---

---

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

AMENDMENT
NO. 1
TO

FORM
20-F

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

OR

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

For
the fiscal year ended December 31, 2006

OR

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

OR

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

Date of event requiring this shell company report __________

For the transition period from ___________ to _____________

Commission file number
001-14184

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

ISRAEL
(Jurisdiction
of incorporation or organization)

20 Freiman Street,
Rishon LeZion, 75100, Israel

(Address of
principal executive offices)

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

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

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



---

---

Indicate the number of outstanding
shares of each of the issuers classes of capital or common stock as of the close of
the period covered by the annual report: 6,744,798 Ordinary Shares, nominal value NIS
4.00 per share, as of December 31, 2006; and 8,492,213 Ordinary Shares, nominal value NIS
4.00 per share, as of April 30, 2007.

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

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

EXPLANATORY
NOTE

This Amendment No. 1 to the Annual
Report on Form 20-F for the year ended December 31, 2006, of B.O.S Better Online Solutions
Ltd. (the Registrant) is filed in order to correct and supplement the
description of a claim brought against the Registrant by BosaNova EURL in France. In
particular, in the Registrants previous description, it was mistakenly reported that
the claim was filed in March 2005, for the amount of 1.4 million Euros whereas the claim
was served on the Registrant in April 2006, for approximately 3.3 million Euros and
additional remedies.

This Amendment No. 1 contains item 8
and the Companys Consolidated Financial Statements, in which a corresponding
revision was made in Notes  14.b.3 and 20.b, and which also include an updated auditors report. Except
as described above, this Amendment No. 1 to the Form 20-F continues to speak as
of June 5, 2007 and no other changes have been made to the Annual Report. This
Amendment No. 1 does not amend or update any other information set forth in the Annual
Report and we have not updated disclosures contained therein to reflect any events that
occurred at a date subsequent to the filing of the Annual Report.

- 2 -

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# Item 8: Financial
Information.

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

Consolidated Financial
Statements

See Item 18.

Sales Outside Israel

The total amount of export revenues
of the Company has been as follows:

|Year | export revenues | % of all revenues
|---- | --------------- | -----------------
|
|
|
|
|2006 |                 |                  
|2005 |                 |                  
|2004 |                 |                  

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 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 as remote. The Companys
financial statements include a provision in this respect.

On May 10, 2006 the Company received
a written demand from IDEAL Software GmbH (IDEAL), a German corporation, in
which it claims that the Company owes it for unpaid license fees. On June 11, 2006 the
Company filed with the Haifa District Court in Israel a claim against IDEAL. Recently, we
announced that we entered into a settlement of this dispute with IDEAL, pursuant to which,
on December 21, 2006, we paid IDEAL an amount of 110,000 Euros, and we agreed to withdraw
the claim we filed in Israel.

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. Any dividends
paid out of Approved Enterprise earnings (i.e. tax exempt income) will be liable to tax.
As we cannot currently distribute dividends, no provision has been made for this
additional tax in our Financial Statements.

- 3 -

---

---

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

Not applicable.

# 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 |  | Share
Purchase Agreement, dated as of February 23, 2003, and Option Agreement and Registration
Rights Agreement, dated as of March 30, 2003, by and between Catalyst Investments L.P.
and the Registrant (incorporated by reference to the Companys Annual Report on Form
20-F filed on June 17, 2004).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | 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).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | 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).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.5 |  | Securities
Purchase Agreement and Master Security Agreement and Registration Rights Agreement, dated
as of June 10, 2004, by and between Laurus Master Fund Ltd. and the Registrant
(incorporated by reference to the Companys Annual Report on Form 20-F filed on June
17, 2004), and Amendment no. 1 to the Securities Purchase Agreement dated as of November
16, 2004 (incorporated by reference to the Companys Registration Statement on Form
F-3 no. 333-117529).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.6 |  | Securities
Purchase Agreement and Master Security Agreement, dated as of September 29, 2005, by and
between Laurus Master Fund Ltd. and the Registrant (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;
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. 333-130048).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.7* |  | 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 -

---

---

|4.8 |  | 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).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.9 |  | Asset
Purchase Agreement, dated as of September 29, 2004, by and between Quasar Communication
Systems Ltd. and the Registrant (incorporated by reference to the Companys
Registration Statement on Form F-3 no. 333-117529).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.10 |  | Share
Purchase Agreement, dated as of November 2, 2004, by and between Jacob and Sara Neuhof,
Odem Electronic Technologies 1992 Ltd. and the Registrant (incorporated by reference to
the Companys Registration Statement on Form F-3 no. 333-117529).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.11 |  | Agreement,
dated as of September 29, 2005, by and between Jacob and Sara Neuhof and the Registrant,
for the purchase of the shares of Odem Electronic Technologies 1992 Ltd. held by the
Jacob and Sara Neuhof (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).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.12 |  | Share
Purchase Agreement, dated as of May 24, 2005, by and between certain investors and the
Registrant (incorporated by reference to the Companys Annual Report on Form 20-F
filed on June 27, 2005).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.13 |  | Asset
Purchase Agreement and Amendments no. 1 and 2 to Agreement, dated as of July 18, 2005,
August 31, 2005 and September 25, 2005, respectively, by and between BOSCom, Consist
Technologies Ltd. and Consist International Inc., and Escrow Agreement and Amendment no.
1 to Escrow Agreement between the parties, dated as of July 18, 2005 and August 31, 2005,
respectively (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).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.14 |  | Asset
Purchase Agreement, Amendment no. 1 to the Agreement and Amendment no. 2 to the
Agreement, dated as of October 26, 2005, November 2, 2005, and December 31, 2005,
respectively, by and between Qualmax, Inc., BOScom Ltd. and the Registrant; Loan
Agreement dated as of December 31, 2005, by and between Qualmax Ltd. and the Registrant;
Registration Rights Agreement, dated as of December 31, 2005, by and between Qualmax Inc.
and the Registrant; and Form of warrant dated as of December 31, 2005, issued by Qualmax
Inc. to the Registrant (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).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.15 |  | 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).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.16 |  | The
 Registrant's  Israeli 2003 Share  Option Plan  (incorporated  by reference to the
 Company's          Registration Statement on Form S-8 No. 333-11650).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

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

- 5 -

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---

|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 Kesselman & Kesselman, a member of PricewaterhouseCoopers International Limited.
|----- |  | -------------------------------------------------------------------------------------------

---

* Previously filed.

** Filed herewith.

- 6 -

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# Signatures

The Registrant hereby certifies that
it meets all of the requirements for filing on Amendment No. 1 to the Form 20-F and that it has duly caused and
authorized the undersigned to sign this Amendment No. 1 to the annual report on its behalf.

B.O.S. Better Online Solutions Ltd.

|By: /s/ Shmuel Koren
Shmuel KorenPresident and Chief Executive Officer |  | By: /s/ Eyal Cohen
Eyal CohenChief Financial Officer
|------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------

Date: November 28, 2007

- 7 -

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B.O.S. BETTER ONLINE SOLUTIONS LTD.

