounted using the equity method was as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                                |  |                                |       | 
|----------------------------------------------- |  | ------------------------------ | ----- | 
|                                                |  | Year ended December 31,
  2005 |      
|                                                |  |                                |      
|                                                |  |                                |      
|Revenues                                        |  | $                              | 2,055 | 
|                                                |  |                                |       | 
|                                                |  |                                |       | 
|Cost of
  sales                                 |  | $                              | 660   | 
|                                                |  |                                |       | 
|                                                |  |                                |       | 
|Operating
  expenses from continuing operations |  | $                              | 3,694 | 
|                                                |  |                                |       | 
|                                                |  |                                |       | 
|Net loss                                        |  | $                              | 2,334 | 
|                                                |  |                                |       | 

F-34

---

---



|                                                          
|----------------------------------------------------------
|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 5:- | INVESTMENT IN OTHER COMPANIES (Cont.)
|         |                                      
|         | b.                                    | The
  Companys investments in companies comprise of:

|                                  |  |              |       |      |   |       | 
|--------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                                  |  | December 31, |      
|                                  |  |              |      
|                                  |  | 2007         |       | 2006 |  
|                                  |  |              |       |      |  
|                                  |  |              |       |      |  
|Surf
  Communication Systems Ltd. |  | $            | 983   |      | $ | 983   | 
|                                  |  |              |       |      |   |       | 
|Qualmax Inc.
  (1)                |  |              | 819   |      |   | 5,619 | 
|                                  |  |              |       |      |   |       | 
|New World
  Brands Inc. (1)       |  |              | 692   |      |   | 1,480 | 
|                                  |  |              |       |      |   |       | 
|                                  |  |              |       |      |   |       | 
|                                  |  | $            | 2,494 |      | $ | 8,082 | 
|                                  |  |              |       |      |   |       | 

|         |                               |                                                                                                                                                                                                     
|-------- | ----------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                               | (1) As of
  December 31, 2007 the investment in the companies was changed from cost
  method under APB18 to available for sale under FAS115 and presented in fair
  value (See Note 1d and Note 2h).
|         |                              
|NOTE 6:- | PROPERTY, PLANT AND EQUIPMENT

|                                   |  |              |       |      |   |       | 
|---------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                                   |  | December 31, |      
|                                   |  |              |      
|                                   |  | 2007         |       | 2006 |  
|                                   |  |              |       |      |  
|                                   |  |              |       |      |  
|Cost:                              |  |              |       |      |   |       | 
|Computers and
  software           |  | $            | 1,942 |      | $ | 1,697 | 
|Office
  furniture and equipment   |  |              | 562   |      |   | 458   | 
|Leasehold
  improvements and plant |  |              | 1,313 |      |   | 1,116 | 
|Vehicles                           |  |              | 60    |      |   | 89    | 
|                                   |  |              |       |      |   |       | 
|                                   |  |              |       |      |   |       | 
|                                   |  |              | 3,877 |      |   | 3,360 | 
|                                   |  |              |       |      |   |       | 
|Accumulated
  depreciation:        |  |              |       |      |   |       | 
|Computers and
  software           |  |              | 1,794 |      |   | 1,569 | 
|Office
  furniture and equipment   |  |              | 431   |      |   | 301   | 
|Leasehold
  improvements and plant |  |              | 928   |      |   | 906   | 
|Vehicles                           |  |              | 5     |      |   | 64    | 
|                                   |  |              |       |      |   |       | 
|                                   |  |              |       |      |   |       | 
|                                   |  |              | 3,158 |      |   | 2,840 | 
|                                   |  |              |       |      |   |       | 
|                                   |  |              |       |      |   |       | 
|Depreciated
  cost                 |  | $            | 719   |      | $ | 520   | 
|                                   |  |              |       |      |   |       | 

| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | Depreciation
  expenses amounted to $123, $171 and $317 for the years ended December 31,
  2007, 2006 and 2005, respectively.

F-35

---

---



|                                                          
|----------------------------------------------------------
|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 7:- | OTHER INTANGIBLE ASSETS

|                          |  |              |       |      |   |       | 
|------------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                          |  | December 31, |      
|                          |  |              |      
|                          |  | 2007         |       | 2006 |  
|                          |  |              |       |      |  
|                          |  |              |       |      |  
|Cost:                     |  |              |       |      |   |       | 
|Backlog                   |  | $            | 55    |      | $ | -     | 
|Non-competing
  rights    |  |              | 40    |      |   | -     | 
|Technology                |  |              | 226   |      |   | -     | 
|Customer list             |  |              | 2,177 |      |   | 2,010 | 
|                          |  |              |       |      |   |       | 
|                          |  |              |       |      |   |       | 
|                          |  |              | 2,498 |      |   | 2,010 | 
|                          |  |              |       |      |   |       | 
|                          |  |              |       |      |   |       | 
|Accumulated amortization: |  |              |       |      |   |       | 
|Backlog                   |  |              | 55    |      |   | -     | 
|Non-competing
  rights    |  |              | 1     |      |   | -     | 
|Technology                |  |              | 178   |      |   | -     | 
|Customer list             |  |              | 586   |      |   | 381   | 
|                          |  |              |       |      |   |       | 
|                          |  |              |       |      |   |       | 
|                          |  |              | 820   |      |   | 381   | 
|                          |  |              |       |      |   |       | 
|                          |  |              |       |      |   |       | 
|Amortized cost            |  | $            | 1,678 |      | $ | 1,629 | 
|                          |  |              |       |      |   |       | 

| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | Amortization
  expenses amounted to $439, $207 and $143 for the years ended December 31,
  2007, 2006 and 2005, respectively.
| |                                                                                                                              
| | Estimated
  amortization expenses for the years ended:                                                                       

|                    |  |              |       | 
|------------------- |  | ------------ | ----- | 
|                    |  | December 31, |      
|                    |  |              |      
|                    |  |              |      
|2008                |  |              | 246   | 
|2009                |  |              | 246   | 
|2010                |  |              | 238   | 
|2011                |  |              | 227   | 
|                    |  |              |       | 
|2012 and thereafter |  |              | 721   | 
|                    |  |              |       | 
|                    |  | $            | 1,678 | 
|                    |  |              |       | 