AND ITS
SUBSIDIARIES

CONSOLIDATED
FINANCIAL STATEMENTS

AS OF
DECEMBER 31, 2006

U.S. DOLLARSIN THOUSANDS

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 - F-8    
|                                                             |              
|Consolidated Statements
  of Cash Flows                      | F-9  F-10   
|                                                             |              
|Notes to Consolidated
  Financial Statements                 | F-11 
  F-50

---

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

To the
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, 2006 and
2005, 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, 2006. 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 audits. We did not audit the
December 31, 2004 financial statements of Odem Electronic Technologies 1992 Ltd.
(Odem), a subsidiary whose statements reflect total revenues for the period
from November 18, 2004 (date of acquisition of Odem) to December 31, 2004
constituting 23.5% of the related consolidated total revenues. Those statements
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to amounts included for Odem, is based solely on
the reports of the other auditors. Those auditors expressed an unqualified
opinion on those statements in their report dated March 25, 2005.

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 audits and the report of the other auditors provide a
reasonable basis for our opinion.

In our
opinion, based on our audits 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,
2006 and 2005, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2006,
in conformity with U.S. generally accepted accounting principles.

As
discussed in Note 2t 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 26, 2007, except as to  | A Member of Ernst & Young Global
|Note 14b(3), as to which     
|the date is November 27, 2007

F-2

---

---



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

# ODEM ELECTRONIC
TECHNOLOGIES 1992 LTD.

We have audited the consolidated balance
sheets of Odem Electronic Technologies 1992 Ltd. (the Company) and its
subsidiaries as of December 31, 2003 and 2004 and the related consolidated statements
of operations, changes in shareholders equity and cash flows for each of the years
ended on those dates. These financial statements are the responsibility of the
Companys Board of Directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance
with auditing standards generally accepted in Israel and the standards of the Public
Company Accounting Oversight Board (United States), including those prescribed by the
Israeli Auditors (Mode of Performance) Regulations, 1973. 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 the Companys Board of Directors and management, as well as evaluating the
overall financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion.

In our opinion, the consolidated
financial statements referred to above, present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of
December 31, 2003 and 2004 and the consolidated results of operations, changes in
shareholders equity and cash flows for each of the years ended on those dates, in
conformity with accounting principles generally accepted in the United States of America.

|Jerusalem, Israel 
    March 25, 2005 | Kesselman & Kesselman
Certified Public Accountants (Israel)
A member of PricewaterhouseCoopers International Limited
|------------------------------------- | --------------------------------------------------------------------------------------------------------------------

F-3

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

|                                                                                                                         |  |                |        |      |   |        | 
|------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ------ | ---- | - | ------ | 
|                                                                                                                         |  | December
  31, |       
|                                                                                                                         |  |                |       
|                                                                                                                         |  | 2006           |        | 2005 |  
|                                                                                                                         |  |                |        |      |  
|ASSETS                                                                                                                   |  |                |        |      |   |        | 
|                                                                                                                         |  |                |        |      |   |        | 
|CURRENT ASSETS:                                                                                                          |  |                |        |      |   |        | 
|Cash and cash
equivalents                                                                                                |  | $              | 2,033  |      | $ | 2,232  | 
|Marketable securities (Note
5)                                                                                           |  |                | -      |      |   | 1,333  | 
|Trade receivables (net of
  allowance for doubtful accounts of $23 and $3 at December 31, 2006 and 2005,
  respectively) |  |                | 5,632  |      |   | 4,844  | 
|Other accounts receivable and
  prepaid expenses (Note 3)                                                                |  |                | 858    |      |   | 504    | 
|Inventories (Note 4)                                                                                                     |  |                | 4,017  |      |   | 3,320  | 
|                                                                                                                         |  |                |        |      |   |        | 
|                                                                                                                         |  |                |        |      |   |        | 
|Total
  current assets                                                                                                   |  |                | 12,540 |      |   | 12,233 | 
|                                                                                                                         |  |                |        |      |   |        | 
|                                                                                                                         |  |                |        |      |   |        | 
|LONG-TERM ASSETS:                                                                                                        |  |                |        |      |   |        | 
|Severance pay fund                                                                                                       |  |                | 741    |      |   | 907    | 
|Investment in other companies
  (Note 6)                                                                                 |  |                | 8,082  |      |   | 5,412  | 
|                                                                                                                         |  |                |        |      |   |        | 
|                                                                                                                         |  |                |        |      |   |        | 
|Total long-term
assets                                                                                                   |  |                | 8,823  |      |   | 6,319  | 
|                                                                                                                         |  |                |        |      |   |        | 
|                                                                                                                         |  |                |        |      |   |        | 
|OTHER ASSETS                                                                                                             |  |                | 65     |      |   | 49     | 
|                                                                                                                         |  |                |        |      |   |        | 
|                                                                                                                         |  |                |        |      |   |        | 
|PROPERTY, PLANT AND EQUIPMENT,
NET (Note 7)                                                                              |  |                | 520    |      |   | 667    | 
|                                                                                                                         |  |                |        |      |   |        | 
|                                                                                                                         |  |                |        |      |   |        | 
|GOODWILL (Note 9)                                                                                                        |  |                | 952    |      |   | 952    | 
|                                                                                                                         |  |                |        |      |   |        | 
|                                                                                                                         |  |                |        |      |   |        | 
|CUSTOMER LIST, NET (Note
8)                                                                                              |  |                | 1,629  |      |   | 1,836  | 
|                                                                                                                         |  |                |        |      |   |        | 
|                                                                                                                         |  |                |        |      |   |        | 
|ASSETS RELATED TO DISCONTINUED
OPERATIONS
  (Note 1d)                                                                    |  |                | -      |      |   | 590    | 
|                                                                                                                         |  |                |        |      |   |        | 
|                                                                                                                         |  |                |        |      |   |        | 
|                                                                                                                         |  | $              | 24,529 |      | $ | 22,646 | 
|                                                                                                                         |  |                |        |      |   |        | 

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

F-4

---

---



|                                                            
|------------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                         
|AND ITS
  SUBSIDIARIES                                      
|CONSOLIDATED BALANCE SHEETS                                 
|                                                            
|U.S. dollars in thousands, except share and
  per share data

|                                                                                                                                                                                                         |  |                |         |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ---- | - | ------- | -
|                                                                                                                                                                                                         |  | December
  31, |        
|                                                                                                                                                                                                         |  |                |        
|                                                                                                                                                                                                         |  | 2006           |         | 2005 |  
|                                                                                                                                                                                                         |  |                |         |      |  
|LIABILITIES AND
SHAREHOLDERS EQUITY                                                                                                                                                                     |  |                |         |      |   |         |  
|                                                                                                                                                                                                         |  |                |         |      |   |         |  
|CURRENT LIABILITIES:                                                                                                                                                                                     |  |                |         |      |   |         |  
|Short-term bank loans (Note
10)                                                                                                                                                                          |  | $              | 2,931   |      | $ | 2,271   |  
|Current maturities of
  long-term bank loans and convertible note                                                                                                                                        |  |                | 1,157   |      |   | 354     |  
|Trade payables                                                                                                                                                                                           |  |                | 3,844   |      |   | 3,073   |  
|Employees and payroll
accruals                                                                                                                                                                           |  |                | 460     |      |   | 709     |  
|Deferred revenues                                                                                                                                                                                        |  |                | 103     |      |   | 258     |  
|Accrued expenses and other
  liabilities (Note 11)                                                                                                                                                       |  |                | 999     |      |   | 1,406   |  
|                                                                                                                                                                                                         |  |                |         |      |   |         |  
|                                                                                                                                                                                                         |  |                |         |      |   |         |  
|Total
  current liabilities                                                                                                                                                                              |  |                | 9,494   |      |   | 8,071   |  
|                                                                                                                                                                                                         |  |                |         |      |   |         |  
|                                                                                                                                                                                                         |  |                |         |      |   |         |  
|LONG-TERM
LIABILITIES:                                                                                                                                                                                   |  |                |         |      |   |         |  
|Long-term bank loans (net of
  current maturities) (Note 12)                                                                                                                                             |  |                | -       |      |   | 17      |  
|Convertible note (net of
  current maturities) (Note 13)                                                                                                                                                 |  |                | 1,171   |      |   | 921     |  
|Deferred taxes                                                                                                                                                                                           |  |                | 362     |      |   | 422     |  
|Accrued severance pay                                                                                                                                                                                    |  |                | 916     |      |   | 1,157   |  
|Other long-term
liabilities                                                                                                                                                                              |  |                | 237     |      |   | -       |  
|                                                                                                                                                                                                         |  |                |         |      |   |         |  
|                                                                                                                                                                                                         |  |                |         |      |   |         |  
|Total long-term
liabilities                                                                                                                                                                              |  |                | 2,686   |      |   | 2,517   |  
|                                                                                                                                                                                                         |  |                |         |      |   |         |  
|                                                                                                                                                                                                         |  |                |         |      |   |         |  
|LIABILITIES RELATED TO
  DISCONTINUED OPERATIONS (Note 1d)                                                                                                                                               |  |                | -       |      |   | 792     |  
|                                                                                                                                                                                                         |  |                |         |      |   |         |  
|                                                                                                                                                                                                         |  |                |         |      |   |         |  
|COMMITMENTS AND CONTINGENT
  LIABILITIES (Note 14)                                                                                                                                                       |  |                |         |      |   |         |  
|                                                                                                                                                                                                         |  |                |         |      |   |         |  
|SHAREHOLDERS EQUITY (Note
  15):                                                                                                                                                                        |  |                |         |      |   |         |  
|Share capital                                                                                                                                                                                            |  |                |         |      |   |         |  
|Ordinary shares of NIS 4.00 parvalue:  Authorized: 35,000,000 shares at December 31, 2006 and 2005; Issued and outstanding: 6,744,798 and  6,589,385 shares at December 31, 2006 and 2005, respectively; |  |                | 6,571   |      |   | 6,432   |  
|Additional paid-in
capital                                                                                                                                                                               |  |                | 48,330  |      |   | 47,588  |  
|Deferred share-based
compensation                                                                                                                                                                        |  |                | -       |      |   | (112    | )
|Accumulated other comprehensive
income                                                                                                                                                                   |  |                | 19      |      |   | 21      |  
|Accumulated deficit                                                                                                                                                                                      |  |                | (42,571 | )    |   | (42,663 | )
|                                                                                                                                                                                                         |  |                |         |      |   |         |  
|                                                                                                                                                                                                         |  |                |         |      |   |         |  
|Total
  shareholders equity                                                                                                                                                                             |  |                | 12,349  |      |   | 11,266  |  
|                                                                                                                                                                                                         |  |                |         |      |   |         |  
|                                                                                                                                                                                                         |  |                |         |      |   |         |  
|Total liabilities
  and shareholders equity                                                                                                                                                             |  | $              | 24,529  |      | $ | 22,646  |  
|                                                                                                                                                                                                         |  |                |         |      |   |         |  

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

|                                             |  |                                                       |  |                                     
|-------------------------------------------- |  | ----------------------------------------------------- |  | ------------------------------------
|March 26, 2007                               |  |                                                       |  |                                     
|                                             |  |                                                       |  |                                     
|Date of approval of the financial statements |  | Shmuel Koren
  Presidentand Chief
  Executive Officer |  | Eyal Cohen
  Chief Financial Officer

F-5

---

---



|                                                  
|--------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.               
|AND ITS
  SUBSIDIARIES                            
|CONSOLIDATED STATEMENTS OF OPERATIONS             
|                                                  
|U.S. dollars in thousands, except per share
  data

|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                                                                                        |  | Year ended December 31, |       
|                                                                                                                                        |  |                         |       
|                                                                                                                                        |  | 2006                    |        | 2005 |   | 2004   |  
|                                                                                                                                        |  |                         |        |      |   |        |  
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Revenues                                                                                                                                |  | $                       | 20,917 |      | $ | 24,099 |   | $ | 6,919  |  
|Cost of revenues                                                                                                                        |  |                         | 16,200 |      |   | 17,854 |   |   | 3,659  |  
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Gross profit                                                                                                                            |  |                         | 4,717  |      |   | 6,245  |   |   | 3,260  |  
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Operating costs and
expenses:                                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Research and
development                                                                                                                |  |                         | 486    |      |   | 893    |   |   | 669    |  
|Sales and marketing                                                                                                                     |  |                         | 2,019  |      |   | 2,425  |   |   | 1,015  |  
|General and administrative
(including
  share-based compensation expense of $727, $348 and $117 in 2006, 2005 and
  2004, respectively) |  |                         | 3,268  |      |   | 2,667  |   |   | 1,271  |  
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Total
  operating costs and expenses                                                                                                    |  |                         | 5,773  |      |   | 5,985  |   |   | 2,955  |  
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Operating income
(loss)                                                                                                                 |  |                         | (1,056 | )    |   | 260    |   |   | 305    |  
|Financial expenses, net (Note
  17a)                                                                                                    |  |                         | (626   | )    |   | (448   | ) |   | (158   | )
|Other income, net (Note
1d)                                                                                                             |  |                         | -      |      |   | 355    |   |   | -      |  
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Income (loss) before taxes on
  income                                                                                                  |  |                         | (1,682 | )    |   | 167    |   |   | 147    |  
|Tax benefit (taxes on income)
(Note
  16)                                                                                               |  |                         | 89     |      |   | (204   | ) |   | (20    | )
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Net income (loss) after taxes
  on income                                                                                               |  |                         | (1,593 | )    |   | (37    | ) |   | 127    |  
|Equity in losses of an
  affiliate                                                                                                      |  |                         | -      |      |   | (1,750 | ) |   | (308   | )
|Minority interest in earnings
  of a subsidiary                                                                                         |  |                         | -      |      |   | (223   | ) |   | (17    | )
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Loss from continuing
  operations                                                                                                       |  |                         | (1,593 | )    |   | (2,010 | ) |   | (198   | )
|Income (loss) from to
  discontinued operations (Note 1d)                                                                               |  |                         | 1,685  |      |   | (1,595 | ) |   | (1,855 | )
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Net income (loss)                                                                                                                       |  | $                       | 92     |      | $ | (3,605 | ) | $ | (2,053 | )
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Basic and diluted loss per share
  from continuing operations (Note 17b)                                                                |  | $                       | (0.24  | )    | $ | (0.36  | ) | $ | (0.04  | )
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Basic and diluted net earnings
(loss) per share from discontinued operations (Note 17b)                                                 |  | $                       | 0.25   |      | $ | (0.28  | ) | $ | (0.40  | )
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Basic and diluted net earnings
  (loss) per share (Note 17b)                                                                            |  | $                       | 0.01   |      | $ | (0.64  | ) | $ | (0.44  | )
|                                                                                                                                        |  |                         |        |      |   |        |   |   |        |  