F-36

---

---



|                                                          
|----------------------------------------------------------
|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 8:- | GOODWILL                                                                                                         
|         |                                                                                                                  
|         | Goodwill
  attributed to operating segments for the years ended December 31, 2007, 2006
  and 2005 is as follows:

|                                |  |                   |   |                           |   |       |  |   |       | 
|------------------------------- |  | ----------------- | - | ------------------------- | - | ----- |  | - | ----- | 
|                                |  | Mobile and
  RFID |   | Supply 
  chain solutions |   | Total | 
|                                |  |                   |   |                           |   |       | 
|                                |  |                   |   |                           |   |       | 
|Balance as of January 1, 2006   |  | $                 | - |                           | $ | 952   |  | $ | 952   | 
|                                |  |                   |   |                           |   |       |  |   |       | 
|                                |  |                   |   |                           |   |       |  |   |       | 
|Acquisition of Summit           |  |                   | - |                           |   | 1,909 |  |   | 1,909 | 
|                                |  |                   |   |                           |   |       |  |   |       | 
|                                |  |                   |   |                           |   |       |  |   |       | 
|Balance as of December 31, 2007 |  | $                 | - |                           | $ | 2,861 |  | $ | 2,861 | 
|                                |  |                   |   |                           |   |       |  |   |       | 

|         |                      
|-------- | ---------------------
|NOTE 9:- | SHORT-TERM BANK LOANS

|                       |  |                                                   |      |              |   |       |  |   |       | 
|---------------------- |  | ------------------------------------------------- | ---- | ------------ | - | ----- |  | - | ----- | 
|Loan currency          |  | Weighted Interest 
  Rate as of December 31, 2007 |      | December 31, |  
|                       |  |                                                   |      |              |  
|                       |  | %                                                 |      | 2007         |   | 2006  | 
|                       |  |                                                   |      |              |   |       | 
|                       |  |                                                   |      |              |   |       | 
|NIS                    |  |                                                   | 6.61 |              | $ | 1,380 |  | $ | 2,931 | 
|Euro                   |  |                                                   | 6.55 |              |   | 590   |  |   | -     | 
|$                      |  |                                                   | 6.55 |              |   | 2,415 |  |   | -     | 
|                       |  |                                                   |      |              |   | 4,385 |  |   | 2,931 | 
|Add current maturities |  |                                                   | 7.75 |              |   | 643   |  |   | 18    | 
|                       |  |                                                   |      |              |   |       |  |   |       | 
|                       |  |                                                   |      |              |   |       |  |   |       | 
|                       |  |                                                   |      |              | $ | 5,028 |  | $ | 2,949 | 
|                       |  |                                                   |      |              |   |       |  |   |       | 

| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | Odem has
  registered floating charges on its assets and certain fix charges on its
  assets in connection with the loans.

F-37

---

---



|                                                          
|----------------------------------------------------------
|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 10:- | ACCRUED EXPENSES AND OTHER LIABILITIES

|                                             |  |              |       |      |   |     | 
|-------------------------------------------- |  | ------------ | ----- | ---- | - | --- | 
|                                             |  | December 31, |      
|                                             |  |              |      
|                                             |  | 2007         |       | 2006 |  
|                                             |  |              |       |      |  
|                                             |  |              |       |      |  
|Government of Israel  royalties
  and V.A.T |  | $            | 416   |      | $ | 319 | 
|Provision for warranty                       |  |              | 20    |      |   | 73  | 
|Professional
  services                      |  |              | 342   |      |   | 315 | 
|Short term deferred tax                      |  |              | 75    |      |   | 60  | 
|Other                                        |  |              | 437   |      |   | 232 | 
|                                             |  |              |       |      |   |     | 
|                                             |  |              |       |      |   |     | 
|                                             |  | $            | 1,290 |      | $ | 999 | 
|                                             |  |              |       |      |   |     | 

|          |                      |                                                                                                 
|--------- | -------------------- | ------------------------------------------------------------------------------------------------
|NOTE 11:- | 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, 2007 |      | December 31, |  
|                          |  |                                                   |      |              |  
|                          |  | %                                                 |      | 2007         |   | 2006  | 
|                          |  |                                                   |      |              |   |       | 
|                          |  |                                                   |      |              |   |       | 
|NIS                       |  |                                                   | 6.43 |              | $ | 1,479 |  | $ | 18 | 
|$                         |  |                                                   | 7.75 |              |   | 2,450 |  |   | -  | 
|                          |  |                                                   |      |              |   |       |  |   |    | 
|                          |  |                                                   |      |              |   | 3,929 |  |   | 18 | 
|Less  current maturities |  |                                                   | 7.75 |              |   | 643   |  |   | 18 | 
|                          |  |                                                   |      |              |   |       |  |   |    | 
|                          |  |                                                   |      |              |   |       |  |   |    | 
|                          |  |                                                   |      |              | $ | 3,286 |  | $ | -  | 
|                          |  |                                                   |      |              |   |       |  |   |    | 

| |    |                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------
| |    | During 2007,
  the Company complied with the covenants set forth under the long-term loan
  agreement.
| |    |                                                                                                       
| | b. | The loans
  mature in the following years subsequent to the balance sheet dates:                      

|                                |  |  |       | 
|------------------------------- |  |  | ----- | 
|First year (current maturities) |  |  | 643   | 
|2009                            |  |  | 3,091 | 
|2010                            |  |  | 174   | 
|2011                            |  |  | 13    | 
|2012                            |  |  | 8     | 

| |    |                                                                                                                           
| | -- | --------------------------------------------------------------------------------------------------------------------------
| | c. | Odem and
  Summit have registered floating charges on their assets and certain fix
  charges in connection with the loans.

F-38

---

---



|                                                          
|----------------------------------------------------------
|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 12:- | LONG-TERM CONVERTIBLE NOTE

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 10,
  2004, the Company entered into a Securities Purchase Agreement (the Purchase
  Agreement), with Laurus Master Fund Ltd. (the Investor), under which the
  Company issued to the Investor in a private placement (i) a Secured
  Convertible Term Note of a $2,000 principal amount, due June 10, 2007 (the
  Note); and (ii) a warrant to purchase 130,000 Ordinary shares at an
  exercise price of $4.04 per share (the Warrant). Under the terms of the
  agreement, several fees in the amount of $115 were paid to the Investor.
  These fees are presented as discount of the principal convertible loan. The
  Note is convertible into Ordinary shares at a price of $3.08 per share. The
  principal amount of the Note is repayable in monthly installments, commencing
  September 2004, in the initial amount of $20 eventually increasing to $74.
  The Note bears prime interest rate plus 3% which is subject to reduction in
  certain conditions. The Warrant is exercisable, in whole or in part, until
  June 10, 2011. 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 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 Rights Agreement provided that any
  delay in registration and/or effectiveness of the underlying shares of the
  transaction, or failure to maintain their effectiveness, will result in
  penalties to be paid in cash, as liquidated damages. The registration
  statement became effective on March 11, 2005. Due to the delay in the
  effectiveness of the registration of the shares, the Company paid the
  Investor liquidated damages of $92.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The Note
  conversion price is subject to proportional adjustment in the event of stock
  splits, combinations, subdivisions of the Ordinary shares or if dividend is
  paid in Ordinary shares. In addition, if the Company issues stock in certain
  types of transactions at a price lower than the initial conversion price,
  then the conversion price will be adjusted to a lower price based on a
  weighted average formula.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The fair
  value of the Warrants was calculated using the Black-Scholes
  options pricing model with the following assumptions: a risk-free
  interest rate of 3.34%, a dividend yield of 0%, a volatility of the expected
  market price of the Companys Ordinary shares of 100% and a weighted-average
  contractual life of 7 year. The fair value of the Warrants in the amount of
  $99 is presented as a component in shareholders equity. Since the effective
  conversion price was greater than the share price at the commitment date, no
  beneficial conversion feature exists.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In March
  2005, the Investor elected to convert $308 of the Note principal into 100,000
  Ordinary shares of the Company. Due to the private placement agreement
  secured by the Company in June 2005, the conversion price was adjusted to
  $2.94 per share, and in July 2005, the Investor completed the conversion of
  the balance of the Note principal, which had not been previously converted or
  repaid, and the accrued interest into an additional 540,293 Ordinary shares
  for approximately $1,580.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F-39