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 |   | Treasury
  shares |   | Accumulated
  deficit |    | Total
  comprehensive
  loss |   | Total
  shareholders
  equity |  
|                                                                           |  |                   |           |                 |   |                                |  |                                       |        |                                              |   |                   |   |                       |    |                              |   |                                |  
|                                                                           |  |                   |           |                 |   |                                |  |                                       |        |                                              |   |                   |   |                       |    |                              |   |                                |   |   |         |   |   |        |   |   |        |  
|Balance at January 1, 2004                                                 |  |                   | 4,167,509 |                 | $ | 4,309                          |  | $                                     | 43,247 |                                              | $ | -                 |   | $                     | -  |                              | $ | (150                           | ) | $ | (36,865 | ) |   |        |   | $ | 10,541 |  
|Deferred share-based compensation                                          |  |                   | -         |                 |   | -                              |  |                                       | 179    |                                              |   | (179              | ) |                       | -  |                              |   | -                              |   |   | -       |   |   |        |   |   | -      |  
|Amortization of deferred share-based
  compensation                        |  |                   | -         |                 |   | -                              |  |                                       | -      |                                              |   | 5                 |   |                       | -  |                              |   | -                              |   |   | -       |   |   |        |   |   | 5      |  
|Issuance of shares related to the
  acquisitions of Quasar and Odem, net   |  |                   | 570,149   |                 |   | 514                            |  |                                       | 784    |                                              |   | -                 |   |                       | -  |                              |   | 150                            |   |   | (140    | ) |   |        |   |   | 1,308  |  
|Share-based compensation related to warrants
  issued to service providers |  |                   | -         |                 |   | -                              |  |                                       | 117    |                                              |   | -                 |   |                       | -  |                              |   | -                              |   |   | -       |   |   |        |   |   | 117    |  
|Warrants related to a convertible note
  issued to lenders                 |  |                   | -         |                 |   | -                              |  |                                       | 99     |                                              |   | -                 |   |                       | -  |                              |   | -                              |   |   | -       |   |   |        |   |   | 99     |  
|Other comprehensive loss:                                                  |  |                   |           |                 |   |                                |  |                                       |        |                                              |   |                   |   |                       |    |                              |   |                                |   |   |         |   |   |        |   |   |        |  
|Net loss                                                                   |  |                   | -         |                 |   | -                              |  |                                       | -      |                                              |   | -                 |   |                       | -  |                              |   | -                              |   |   | (2,053  | ) | $ | (2,053 | ) |   | (2,053 | )
|Unrealized gain on available-for-sale
  marketable securities              |  |                   | -         |                 |   | -                              |  |                                       | -      |                                              |   | -                 |   |                       | 5  |                              |   | -                              |   |   | -       |   |   | 5      |   |   | 5      |  
|Foreign currency translation adjustments                                   |  |                   | -         |                 |   | -                              |  |                                       | -      |                                              |   | -                 |   |                       | 26 |                              |   | -                              |   |   | -       |   |   | 26     |   |   | 26     |  
|                                                                           |  |                   |           |                 |   |                                |  |                                       |        |                                              |   |                   |   |                       |    |                              |   |                                |   |   |         |   |   |        |   |   |        |  
|Total comprehensive loss                                                   |  |                   |           |                 |   |                                |  |                                       |        |                                              |   |                   |   |                       |    |                              |   |                                |   |   |         |   | $ | (2,022 | ) |   |        |  
|                                                                           |  |                   |           |                 |   |                                |  |                                       |        |                                              |   |                   |   |                       |    |                              |   |                                |   |   |         |   |   |        |   |   |        |  
|                                                                           |  |                   |           |                 |   |                                |  |                                       |        |                                              |   |                   |   |                       |    |                              |   |                                |   |   |         |   |   |        |   |   |        |  
|Balance at December 31, 2004                                               |  |                   | 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 |  
|                                                                           |  |                   |           |                 |   |                                |  |                                       |        |                                              |   |                   |   |                       |    |                              |   |                                |   |   |         |   |   |        |   |   |        |  

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

F-7

---

---



|                                              |                                                        
|--------------------------------------------- | -------------------------------------------------------
|                                              | 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 |   | Treasury
  shares |   | Accumulated
  deficit |    | Total
  comprehensive
  income |   | Total
  shareholders
  equity | 
|                                                                           |  |                   |           |                 |   |                                |  |                                       |        |                                              |   |                   |   |                       |    |                                |   |                                | 
|                                                                           |  |                   |           |                 |   |                                |  |                                       |        |                                              |   |                   |   |                       |    |                                |   |                                |  |   |         |   |   |    |   |   |        |  
|Balance at January 1, 2006                                                 |  |                   | 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 |  
|                                                                           |  |                   |           |                 |   |                                |  |                                       |        |                                              |   |                   |   |                       |    |                                |   |                                |  |   |         |   |   |    |   |   |        |  