---

---



|                                                          
|----------------------------------------------------------
|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 12:- | LONG-TERM CONVERTIBLE NOTE (Cont.)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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). According to the Second Agreement, several fees in
  the total amount of $116 were paid to the Investor. These fees are presented
  as a discount of the principal convertible loan. The Note is convertible into
  Ordinary shares at a price of $3.08 per share. The principal amount of the
  Note is repayable in monthly installments, commencing as of January 2006, in
  the initial amount of $15 eventually increasing to $55. The Note bears prime
  interest rate plus 1.5% which is subject to reduction under certain
  conditions. 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 Rights agreement provided that any delay in
  registration and/or effectiveness of the underlying shares of the
  transaction, or failure to maintain their effectiveness, will result in
  penalties to be paid in cash, as liquidated damages. The registration statement
  became effective on February 8, 2006.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The Note
  conversion price is subject to proportional adjustment in the event of stock
  splits, combinations, subdivisions of the Ordinary shares or if dividend is
  paid on the Ordinary shares in Ordinary shares. In addition, if BOS issues
  stock in certain types of transactions at a price lower than the initial
  conversion price, then the conversion price will be adjusted to a lower price
  based on a weighted average formula.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The fair
  value of the Warrants was calculated using the Black-Scholes
  options pricing model with the following assumptions: a risk-free
  interest rate of 4.08%, a dividend yield of 0%, a volatility of the expected
  market price of the Companys Ordinary shares of 100% and a weighted-average contractual
  life of seven years. The fair value of the Warrants in the amount of $144 is
  offset against the note, amortized over the period of the note and presented
  as a component in shareholders equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 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 principal amount of the Note is repayable in monthly
  installments, commencing as of December 2006, in the initial amount of $15
  eventually increasing to $55. The Note bears prime interest rate plus 1.5%
  which is subject to reduction under certain conditions. The Warrant is
  exercisable, in whole or in part, until August 16, 2013 at an exercise price
  of $4.04 for the first 24,351 Ordinary shares acquirable thereunder, and of
  $5.30 per share for the additional 48,701 acquirable thereunder. 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.                                                                                                                                                                                                                                                                                           

F-40

---

---



|                                                          
|----------------------------------------------------------
|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 12:- | LONG-TERM CONVERTIBLE NOTE (Cont.)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
  Registration Rights agreement provided that any delay in registration and/or
  effectiveness of the underlying shares of the transaction, or failure to
  maintain their effectiveness, will result in penalties to be paid in cash, as
  liquidated damages. The registration statement became effective on December
  5, 2006.                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The fair
  value of the Warrants was calculated using the Black-Scholes
  options pricing model with the following assumptions: a risk-free
  interest rate of 4.83%, a dividend yield of 0%, a volatility of the expected
  market price of the Companys Ordinary shares of 80% and a weighted-average
  contractual life of seven years. The fair value of the Warrants in the amount
  of $131 is offset against the note, amortized over the period of the note and
  presented as a component in shareholders equity.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | On June 21,
  2007, the Company entered into an agreement with the Investor, pursuant to
  which the Investor converted the entire outstanding principal amount for
  approximately $2,223 into 878,670 Ordinary Shares of the Company at a
  conversion price of $2.53. As a result of reducing the conversion price which
  resulted in the Company recorded expenses upon conversion of $611 in year
  2007.                                                                                                             

|          |                                       
|--------- | --------------------------------------
|NOTE 13:- | 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.
| |    |              |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |              |                        | As of
  December 31, 2007, the Company has an outstanding contingent obligation to
  pay royalties, including interest, in the amount of approximately $3,462, in
  respect of these grants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |              |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |              | 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.                                                                                                                                                                                                                                                                                                                                                                                 

F-41

---

---



|                                                          
|----------------------------------------------------------
|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 13:- | COMMITMENTS AND CONTINGENT LIABILITIES

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                               |                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                               | As of
  December 31, 2007, the Company has an outstanding contingent obligation to
  pay royalties including interest of $83 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 2009. Minimum future rental payments for
  2008, 2009, 2010, 2011, 2012, are $163, $140, $55, $48 and $4 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 $74.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Lease
  payments for the facilities occupied by the Company and the Companys motor
  vehicles in 2007, 2006 and 2005 amounted to $407, $343 and $408,
  respectively.                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                              
| | b. | 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 seeks
  an amount of approximately 3.3 million Euros and additional remedies. This
  claim follows a previous motion for temporary injunctive relief that was
  filed against the Companys new French distributor, said motion ultimately
  denied by French Trade Tribunal. On September 18, 2007, the French Trade
  Tribunal rejected the Companys assertion that jurisdiction is with the
  Israeli courts, and the Company has appealed this decision. The Company
  assesses the prospect of the claimant to prevail and recover a significant
  amount is remote. The Companys financial statements include a provision in
  this respect.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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 14:- | SHAREHOLDERS EQUITY

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Private
  placement:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | 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. (See also Note 12).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | 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
  11, 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 on December 31, 2007 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
  Companys outstanding warrants to shareholders as of December 31, 2007 are as
  follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                        |      |                                                                      |  |                                                               |  |                                                             |      |                                                                 |  |      |  |   |      | 
|----------------------- | ---- | -------------------------------------------------------------------- |  | ------------------------------------------------------------- |  | ----------------------------------------------------------- | ---- | --------------------------------------------------------------- |  | ---- |  | - | ---- | 
|Range of exercise price |      | Outstanding
  and exercisable warrants
  as of
  December 31,
  2007 |  | Weighted
  average exercise
  Price of
  outstanding warrants |  | Weighted
  average
  remaining
  contractual
  life (years) |      | Weighted
  average exercise
  price of
  warrants
  exercisable | 
|                        |      |                                                                      |  |                                                               |  |                                                             |      |                                                                 |  |      |  |   |      | 
|                        |      |                                                                      |  |                                                               |  |                                                             |      |                                                                 |  |      |  |   |      | 
|$                       | 2.76 |                                                                      |  | 541,814                                                       |  | $                                                           | 2.76 |                                                                 |  | 4.00 |  | $ | 2.76 | 
|$                       | 3.03 |                                                                      |  | 572,219                                                       |  | $                                                           | 3.03 |                                                                 |  | 0.50 |  | $ | 3.03 | 
|                        |      |                                                                      |  |                                                               |  |                                                             |      |                                                                 |  |      |  |   |      | 
|                       
|                        |      |                                                                      |  | 1,114,033                                                     |  | $                                                           | 2.90 |                                                                 |  | 2.20 |  | $ | 2.90 | 
|                        |      |                                                                      |  |                                                               |  |                                                             |      |                                                                 |  |      |  |   |      | 

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 14:- | SHAREHOLDERS EQUITY (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. In June 2005, the Companys shareholders approved an increase of the
  number of Ordinary shares reserved for issuance under the Plan, to 1,000,000.
  In May 2006, the Companys shareholders approved an increase of the number of
  Ordinary Shares reserved for issuance under Plan, to 1,500,000. In August
  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, 2007 an aggregate of 869,171 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | During 1994,
  1995, 1999, 2000, 2001, the Companys Board adopted stock option plans (the
  Plans) pursuant to which 656,250 options for the purchase of the Companys
  Ordinary Shares may be granted to officers, directors, consultants and
  employees of the Company. The Board has resolved that no further grants shall
  be made from these Plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | A summary of
  the Companys employees and directors stock option activity and related
  information for the year ended December 31, 2007, is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                                           |  |                   |           |                                   |   |                                                           |  |                             |      |  |   |      | 
|------------------------------------------ |  | ----------------- | --------- | --------------------------------- | - | --------------------------------------------------------- |  | --------------------------- | ---- |  | - | ---- | 
|                                           |  | Number of options |           | Weighted-average
  exercise price |   | Weighted-
  average remaining contractual term (in years) |  | Aggregate
  intrinsic value |     
|                                           |  |                   |           |                                   |   |                                                           |  |                             |      |  |   |      | 
|                                           |  |                   |           |                                   |   |                                                           |  |                             |      |  |   |      | 
|Options
  outstanding at January 1, 2007   |  |                   | 822,660   |                                   | $ | 3.36                                                      |  |                             | 5.01 |  | $ | 0.69 | 
|Changes
  during the year:                 |  |                   |           |                                   |   |                                                           |  |                             |      |  |   |      | 
|Granted                                    |  |                   | 1,153,100 |                                   | $ | 2.47                                                      |  |                             |      |  |   |      | 
|Exercised                                  |  |                   | (19,999   | )                                 | $ | 2.39                                                      |  |                             |      |  |   |      | 
|Forfeited
  or cancelled                   |  |                   | (135,565  | )                                 | $ | 7.98                                                      |  |                             |      |  |   |      | 
|                                           |  |                   |           |                                   |   |                                                           |  |                             |      |  |   |      | 
|                                           |  |                   |           |                                   |   |                                                           |  |                             |      |  |   |      | 
|Options
  outstanding at December 31, 2007 |  |                   | 1,820,196 |                                   | $ | 2.47                                                      |  |                             | 6.62 |  | $ | 0.15 | 
|                                           |  |                   |           |                                   |   |                                                           |  |                             |      |  |   |      | 
|                                           |  |                   |           |                                   |   |                                                           |  |                             |      |  |   |      | 
|Vested
  and expected to vest              |  |                   | 1,619,554 |                                   | $ | 2.47                                                      |  |                             | 6.62 |  | $ | 0.15 | 
|                                           |  |                   |           |                                   |   |                                                           |  |                             |      |  |   |      | 
|Exercisable
  at December 31, 2007         |  |                   | 334,665   |                                   | $ | 2.24                                                      |  |                             | 3.87 |  |   |      | 
|                                           |  |                   |           |                                   |   |                                                           |  |                             |      |  |   |      | 

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The
  weighted-average grant-date fair value of options granted during the year
  ended December 31, 2007 and 2006 was $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, 2007 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, 2007.

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 14:- | SHAREHOLDERS EQUITY (Cont.)

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Total
  aggregate intrinsic value of options exercised for the year ended December
  31, 2007 and 2006 was $0.70 and $0.00 respectively. The aggregated intrinsic
  value of options outstanding for the year ended December 31, 2007 and 2006
  was $0.15 and $0.69, respectively. As of December 31, 2007 there was $1,560
  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 23
  months.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | As of
  December 31, 2007 there was $1,560 of total unrecognized compensation cost
  related to non-vested share-based compensation arrangements granted to
  employees and directors under the Companys Plans. That cost is expected to
  be recognized over a weighted-average period of 23 months.                                                                                                                                                                                                                                                                      
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Cash
  received from exercise of options for the years ended December 31, 2007, 2006
  and 2005 were approximately $46, $135 and $50 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | As part of
  the disposition of the communication segment and the PrintBOS product line,
  the Company extended the options contractual life of employees who became the
  buyers employees. As a result, the Company recorded an expense of $104 in
  2005 which was offset from the capital gain derived from the sale of this
  segment and product line in 2005.                                                                                                                                                                                                       
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | The options
  granted to employees outstanding as of December 31, 2007 have been separated
  into ranges of exercise prices, as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                 |       |                                                     |  |                                        |  |                                                      |      |                                                             |  |  |         |  |  |      |  | 
|---------------- | ----- | --------------------------------------------------- |  | -------------------------------------- |  | ---------------------------------------------------- | ---- | ----------------------------------------------------------- |  |  | ------- |  |  | ---- |  | 
|exercise
  price |       | Options
  outstanding
  as of
  December 31,
  2007 |  | remaining
  contractual
  life (years) |  | Options
  exercisable
  as of
  December 31, 
  2007 |      | Weighted
  average
  remaining
  contractual
  life (years) | 
|                 |       |                                                     |  |                                        |  |                                                      |      |                                                             | 
|$                | 0     |                                                     |  | 73,000                                 |  |                                                      | 6.88 |                                                             |  |  | 73,000  |  |  | 6.88 |  | 
|$                | 1.84  |                                                     |  | 30,000                                 |  |                                                      | 0.67 |                                                             |  |  | 30,000  |  |  | 0.67 |  | 
|$                | 2.00  |                                                     |  | 10,462                                 |  |                                                      | 1.62 |                                                             |  |  | 10,462  |  |  | 1.62 |  | 
|$                | 2.28  |                                                     |  | 7,500                                  |  |                                                      | 2.50 |                                                             |  |  | 5,000   |  |  | 2.50 |  | 
|$                | 2.39  |                                                     |  | 400,000                                |  |                                                      | 6.75 |                                                             |  |  | -       |  |  | -    |  | 
|$                | 2.48  |                                                     |  | 7,500                                  |  |                                                      | 2.87 |                                                             |  |  | 5,000   |  |  | 2.87 |  | 
|$                | 2.52  |                                                     |  | 700,600                                |  |                                                      | 9.16 |                                                             |  |  | -       |  |  | -    |  | 
|$                | 2.57  |                                                     |  | 22,500                                 |  |                                                      | 4.61 |                                                             |  |  | -       |  |  | -    |  | 
|$                | 2.58  |                                                     |  | 67,261                                 |  |                                                      | 5.84 |                                                             |  |  | 16,816  |  |  | 5.84 |  | 
|$                | 2.63  |                                                     |  | 7,500                                  |  |                                                      | 3.14 |                                                             |  |  | 2,500   |  |  | 3.14 |  | 
|$                | 2.68  |                                                     |  | 420,976                                |  |                                                      | 3.38 |                                                             |  |  | 140,324 |  |  | 2.38 |  | 
|$                | 2.70  |                                                     |  | 15,000                                 |  |                                                      | 3.39 |                                                             |  |  | 5,000   |  |  | 3.39 |  | 
|$                | 3.00  |                                                     |  | 48,000                                 |  |                                                      | 7.15 |                                                             |  |  | 36,666  |  |  | 7.08 |  | 
|$                | 6.80  |                                                     |  | 8,197                                  |  |                                                      | 0.87 |                                                             |  |  | 8,197   |  |  | 0.87 |  | 
|$                | 18.00 |                                                     |  | 450                                    |  |                                                      | 1.86 |                                                             |  |  | 450     |  |  | 1.86 |  | 
|$                | 28.00 |                                                     |  | 1,250                                  |  |                                                      | 2.4  |                                                             |  |  | 1,250   |  |  | 2.4  |  | 
|                 |       |                                                     |  |                                        |  |                                                      |      |                                                             |  |  |         |  |  |      |  | 
|                 |       |                                                     |  |                                        |  |                                                      |      |                                                             |  |  |         |  |  |      |  | 
|                 |       |                                                     |  | 1,820,196                              |  |                                                      | 6.62 |                                                             |  |  | 334,665 |  |  | 3.87 |  | 
|                 |       |                                                     |  |                                        |  |                                                      |      |                                                             |  |  |         |  |  |      |  | 