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, |       
|                                                                                                        |  |                         |       
|                                                                                                        |  | 2006                    |        | 2005 |   | 2004   |  
|                                                                                                        |  |                         |        |      |   |        |  
|Cash flows fromoperatingactivities:                                                                     |  |                         |        |      |   |        |   |   |        |  
|Net income (loss)                                                                                       |  | $                       | 92     |      | $ | (3,605 | ) | $ | (2,053 | )
|Adjustments to reconcile net income (loss)
  to net cash used in operating activities:                  |  |                         |        |      |   |        |   |   |        |  
|Loss (income) from discontinued
operations                                                              |  |                         | (1,685 | )    |   | 1,595  |   |   | 1,855  |  
|Depreciation and amortization                                                                           |  |                         | 378    |      |   | 474    |   |   | 311    |  
|Amortization of premium and accretion of
  accrued interest on available-for-sale marketable securities |  |                         | -      |      |   | 35     |   |   | 47     |  
|Impairment of investment                                                                                |  |                         | 39     |      |   | -      |   |   | -      |  
|Severance pay, net                                                                                      |  |                         | (75    | )    |   | (75    | ) |   | 8      |  
|Equity in losses of an affiliate                                                                        |  |                         | -      |      |   | 1,750  |   |   | 308    |  
|Minority interest in earnings of a
  subsidiary                                                         |  |                         | -      |      |   | 223    |   |   | 17     |  
|Share-based compensation related to
  warrants issued to service providers                              |  |                         | 296    |      |   | 59     |   |   | 5      |  
|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                                                      |  |                         | -      |      |   | 3      |   |   | 5      |  
|Share-based compensation related to
  employees                                                         |  |                         | 431    |      |   | 244    |   |   | 121    |  
|Financial expenses related to warrants
  issued in connection with long-term convertible note           |  |                         | 162    |      |   | 120    |   |   | 78     |  
|Increase in trade receivables                                                                           |  |                         | (788   | )    |   | (547   | ) |   | (118   | )
|Decrease in deferred taxes                                                                              |  |                         | (70    | )    |   | (88    | ) |   | (47    | )
|Decrease (increase) in other accounts
  receivable and prepaid expenses                                 |  |                         | (595   | )    |   | 86     |   |   | 160    |  
|Increase in inventories                                                                                 |  |                         | (697   | )    |   | (1,971 | ) |   | 357    |  
|Increase (decrease) in trade payables                                                                   |  |                         | 790    |      |   | (172   | ) |   | 531    |  
|Decrease in employees and payroll accruals,
  deferred revenues, accrued expenses and other liabilities |  |                         | (231   | )    |   | (123   | ) |   | (111   | )
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Net cash provided by (used in) operating activities from continuing
  operations                        |  |                         | (1,953 | )    |   | (2,257 | ) |   | 1,474  |  
|Net cash used in operating activities from discontinued
operations                                      |  |                         | (446   | )    |   | (1,647 | ) |   | (2,593 | )
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Net cash used in operating activities                                                                   |  |                         | (2,399 | )    |   | (3,904 | ) |   | (1,119 | )
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Cash flows from investing activities:                                                                   |  |                         |        |      |   |        |   |   |        |  
|Purchase of property and equipment                                                                      |  |                         | (24    | )    |   | (245   | ) |   | (214   | )
|Proceeds from sale of property and
  equipment                                                          |  |                         | -      |      |   | 13     |   |   | 38     |  
|Proceeds from sale of product line                                                                      |  |                         | -      |      |   | 257    |   |   | -      |  
|Investment in long-term marketable
  securities                                                         |  |                         | -      |      |   | (607   | ) |   | (1,247 | )
|Proceeds from redemption of marketable
  securities                                                     |  |                         | 1,331  |      |   | 2,316  |   |   | 1,000  |  
|Investment in other companies                                                                           |  |                         | (676   | )    |   | -      |   |   | -      |  
|Acquisitions, net of cash acquired (a)                                                                  |  |                         | -      |      |   | (1,124 | ) |   | (1,385 | )
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Net cash provided by (used in) investing
  activities from
  continuing operations                      |  |                         | 631    |      |   | 610    |   |   | (1,808 | )
|Net cash used in investing activities from
  discontinued operations                                    |  |                         | (221   | )    |   | (1,087 | ) |   | (58    | )
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Net cash provided by (used in) investing activities                                                     |  |                         | 410    |      |   | (477   | ) |   | (1,866 | )
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Cash flows from financing activities:                                                                   |  |                         |        |      |   |        |   |   |        |  
|Repayment of short-term and long-term bank
  loans                                                      |  |                         | (26    | )    |   | (55    | ) |   | (93    | )
|Proceeds from short-term bank loans                                                                     |  |                         | 686    |      |   | 933    |   |   | -      |  
|Proceeds from long-term convertible note
  and warrants, net of issuance expenses                       |  |                         | 1,319  |      |   | 1,246  |   |   | 1,787  |  
|Payment of long-term convertible note                                                                   |  |                         | (438   | )    |   | (55    | ) |   | (80    | )
|Proceeds from exercise of options                                                                       |  |                         | 135    |      |   | 2,090  |   |   | -      |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Net cash provided by financing activities                                                               |  |                         | 1,676  |      |   | 4,159  |   |   | 1,614  |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Decrease in cash and cash equivalents                                                                   |  |                         | (313   | )    |   | (222   | ) |   | (1,371 | )
|Increase (decrease) in cash and cash equivalents from discontinued
  operations                         |  |                         | 114    |      |   | 163    |   |   | (208   | )
|Effect of exchange rate changes on cash and
  cash equivalents                                          |  |                         | -      |      |   | (13    | ) |   | 11     |  
|Cash and cash equivalents at the beginning
  of the year                                                |  |                         | 2,232  |      |   | 2,304  |   |   | 3,872  |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  
|Cash and cash equivalents at the end of the
  year                                                      |  | $                       | 2,033  |      | $ | 2,232  |   | $ | 2,304  |  
|                                                                                                        |  |                         |        |      |   |        |   |   |        |  

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, |      
|                                                 |  |  |                                                                                                                                  |  |                         |      
|                                                 |  |  |                                                                                                                                  |  | 2006                    |       | 2005 |   | 2004   |  
|                                                 |  |  |                                                                                                                                  |  |                         |       |      |   |        |  
|Supplemental disclosure of cash flow activities: |  |  |                                                                                                                                  |  |                         |       |      |   |        |  
|                                                 |  |  |                                                                                                                                  |  |                         |       |      |   |        |   |   |       | 
|(i)                                              |  |  | Net cash paid during the year for:                                                                                               |  |                         |       |      |   |        |   |   |       | 
|                                                 |  |  | Interest                                                                                                                         |  | $                       | 532   |      | $ | 126    |   | $ | 129   | 
|                                                 |  |  |                                                                                                                                  |  |                         |       |      |   |        |   |   |       | 
|                                                 |  |  | Income tax                                                                                                                       |  | $                       | 180   |      | $ | 309    |   | $ | -     | 
|                                                 |  |  |                                                                                                                                  |  |                         |       |      |   |        |   |   |       | 
|                                                 |  |  |                                                                                                                                  |  |                         |       |      |   |        |   |   |       | 
|(ii)                                             |  |  | Non-cash activities:                                                                                                             |  |                         |       |      |   |        |   |   |       | 
|                                                 |  |  |                                                                                                                                  |  |                         |       |      |   |        |   |   |       | 
|                                                 |  |  | Conversion of convertible note into shares                                                                                       |  | $                       | -     |      | $ | 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  |   | $ | 1,366 | 
|                                                 |  |  | Fair value of net intangible
  assets acquired at acquisition date                                                               |  |                         | -     |      |   | 718    |   |   | 927   | 
|                                                 |  |  | Less -                                                                                                                           |  |                         | -     |      |   |        |   |   |       | 
|                                                 |  |  | Amount acquired by issuance of
  shares                                                                                          |  |                         | -     |      |   | 532    |   |   | 769   | 
|                                                 |  |  | Payables                                                                                                                         |  |                         | -     |      |   | 219    |   |   | 139   | 
|                                                 |  |  | Add-                                                                                                                             |  |                         | -     |      |   |        |   |   |       | 
|                                                 |  |  | Cancellation of Put and Call
  options                                                                                           |  |                         | -     |      |   | 137    |   |   | -     | 
|                                                 |  |  |                                                                                                                                  |  |                         |       |      |   |        |   |   |       | 
|                                                 |  |  |                                                                                                                                  |  |                         |       |      |   |        |   |   |       | 
|                                                 |  |  |                                                                                                                                  |  | $                       | -     |      | $ | 1,124  |   | $ | 1,385 | 
|                                                 |  |  |                                                                                                                                  |  |                         |       |      |   |        |   |   |       | 