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 14:- | SHAREHOLDERS EQUITY (Cont.)

| |    |                                        
| | -- | ---------------------------------------
| | 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 year 2007.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | The
  compensation expenses that have been recorded in the consolidated financial
  statements regarding these warrants for the years ended December 31, 2007,
  2006 and 2005 were $43, $116 and $348, respectively.                                                                                                                                                                                                                                                                                                                                                                       
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | The
  Companys outstanding warrants to service providers as of December 31, 2007
  are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                            |      |                                                                       |  |                                                               |  |                                                                 |      |                                                             |   |      |  |  |      | 
|--------------------------- | ---- | --------------------------------------------------------------------- |  | ------------------------------------------------------------- |  | --------------------------------------------------------------- | ---- | ----------------------------------------------------------- | - | ---- |  |  | ---- | 
|Range of
  exercise
  price |      | Outstanding and exercisable
  warrants
  as of 
  December 31,
  2007 |  | Warrants outstanding 
  Weighted
  average
  exercise
  price |  | Weighted average
  exercise
  price of
  warrants
  exercisable |      | Weighted
  average
  remaining
  contractual
  life (years) |  
|                            |      |                                                                       |  |                                                               |  |                                                                 |      |                                                             |  
|                            |      |                                                                       |  |                                                               |  |                                                                 |      |                                                             |   |      |  |  |      | 
|$                           | 2.3  |                                                                       |  | 10,000                                                        |  | $                                                               | 2.3  |                                                             | $ | 2.3  |  |  | 3.00 | 
|$                           | 3.08 |                                                                       |  | 10,000                                                        |  | $                                                               | 3.08 |                                                             | $ | 3.08 |  |  | 1.00 | 
|$                           | 4.00 |                                                                       |  | 75,000                                                        |  | $                                                               | 4.00 |                                                             | $ | 4.00 |  |  | 1.00 | 
|$                           | 4.04 |                                                                       |  | 227,403                                                       |  | $                                                               | 4.04 |                                                             | $ | 4.04 |  |  | 4.10 | 
|$                           | 5.30 |                                                                       |  | 48,701                                                        |  | $                                                               | 5.30 |                                                             | $ | 5.3  |  |  | 5.63 | 
|                            |      |                                                                       |  |                                                               |  |                                                                 |      |                                                             |   |      |  |  |      | 
|                            |      |                                                                       |  |                                                               |  |                                                                 |      |                                                             |   |      |  |  |      | 
|                            |      |                                                                       |  | 371,104                                                       |  | $                                                               | 4.12 |                                                             | $ | 4.12 |  |  | 3.56 | 
|                            |      |                                                                       |  |                                                               |  |                                                                 |      |                                                             |   |      |  |  |      | 

|          |                
|--------- | ---------------
|NOTE 15:- | TAXES ON INCOME

| |    |                                   
| | -- | ----------------------------------
| | a. | Reduction in
  corporate tax rate:

In June 2004,
an amendment to the Income Tax Ordinance (No. 140 and Temporary Provision),
2004 was passed by the Knesset (Israeli parliament) and on July 25, 2005,
another law was passed, the amendment to the Income Tax Ordinance (No. 147)
2005, according to which the corporate tax rate is to be progressively reduced
to the following tax rates: 2004 - 35%, 2005 - 34%, 2006 - 31%, 2007 - 29%,
2008 - 27%, 2009 - 26%, 2010 and thereafter - 25%.

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 15:- | TAXES ON INCOME (Cont.)

| |    |                     
| | -- | --------------------
| | c. | Loss
  carryforward:

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Domestic
  (Israel):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | The Company
  and its Israeli subsidiary have accumulated losses for Israel income tax
  purposes as of December 31, 2007, in the amount of approximately $36,132. These losses may be carryforward (linked to the Israeli
  Consumer Price Index (CPI)) and offset against taxable income in the future
  for an indefinite period.                                                                                                                                                                                       
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Foreign:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | As of
  December 31, 2007, the U.S. subsidiaries had U.S. Federal and State net
  operating loss carryforward of approximately $8,100, which can be carried
  forward and offset against taxable income. 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.

| |    |                                                                                                                                                                                                                                                                                                                    
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | d. | 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, |        
|                                                     |  |                |        
|                                                     |  | 2007           |         | 2006 |  
|                                                     |  |                |         |      |  
|                                                     |  |                |         |      |   |         |  
|Assets in
  respect of:                              |  |                |         |      |   |         |  
|                                                     |  |                |         |      |   |         |  
|Property,
  plant and equipment                      |  | $              | 21      |      | $ | 3       |  
|Allowances
  and provisions                          |  |                | 517     |      |   | 296     |  
|Net operating
  loss carryforward                    |  |                | 11,445  |      |   | 10,674  |  
|                                                     |  |                |         |      |   |         |  
|                                                     |  |                |         |      |   |         |  
|                                                     |  |                | 11,983  |      |   | 10,973  |  
|Liabilities
  in respect of intangible assets        |  |                | (441    | )    |   | (422    | )
|                                                     |  |                |         |      |   |         |  
|                                                     |  |                |         |      |   |         |  
|Net deferred
  tax assets before valuation allowance |  |                | 11,542  |      |   | 10,551  |  
|Valuation
  allowance (1)                            |  |                | (11,922 | )    |   | (10,936 | )
|                                                     |  |                |         |      |   |         |  
|                                                     |  |                |         |      |   |         |  
|Net deferred
  tax liability                         |  | $              | (380    | )    | $ | (385    | )
|                                                     |  |                |         |      |   |         |  

| |  |     |                                                                                                                                                                                                                                                                                                                                                                 
| |  | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (1) | The Company
  has provided valuation allowances for BOS and all its subsidiaries except for
  Odem, in respect of deferred tax assets resulting from tax loss carryforward
  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.

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 15:- | TAXES ON INCOME (Cont.)

|                            |  |                |      |      |   |      |  
|--------------------------- |  | -------------- | ---- | ---- | - | ---- | -
|                            |  | December
  31, |     
|                            |  |                |     
|                            |  | 2007           |      | 2006 |  
|                            |  |                |      |      |  
|                            |  |                |      |      |   |      |  
|Presented in balance sheet: |  |                |      |      |   |      |  
|                            |  |                |      |      |   |      |  
|Current assets              |  | $              | 19   |      | $ | 14   |  
|Long-term assets            |  |                | 42   |      |   | 23   |  
|Current liabilities         |  |                | (75  | )    |   | (60  | )
|Long-term liabilities       |  |                | (366 | )    |   | (362 | )
|                            |  |                |      |      |   |      |  
|                            |  |                |      |      |   |      |  
|Net deferred tax liability  |  | $              | (380 | )    | $ | (385 | )
|                            |  |                |      |      |   |      |  

| |    |                                                        
| | -- | -------------------------------------------------------
| | e. | Taxes on income (tax benefit) are comprised as follows:

|            |  |                         |      |      |   |      |   |   |     |  
|----------- |  | ----------------------- | ---- | ---- | - | ---- | - | - | --- | -
|            |  | Year ended December 31, |     
|            |  |                         |     
|            |  | 2007                    |      | 2006 |   | 2005 |  
|            |  |                         |      |      |   |      |  
|            |  |                         |      |      |   |      |  
|Current     |  | $                       | 80   |      | $ | 17   |   | $ | 259 |  
|Prior years |  |                         | 47   |      |   | -    |   |   | -   |  
|Deferred    |  |                         | (118 | )    |   | (106 | ) |   | (55 | )
|            |  |                         |      |      |   |      |   |   |     |  
|            |  |                         |      |      |   |      |   |   |     |  
|            |  | $                       | 9    |      | $ | (89  | ) | $ | 204 |  
|            |  |                         |      |      |   |      |   |   |     |  
|            |  |                         |      |      |   |      |   |   |     |  
|Domestic    |  | $                       | 16   |      | $ | (106 | ) | $ | 74  |  
|Foreign     |  |                         | (7   | )    |   | 17   |   |   | 130 |  
|            |  |                         |      |      |   |      |   |   |     |  
|            |  |                         |      |      |   |      |   |   |     |  
|            |  | $                       | 9    |      | $ | (89  | ) | $ | 204 |  
|            |  |                         |      |      |   |      |   |   |     |  

| |    |                
| | -- | ---------------
| | f. | Effective
  tax

|                                                                                                    |  |   |        |   |   |        |   |   |     |  
|--------------------------------------------------------------------------------------------------- |  | - | ------ | - | - | ------ | - | - | --- | -
|Income (loss)
  before taxes on income from operating activities related to continuing
  operations |  | $ | (8,624 | ) | $ | (1,682 | ) | $ | 167 |  
|                                                                                                    |  |   |        |   |   |        |   |   |     |  
|                                                                                                    |  |   |        |   |   |        |   |   |     |  
|Statutory tax
  rate                                                                                |  |   | 29     | % |   | 31     | % |   | 34  | %
|                                                                                                    |  |   |        |   |   |        |   |   |     |  
|                                                                                                    |  |   |        |   |   |        |   |   |     |  
|Provision at
  statutory tax rate                                                                   |  |   | (2,501 | ) |   | (521   | ) |   | 57  |  
|Non-deductible
  expenses                                                                           |  |   | 290    |   |   | 21     |   |   | 219 |  
|Deferred
  taxes on losses reserves and allowances for which a valuation allowance was
  provided   |  |   | 2,220  |   |   | 411    |   |   | (72 | )
|                                                                                                    |  |   |        |   |   |        |   |   |     |  
|                                                                                                    |  |   |        |   |   |        |   |   |     |  
|Taxes on
  income (tax benefit)                                                                     |  | $ | 9      |   | $ | (89    | ) | $ | 204 |  
|                                                                                                    |  |   |        |   |   |        |   |   |     |  

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 15:- | TAXES ON INCOME (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | g. | Tax
  assessments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | BOS and
  BOScom have final assessments through 2002. Odem has final assessment through
  2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | k. | 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 impact on 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 condensed
  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,
  BOScom and Quasar may be subject to examination by the Israel tax authorities
  for fiscal years 2002 through 2007. Odem may be subjected to examination by
  the Israel tax authorities for fiscal years 2004 through 2007. 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 can be carried forward and
  offset against taxable income for 15 to 20 years.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | 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-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 16:- | SUPPLEMENTARY INFORMATION TO STATEMENTS OF OPERATIONS
|          |                                                       |                                  
|          | a.                                                    | Financial income (expenses), net:

|                                                          |  |                         |      |      |   |      |   |   |      |  
|--------------------------------------------------------- |  | ----------------------- | ---- | ---- | - | ---- | - | - | ---- | -
|                                                          |  | Year ended December 31, |     
|                                                          |  |                         |     
|                                                          |  | 2007                    |      | 2006 |   | 2005 |  
|                                                          |  |                         |      |      |   |      |  
|                                                          |  |                         |      |      |   |      |   |   |      |  
|Financial
  income:                                       |  |                         |      |      |   |      |   |   |      |  
|Interest
  on bank deposits and marketable securities     |  | $                       | 122  |      | $ | 73   |   | $ | 57   |  
|Other
  (mainly foreign currency translation income)      |  |                         | -    |      |   | 65   |   |   | -    |  
|                                                          |  |                         |      |      |   |      |   |   |      |  
|                                                          |  |                         |      |      |   |      |   |   |      |  
|                                                          |  |                         | 122  |      |   | 138  |   |   | 57   |  
|                                                          |  |                         |      |      |   |      |   |   |      |  
|Financial
  expenses:                                     |  |                         |      |      |   |      |   |   |      |  
|In
  respect of long-term bank loans and convertible note |  |                         | (585 | )    |   | (694 | ) |   | (427 | )
|Other
  (mainly foreign currency translation losses)      |  |                         | (6   | )    |   | (70  | ) |   | (78  | )
|                                                          |  |                         |      |      |   |      |   |   |      |  
|                                                          |  |                         |      |      |   |      |   |   |      |  
|                                                          |  |                         | (611 | )    |   | (764 | ) |   | (505 | )
|                                                          |  |                         |      |      |   |      |   |   |      |  
|                                                          |  |                         |      |      |   |      |   |   |      |  
|                                                          |  | $                       | (469 | )    | $ | (626 | ) | $ | (448 | )
|                                                          |  |                         |      |      |   |      |   |   |      |  