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

F-10

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS
  SUBSIDIARIES                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL
|            |        
|            | a.      | B.O.S.
  Better Online Solutions Ltd. is an Israeli corporation (together with its
  subsidiaries the Company).                                                                                                                                                                                                                                                                                                                                                                              
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |         | The Company
  manages its operations through two wholly-owned subsidiaries:                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |         | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | BOScom Ltd.
  (BOScom) is engaged in the software solutions segment of the Companys
  business. BOScom was involved in cross platform printing solutions answering
  a demand for central printing and output management solutions in
  organizations which were sold during 2005 (see c); and                                                                                                                                                                                                                                                                                                                                  
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |         | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Odem
  Electronic Technologies 1992 Ltd. (Odem) is engaged in the supply chain
  solutions segment of the Companys business. In September and November 2005,
  the Company purchased an additional 23.9% and 12.3%, respectively, of the
  outstanding shares of Odem. Following these purchases, the Company owns 100%
  of Odem. Odem is a solutions supplier of electronic components and systems to
  the technologies sector (see b).                                                                                                                                                                                      
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |         | BOS
  communication segment (the communication segment) included: BOScoms
  business of communication solutions which provide multi-path, intelligent
  routing voice over IP gateways and the Companys wholly-owned subsidiary
  Quasar Telecom (2004) Ltd. (Quasar), which provide 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 7.8% of Surfs issued and outstanding shares (see Note 6).                                                                                                                                                                                                                                                                      
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |         | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Qualmax Inc. (Qualmax),
  a U.S. public corporation listed on the Pink Sheets (QMXI.PK), and
  its subsidiaries New World Brands Inc. (OTC: NWBD.OB) and IPGear. Qualmax and its subsidiaries are developers and
  suppliers of voiceover IP technology products and services. The
  Company holds 18% of the issued and outstanding shares of Qualmax Inc. and
  Preferred shares in New World Brands Inc. that can be converted into 4.2% of
  New World Brands Inc. issued and outstanding shares. The Companys holdings in Qualmax were received as the consideration
  for the sale of the communication segment (see d).

F-11

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS
  SUBSIDIARIES                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------- | --------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL (Cont.)
|            |                
|            | 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. In
  addition, Odems selling shareholders and the Company had certain Put and
  Call options, based on performance, with respect to all of the remaining Odem
  shares held by such sellers, exercisable for a consideration comprised of
  additional cash and issuance of additional Ordinary shares of the Company.
  The Company recorded assets and liability with respect to these options at
  fair value. The Put option liability will be measured periodically until it
  expires or is exercised and the changes in the fair value will be charged to
  financial expenses.
|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                 | 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 subject to lock up periods of 2 to 4 years and (ii) an amount of
  $716 to be paid in cash.                                                                                                                                                                                                                                                                                                                 
|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                 | The
  Companys consolidated financial statements reflect the purchase price
  determined as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| |                                      |  |                  |     |                   |   |                  |   |       |       |  |   |       |  
| | ------------------------------------ |  | ---------------- | --- | ----------------- | - | ---------------- | - | ----- | ----- |  | - | ----- | -
| |                                      |  | Odem             |    
| |                                      |  |                  |    
| |                                      |  | November 1, 2005 |     | September 29,2005 |   | November 18,2004 |   | Total |      
| |                                      |  |                  |     |                   |   |                  |   |       |      
| |                                      |  |                  |     |                   |   |                  |   |       |       |  |   |       |  
| | Issuance of shares (1)               |  | $                | -   |                   | $ | 532              |   | $     | 769   |  | $ | 1,301 |  
| | Cash consideration                   |  |                  | 554 |                   |   | 716              |   |       | 1,971 |  |   | 3,241 |  
| | Transaction costs                    |  |                  | 19  |                   |   | 54               |   |       | 139   |  |   | 212   |  
| | Cancellation of Put and Call options |  |                  | (33 | )                 |   | (104             | ) |       | -     |  |   | (137  | )
| |                                      |  |                  |     |                   |   |                  |   |       |       |  |   |       |  
| |                                      |  |                  |     |                   |   |                  |   |       |       |  |   |       |  
| | Total purchase price                 |  | $                | 540 |                   | $ | 1,198            |   | $     | 2,879 |  | $ | 4,617 |  
| |                                      |  |                  |     |                   |   |                  |   |       |       |  |   |       |  

| |     |                                                                                                                                                                                                                                        
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The value of
  the Ordinary shares issued was determined based on the average market price
  of the Companys Ordinary shares over the period of two days before and after
  the terms of the transaction were agreed to and announced.

F-12

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS
  SUBSIDIARIES                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

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

| |                                                                         
| | ------------------------------------------------------------------------
| | The Company
  has allocated the total purchase price in 2004 as follows:

| |                                            |  |      |       |                         |  |          | 
| | ------------------------------------------ |  | ---- | ----- | ----------------------- |  | -------- | 
| | Allocation of purchase price               |  | Odem |       | Estimated
  useful life | 
| |                                            |  |      |       |                         | 
| |                                            |  |      |       |                         |  |          | 
| | Cash                                       |  | $    | 586   |                         |  |          | 
| | Tangible
  assets                          |  |      | 780   |                         |  |          | 
| | Put option
  to minority shareholders (2)  |  |      | (359  | )                       |  |          | 
| | Call option
  to minority shareholders (2) |  |      | 230   |                         |  |          | 
| | Customer
  list (1)                        |  |      | 1,406 |                         |  | 10 years | 
| | Deferred tax
  liability                   |  |      | (430  | )                       |  |          | 
| | Goodwill                                   |  |      | 666   |                         |  | 10 years | 
| |                                            |  |      |       |                         |  |          | 
|
| | Total
  purchase price                     |  | $    | 2,879 |                         |  |          | 
| |                                            |  |      |       |                         |  |          | 

| |     |                                                                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The
  Companys allocation of purchase price valuated the acquired customer list by
  calculating cash flow benefit as a direct result of the customer
  relationship.
| |     |                                                                                                                                                                       
| | (2) | The Put and
  Call options were valuated by using the Black-Scholes
  options pricing model.                                                                          

| |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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   |   |  | 9
  years | 
| |                              |  |                   |     |                     |   |       |   |                         |       |   |  |           | 
| |                              |  |                   |     |                     |   |       |   |                         |       |   |  |           | 
| | Total purchase price         |  | $                 | 540 |                     | $ | 1,198 |   | $                       | 1,738 |   |  |           | 
| |                              |  |                   |     |                     |   |       |   |                         |       |   |  |           | 

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

F-13

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS
  SUBSIDIARIES                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and 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 year ended December 31, 2006, total
  revenues generated by Consist from the PrintBOS products were less than
  $1,000 and, therefore, the Company did not receive any royalties in 2006.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-14

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS
  SUBSIDIARIES                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 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 in the first
  quarter of 2006, losses that exceed $250, 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 following which, the Company holds approximately
  17.8% of Qualmaxs total issued and outstanding Common stock. As part of the agreement
  signed between the parties in December 2006, the loan was fully repaid by
  issuance of additional shares of Qualmax (see below).                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 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, New
  World Brands Inc. (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 16,450,000
  shares of NWB Common stock, reflecting a conversion rate of $0.09 per one
  share of Common stock. Conversion of the series A Preferred stock into Common
  stock will take place automatically upon effectiveness of an amendment to the
  NWBs certificate of incorporation authorizing an increase in the number of
  outstanding shares of Common stock. Following the conversion, the Company
  holds 18% in Qualmax and 4.2% in NWB. The Companys registration rights with
  respect to the Qualmax shares shall also apply to NWB shares.

F-15

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS
  SUBSIDIARIES                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

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

| |                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In
  connection with the transaction, the Company agreed to grant NWB, contingent
  upon the satisfaction of certain conditions, a three-year option 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.           
| |                                                                                                                                                                                                                                                                                                    
| | In addition,
  the Company agreed to enter into a lock up agreement, restricting the
  transfer of the share holdings in Qualmax and in NWB, for up to two years.                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                    
| | The Company
  accounts for its holdings in Qualmax shares on the cost basis since it is
  unable to exercise significant influence over Qualmax financial policies and
  since the shares held in Qualmax are restricted stock which do not meet the
  fair value availability criteria of FAS 115.
| |                                                                                                                                                                                                                                                                                                    
| | 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    |  
| |                                                                         |  |                           |       |      |   |        |  

| |     |                                                                                                                                        
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Valuated at $1.43 per share.                                                                                                           
| |     |                                                                                                                                        
| | (2) | Valuated at $0.97 per warrant.                                                                                                         
| |     |                                                                                                                                        
| | (3) | 5.50652 series A Preferred stock convertible into 16.5 million Common
  stock of NWB. Each Common stock is valuated at $0.09 per share.

F-16

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS
  SUBSIDIARIES                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

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

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Following
  the agreement, signed in December 2006, under which the Company has accounted
  for the communication segment as a discontinued operation, 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
  and 2004, have been reclassified in the accompanying statements of operations
  as discontinued operations. The Companys balance sheet as of December 31,
  2005 reflects the net assets and liabilities of the communication segment as
  assets and liabilities related to discontinued operations.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 2. | Discontinued
  product line:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | On June 1,
  1998, the Company acquired 100% of the share capital of Pacific Information
  Systems Inc. (PacInfo), a U.S. corporation. PacInfo was a reseller of
  computer networking products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | During the
  fourth quarter of 2002, the Company initiated a plan to cease operations of
  PacInfo.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The results
  of operations, including, operating expenses and other income and expenses of
  PacInfo for 2004, have been reclassified in the accompanying statement of
  operations as discontinued operations. The Companys balance sheet at
  December 31, 2005 reflects the net assets and liabilities of PacInfo as
  assets and liabilities related to discontinued operations.                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3. | The carrying
  amounts of the major classes of assets and liabilities included as part of
  the discontinued operations are:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| |                                                      |  |                     |      |  
| | ---------------------------------------------------- |  | ------------------- | ---- | -
| |                                                      |  | December
  31, 2005 |     
| |                                                      |  |                     |     
| |                                                      |  |                     |      |  
| | Cash
  and cash equivalents                          |  | $                   | 114  |  
| | Trade
  receivables, net                             |  |                     | 355  |  
| | Other
  accounts receivable and prepaid expenses     |  |                     | 88   |  
| | Inventories                                          |  |                     | 3    |  
| | Severance
  pay fund                                 |  |                     | 30   |  
| | Trade
  payables                                     |  |                     | (488 | )
| | Accrued
  expenses and other liabilities             |  |                     | (271 | )
| | Accrued
  severance pay                              |  |                     | (33  | )
| |                                                      |  |                     |      |  
| |                                                      |  |                     |      |  
| | Net
  liabilities related to discontinued operations |  | $                   | (202 | )
| |                                                      |  |                     |      |  

F-17

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | --------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL (Cont.)
|            |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                 |  | 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 2006, 2005 and 2004, 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 is as follows:

| |                                                               |  |                           |        |      |   |        |   |   |        |  
| | ------------------------------------------------------------- |  | ------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
| |                                                               |  | Year ended
  December 31, |       
| |                                                               |  |                           |       
| |                                                               |  | 2006                      |        | 2005 |   | 2004   |  
| |                                                               |  |                           |        |      |   |        |  
| |                                                               |  |                           |        |      |   |        |   |   |        |  
| | Revenues                                                      |  | $                         | -      |      | $ | 2,954  |   | $ | 1,363  |  
| | Cost of revenues                                              |  |                           | -      |      |   | 2,171  |   |   | 949    |  
| | Operating expenses                                            |  |                           | 752    |      |   | 3,157  |   |   | 2,269  |  
| |                                                               |  |                           |        |      |   |        |   |   |        |  
| |                                                               |  |                           |        |      |   |        |   |   |        |  
| | Operating loss                                                |  |                           | (752   | )    |   | (2,374 | ) |   | (1,855 | )
| | Gain derived from sale of the discontinued
  operation        |  |                           | 2,437  |      |   | 779    |   |   | -      |  
| |                                                               |  |                           |        |      |   |        |   |   |        |  
| |                                                               |  |                           |        |      |   |        |   |   |        |  
| | Net income (loss)                                             |  | $                         | 1,685  |      | $ | (1,595 | ) | $ | (1,855 | )
| |                                                               |  |                           |        |      |   |        |   |   |        |  
| |                                                               |  |                           |        |      |   |        |   |   |        |  
| |                                                               |  | Year ended December 31,   |       
| |                                                               |  |                           |       
| |                                                               |  | 2006                      |        | 2005 |   | 2004   |  
| |                                                               |  |                           |        |      |   |        |  
| |                                                               |  |                           |        |      |   |        |   |   |        |  
| | Cash flows from operating activities                          |  |                           |        |      |   |        |   |   |        |  
| | Gain (loss) from discontinue                                  |  | $                         | 1,685  |      | $ | (1,595 | ) | $ | (1,846 | )
| | Depreciation and amortization of equipment
  and intangibles  |  |                           | -      |      |   | 107    |   |   | 40     |  
| | Capital gain                                                  |  |                           | (2,052 | )    |   | (779   | ) |   | -      |  
| | Adjustments due to changes in working
  capital               |  |                           | (79    | )    |   | 620    |   |   | (787   | )
| |                                                               |  |                           |        |      |   |        |   |   |        |  
| |                                                               |  |                           |        |      |   |        |   |   |        |  
| | Net cash flows used in operating activities                   |  | $                         | (446   | )    | $ | (1,647 | ) | $ | (2,593 | )
| |                                                               |  |                           |        |      |   |        |   |   |        |  
| |                                                               |  |                           |        |      |   |        |   |   |        |  
| | 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                                         |  |                           | -      |      |   | -      |   |   | (58    | )
| |                                                               |  |                           |        |      |   |        |   |   |        |  
| |                                                               |  |                           |        |      |   |        |   |   |        |  
| | Net cash flows provided from (used in)
  investing activities |  | $                         | (221   | )    | $ | (1,087 | ) | $ | (58    | )
| |                                                               |  |                           |        |      |   |        |   |   |        |  

F-18

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

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

F-19

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|----------- | --------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | e.                                      | Marketable
  securities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         | The Company
  accounts for investments in debt securities in accordance with Statement of
  Financial Accounting Standard 115, Accounting for Certain Investments in
  Debt and Equity Securities (FAS 115). Management determines the
  appropriate classification of its investments in debt and equity securities
  at the time of purchase and reevaluates such determinations at each balance
  sheet date. Until November 30, 2005, debt securities have been classified as
  held-to-maturity since the Company had the positive intent and ability to
  hold the securities to maturity and they are stated at amortized cost. The
  amortized cost of held-to-maturity securities is adjusted for amortization of
  premiums and accretion of discounts to maturity. Such amortization and
  decline in value judged to be other than temporary and interest are included
  in financial income, net. Beginning December 1, 2005, the debt securities are
  classified as available-for-sale since the Company does not have the intent
  to hold the securities to maturity, and are stated at fair value. Due to the
  change in classification of the securities to available-for-sale, the
  unrealized holding gain at the date of transfer has been reported in other
  comprehensive income.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         | Available-for-sale
  securities are carried at fair value with unrealized gains, and are reported
  as a separate item under other comprehensive loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | f.                                      | Inventories:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         | Inventory
  write-offs are provided to cover risks arising from slow-moving items or
  technological obsolescence. As of December 31, 2006 and 2005, inventory is
  presented net of $100 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | g.                                      | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | h.                                      | 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 (see Note 6).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F-20