| |    |                            |            | 
| | -- | -------------------------- | ---------- | 
| | b. | Earnings (loss) per share:
| |    |                            |           
| |    | 1.                         | Numerator:

|                                                                 |  |   |        |   |   |        |   |   |        |  
|---------------------------------------------------------------- |  | - | ------ | - | - | ------ | - | - | ------ | -
|Numerator for basic and
  diluted net earnings (loss) per share: |  |   |        |   |   |        |   |   |        |  
|Loss from continuing
  operations                                |  | $ | (8,633 | ) | $ | (1,593 | ) | $ | (2,010 | )
|Income (loss) from
  discontinued operations                     |  |   | 237    |   |   | 1,685  |   |   | (1,595 | )
|                                                                 |  |   |        |   |   |        |   |   |        |  
|                                                                 |  |   |        |   |   |        |   |   |        |  
|Net earnings (loss) available
  to Ordinary shareholders         |  | $ | (8,396 | ) | $ | 92     |   | $ | (3,605 | )
|                                                                 |  |   |        |   |   |        |   |   |        |  

| |  |    |                            
| |  | -- | ---------------------------
| |  | 2. | Denominator (in thousands):

|                                                                               |  |   |        |   |   |       |   |   |       |  
|------------------------------------------------------------------------------ |  | - | ------ | - | - | ----- | - | - | ----- | -
|Basic weighted average
  Ordinary shares outstanding (in thousands)            |  |   | 8,651  |   |   | 6,675 |   |   | 5,616 |  
|                                                                               |  |   |        |   |   |       |   |   |       |  
|Diluted weighted average Ordinary
  Shares outstanding (in thousands)          |  |   | 11,783 |   |   | 6,793 |   |   | 5,616 |  
|                                                                               |  |   |        |   |   |       |   |   |       |  
|                                                                               |  |   |        |   |   |       |   |   |       |  
|Basic and diluted net loss
  per share from continuing operations              |  | $ | (1.00  | ) | $ | (0.24 | ) | $ | (0.36 | )
|                                                                               |  |   |        |   |   |       |   |   |       |  
|Basic and diluted net
  earnings (loss) per share from discontinued operations |  | $ | 0.02   |   | $ | 0.25  |   | $ | (0.28 | )
|                                                                               |  |   |        |   |   |       |   |   |       |  
|Basic and diluted net
  earnings (loss) per share                              |  | $ | (0.97  | ) | $ | 0.01  |   | $ | (0.64 | )
|                                                                               |  |   |        |   |   |       |   |   |       |  

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 17:- | SEGMENTS AND GEOGRAPHICAL INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          | Commencing
  2006 and subsequent to the disposal of the communication segment in 2006, the
  Company managed its business with two reportable segments, consisting of the
  Software Solutions segment and the Supply Chain Solutions segment. Commencing
  2007 and subsequent to the acquisition of Summit, the Company manages its
  business with two reportable segments, consisting of the Mobile and RFID
  Solutions segment and Supply Chain Solutions segment. Amounts for fiscal
  years 2006 and 2005 have been recast to conform to 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, gross profit and operating income
  (loss) before interest and taxes.                                                                                                                                                                                                                      
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                    
|          | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Revenues,
  gross profit and operating income (loss) for the operating segments for the
  years 2007, 2006 and 2005 were as follow:

|                            |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|--------------------------- |  | ----------------- | ----- | ---------------------------- | - | ---------------- | - | ------------ | ------ | - | - | ------ | -
|                            |  | Mobile and
  RFID |       | Supply 
  Chain 
  Solutions |   | Not 
  allocated |   | Consolidated |       
|                            |  |                   |       |                              |   |                  |   |              |       
|                            |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|2007                        |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|                            |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|Revenues                    |  | $                 | 2,673 |                              | $ | 21,101           |   | $            | -      |   | $ | 23,774 |  
|                            |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|Gross profit                |  | $                 | 1,436 |                              | $ | 3,239            |   | $            | -      |   | $ | 4,675  |  
|                            |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|Operating profit (loss)     |  | $                 | (108  | )                            | $ | (108             | ) | $            | (1,706 | ) | $ | (1,922 | )
|                            |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|Assets
  related to segment |  | $                 | 1,205 |                              | $ | 27,002           |   | $            | 2,925  |   | $ | 31,132 |  
|                            |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|2006                        |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|                            |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|Revenues                    |  | $                 | 2,344 |                              | $ | 18,573           |   | $            | -      |   | $ | 20,917 |  
|                            |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|Gross profit                |  | $                 | 1,401 |                              | $ | 3,316            |   | $            | -      |   | $ | 4,717  |  
|                            |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|Operating loss              |  | $                 | 126   |                              | $ | 641              |   | $            | (1,823 | ) | $ | (1,056 | )
|                            |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|Assets
  related to segment |  | $                 | 243   |                              | $ | 13,700           |   | $            | 10,586 |   | $ | 24,529 |  
|                            |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|2005                        |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|                            |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|Revenues                    |  | $                 | 3,993 |                              | $ | 20,186           |   | $            | (80    | ) | $ | 24,099 |  
|                            |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|Gross profit                |  | $                 | 2,442 |                              | $ | 3,803            |   | $            | -      |   | $ | 6,245  |  
|                            |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|Operating income (loss)     |  | $                 | 607   |                              | $ | 1,167            |   | $            | (1,514 | ) | $ | 260    |  
|                            |  |                   |       |                              |   |                  |   |              |        |   |   |        |  
|Assets
  related to segment |  | $                 | 391   |                              | $ | 11,535           |   | $            | 10,720 |   | $ | 22,646 |  

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 17:- | SEGMENTS AND GEOGRAPHICAL INFORMATION (Cont.)

| |    |                                                                                                                                      
| | -- | -------------------------------------------------------------------------------------------------------------------------------------
| | b. | The
  following presents total revenues and long-lived assets for the years 2007,
  2006 and 2005 based on the location of customers:

|                    |  |                         |        |                        |   |                  |  |                        |        |                  |   |                        |  |   |        |  |   |       | 
|------------------- |  | ----------------------- | ------ | ---------------------- | - | ---------------- |  | ---------------------- | ------ | ---------------- | - | ---------------------- |  | - | ------ |  | - | ----- | 
|                    |  | Year ended December 31, |       
|                    |  |                         |       
|                    |  | 2007                    |        | 2006                   |   | 2005             | 
|                    |  |                         |        |                        |   |                  | 
|                    |  | Total
  revenues        |        | Long-lived
  assets *) |   | Total
  revenues |  | Long-lived
  assets *) |        | Total
  revenues |   | Long-lived
  assets *) | 
|                    |  |                         |        |                        |   |                  |  |                        |        |                  |   |                        | 
|                    |  |                         |        |                        |   |                  |  |                        |        |                  |   |                        |  |   |        |  |   |       | 
|America             |  | $                       | 5,420  |                        | $ | 2,225            |  | $                      | 2,848  |                  | $ | -                      |  | $ | 3,439  |  | $ | -     | 
|Far
  East          |  |                         | 964    |                        |   | -                |  |                        | 2,019  |                  |   | -                      |  |   | 6,083  |  |   | -     | 
|Europe              |  |                         | 1,511  |                        |   | -                |  |                        | 1,173  |                  |   | -                      |  |   | 1,171  |  |   | -     | 
|Israel
  and others |  |                         | 15,879 |                        |   | 3,033            |  |                        | 14,877 |                  |   | 3,101                  |  |   | 13,406 |  |   | 3,455 | 
|                    |  |                         |        |                        |   |                  |  |                        |        |                  |   |                        |  |   |        |  |   |       | 
|                    |  |                         |        |                        |   |                  |  |                        |        |                  |   |                        |  |   |        |  |   |       | 
|                    |  | $                       | 23,774 |                        | $ | 5,258            |  | $                      | 20,917 |                  | $ | 3,101                  |  | $ | 24,099 |  | $ | 3,455 | 
|                    |  |                         |        |                        |   |                  |  |                        |        |                  |   |                        |  |   |        |  |   |       | 

| |    |                                                                                                                                                                                                                                              |                                                                                         
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------
| |    | 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 goodwill, intangible assets, property, plant and equipment.
| |    |                                                                                                                                                                                                                                              |                                                                                         
| | c. | Major
  customers data as a percentage of total revenues:                                                                                                                                                                                  

|           |  |                         |    |      |  |      |   |  |    |  
|---------- |  | ----------------------- | -- | ---- |  | ---- | - |  | -- | -
|           |  | Year ended December 31, |   
|           |  |                         |   
|           |  | 2007                    |    | 2006 |  | 2005 |  
|           |  |                         |    |      |  |      |  
|           |  |                         |    |      |  |      |   |  |    |  
|Customer A |  |                         | 4  | %    |  | 7    | % |  | 11 | %
|           |  |                         |    |      |  |      |   |  |    |  
|           |  |                         |    |      |  |      |   |  |    |  
|Customer B |  |                         | 21 | %    |  | 24   | % |  | 16 | %
|           |  |                         |    |      |  |      |   |  |    |  

| |  |                                                                                                                   
| |  | ------------------------------------------------------------------------------------------------------------------
| |  | Major
  customers trade receivable balances as of December 31, 2007 and 2006 are $1,417 and $2,388,
respectively.

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 18:- | 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 provided that the success fees for securing M&A
  transactions will be 3.5% of the proceeds exchanged in such a transaction.

F-52

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---



|                                                            
|------------------------------------------------------------
|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:- | RELATED PARTIES (Cont.)                                                                                  
|          |                                                                                                          
|          | The payments
  the Company paid and accrued according to the Service Agreement with
  Cukierman & Co are:

|                                                             |  |                                              |     |                                                 |   |     | 
|------------------------------------------------------------ |  | -------------------------------------------- | --- | ----------------------------------------------- | - | --- | 
|                                                             |  | Payments in
  Year ended
  December 31, 2007 |     | Accrued
  liability as of
  December 31,
  2007 |  
|                                                             |  |                                              |     |                                                 |  
|                                                             |  |                                              |     |                                                 |   |     | 
|Business development                                         |  | $                                            | 70  |                                                 | $ | 50  | 
|Success fee in respect of issuance of
  convertible loan     |  |                                              | 120 |                                                 |   | -   | 
|Success fee in respect of issuance of
  investment in Summit |  |                                              | 28  | *                                               |   | 143 | 
|                                                             |  |                                              |     |                                                 |   |     | 
|                                                             |  |                                              |     |                                                 |   |     | 
|Total                                                        |  | $                                            | 218 |                                                 | $ | 193 | 
|                                                             |  |                                              |     |                                                 |   |     | 

| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| | * | 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).

|                                                         |  |                                                |     |                                                 |   |    | 
|-------------------------------------------------------- |  | ---------------------------------------------- | --- | ----------------------------------------------- | - | -- | 
|                                                         |  | Payments in
  Year ended
  December 31,
  2006 |     | Accrued
  liability as of
  December 31,
  2006 |  
|                                                         |  |                                                |     |                                                 |  
|                                                         |  |                                                |     |                                                 |   |    | 
|Business development                                     |  | $                                              | 120 |                                                 | $ | 11 | 
|Success fee in respect of issuance of
  convertible loan |  |                                                | 75  |                                                 |   | 2  | 
|                                                         |  | $                                              | 195 |                                                 | $ | 13 | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                                                                                                                                                                                                                                                                                                 

F-53

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---



|                                                            
|------------------------------------------------------------
|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:- | RELATED PARTIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          | 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.
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          | 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
  11, 2007 the Company entered into a Share Purchase Agreement  under which the Company issued on December
  31, 2007  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 investors are Catalyst Fund L.P. (Catalyst) and three
  subsidiaries of D.S. Apex Holdings Ltd. (Apex). The Company paid 3%
  placement fees in cash to Apex and 6% in ordinary shares to Catalyst.                                                                                                                                                                                                                                                                                                                              
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          | The payments the Company paid and accrued according to the Share
  Purchase Agreement are:                                                                                                                                                                                                                                                                                                                                                                                                                                               

|         |  |                                                |    |                                               |   |    | 
|-------- |  | ---------------------------------------------- | -- | --------------------------------------------- | - | -- | 
|         |  | Payments in
  Year ended
  December 31,
  2007 |    | Accrued
  liability as of December 31,
  2007 |  
|         |  |                                                |    |                                               |  
|         |  |                                                |    |                                               |   |    | 
|Catalyst |  | $                                              | 50 |                                               | $ | -  | 
|APEX     |  |                                                | -  |                                               |   | 48 | 

| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| | * | Payment by
  26,000 shares of the Company at a price of $1.90 per share (reflecting the
  Company share price at the grant date).

F-54

---

---



|                                                            
|------------------------------------------------------------
|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:- | SUBSEQUENT EVENT (UNAUDITED)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          | In January 2008, BOScom changed its name to Dimex Solutions Ltd. On
  January 14, 2008, Dimex Solutions incorporated a fully owned subsidiary named
  Dimex Hagalil Projects (2008) Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          | 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., subsidiary of
  Dimex Systems Ltd. (together called Dimex). Dimex is 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 was NIS 17.6 million (approximately $4,800) and for the inventory,
  accounts receivable and fixed assets, the consideration was NIS 27 million
  (approximately $7,400).
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          | The
  consideration is comprised of cash, payable over a 24-month period and
  500,224 BOS Ordinary Shares (equal to approximately 4.4% of then outstanding
  shares of BOS). Part of the acquisition will be financed by bank debt.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          | The
  acquisition is treated using the purchase method of accounting in accordance
  with SFAS 141, Business Combinations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          | On February
  18, 2008 NWB and Qualmax, entered into an agreement and plan of merger,
  pursuant to which Qualmax will be merged with and into the NWB. Upon
  completion of the merger, which is subject to certain conditions, BOS
  holdings in Qualmax will be converted into holdings in NWB.                                                                                                                                                                                                                                                                                                                                                                       

F-55

---

---