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|----------- | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | The
  investment in an affiliate represents investments in Ordinary shares and
  Preferred shares of that company. The Company applies EITF 99-10, Percentage
  Used to Determine the Amount of Equity Method Losses. Accordingly, losses of
  the affiliate are recognized based on the ownership level of the particular
  security of the affiliate held by the Company.                                                                                                                                                                               
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | 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. In 2004,
  based on managements analysis, no impairment losses were identified.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | i                                       | Investment
  in other companies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | Investment
  in other companies are investments in which the Company is unable to exercise
  significant influence over the investees financial policies and which do not
  meet the fair value availability criteria of FAS 115 (Readily Determined
  Sales Price Currently Available on a Security Exchange), consequently such
  investments are accounted for by the cost method.                                                                                                                                                                    
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | The
  Companys investment in such companies 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 APB 18. During 2006, an
  impairment loss of $39 has been recorded. During 2005 and 2004, no impairment
  losses have been identified.                                                                                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | j.                                      | Property,
  plant and equipment:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         | Property,
  plant and equipment are stated at cost, net of accumulated depreciation.
  Depreciation is calculated by using the straight line method over the
  estimated useful lives of the assets, at the following annual rates:                                                                                                                                                                                                                                                                                                                         

| |                                  |         |                                                                           
| | -------------------------------- | ------- | --------------------------------------------------------------------------
| |                                  | %       |                                                                           
| |                                  |         |                                                                           
| |                                  |         |                                                                           
| | Computers
  and software         | 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       |                                                                           

F-21

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|----------- | --------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | k.                                      | 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 2006, 2005 and 2004, no impairment losses have been identified.                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | l.                                      | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         | Goodwill
  represents excess of the costs over the net assets of businesses acquired.
  SFAS 142 requires goodwill to be 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.
  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 2006, 2005 and 2004, no impairment losses have been identified.                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | m.                                      | 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.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | n.                                      | 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.                                                                                                                                                                                                                                                      

F-22

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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 for share and share data)

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            |                                         | 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 2006, 2005 and 2004 amounted to $298, $256 and $214,
  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | o.                                      | 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.                                                                                                                                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         | 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 of the product has occurred, no significant obligations with
  regard to implementation remain, the fee is fixed or determinable, and collectibility
  is probable. The Company generally does not grant a right of return to its
  customers. When a right of return exists, the Company defers revenue until
  the right of return expires, at which time revenue is recognized provided
  that all other revenue recognition criteria have been met.  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         | Revenues
  support is 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         | Revenues
  from commissions are recognized upon their actual receipt, since under
  agreements with suppliers consideration is received on the basis of
  collection from customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | p.                                      | 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.

F-23

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------- | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | q.                                      | 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.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            | r.                                      | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                         | Cash and
  cash equivalents are invested mainly in U.S. dollars in deposits with major
  banks in Israel. Investments in marketable securities are conducted through a
  bank in Israel and include investments in corporate and governmental
  debentures. Management believes that the financial institutions that hold the
  Companys investments are financially sound, the portfolio is well
  diversified and, accordingly, minimal credit risk exists with respect to these
  investments.                                                                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                         | The trade
  receivables of the Company are derived from sales to customers located
  primarily in Israel, United States, Europe and the Far East. 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 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. (see Note 1d).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                         | The Company
  has no off-balance-sheet concentrations of credit risk such as foreign
  exchange contracts, option contracts or other foreign hedging arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-24

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | --------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | s.                                      | 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 1,386,424, 1,506,803 and 855,783 for
  the years ended December 31, 2006, 2005 and 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | t.                                      | 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).                                                                                                            
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         | 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 date of grant 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 date of grant fair value estimated in
  accordance with the provisions of SFAS 123(R). Results for prior periods have
  not been restated.

F-25

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                    |  | 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. For awards granted prior to January 1, 2006, the
  Company recognizes compensation expenses based on the accelerated attribution
  method over the requisite service period of each of the awards. Forfeitures
  were previously accounted for as they occurred, but have been estimated with
  the adoption of SFAS 123(R) for those awards not yet vested. The compensation
  expenses related to the stock options granted to employees, for the year
  ended December 31, 2006, was $360.
|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                    |  | As a result
  of adopting SFAS 123(R) on January 1, 2006, the Companys income before
  income taxes and net income for the year ended December 31, 2006, is $370
  lower than if it had continued to account for share-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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                    |  | 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 2006 and 2005 is estimated on the date of grant
  using a Black-Scholes
  options pricing model with the following weighted average assumptions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| |  |                          |  |              |      |      |  |      |  
| |  | ------------------------ |  | ------------ | ---- | ---- |  | ---- | -
| |  |                          |  | December 31, |     
| |  |                          |  |              |     
| |  |                          |  | 2006         |      | 2005 | 
| |  |                          |  |              |      |      | 
| |  |                          |  |              |      |      |  |      |  
| |  | Risk free interest       |  |              | 4.91 | %    |  | 4.00 | %
| |  | Dividend yields          |  |              | 0    | %    |  | 0    | %
| |  | Volatility               |  |              | 78   | %    |  | 120  | %
| |  | Expected term (in years) |  |              | 3    |      |  | 3    |  

F-26

---

---



|                                                             
|-------------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                          
|AND ITS SUBSIDIARIES                                         
|NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS                 
|                                                             
|U.S. dollars
  in thousands (except for share and 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 years
  ended December 31, 2005 and 2004, had the Company applied the fair value
  recognition provisions of SFAS 123, as follows:

| |  |                                                                                                                                                        |  |              |        |      |   |        |  
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------ | ---- | - | ------ | -
| |  |                                                                                                                                                        |  | December 31, |       
| |  |                                                                                                                                                        |  |              |       
| |  |                                                                                                                                                        |  | 2005         |        | 2004 |  
| |  |                                                                                                                                                        |  |              |        |      |  
| |  |                                                                                                                                                        |  |              |        |      |   |        |  
| |  | Net loss from continuing
  operations, as reported                                                                                                     |  | $            | (2,010 | )    | $ | (198   | )
| |  | Add: share-based compensation expenses
  related to employee stock options determined under intrinsic value method included in the
  reported net loss |  |              | 62     |      |   | 5      |  
| |  | Deduct: share-based compensation expense
  related to employee stock options determined under fair value method for all awards                         |  |              | (246   | )    |   | (96    | )
| |  |                                                                                                                                                        |  |              |        |      |   |        |  
| |  |                                                                                                                                                        |  |              |        |      |   |        |  
| |  | Pro forma net loss from
  continuing operations                                                                                                        |  |              | (2,194 | )    |   | (289   | )
| |  | Pro forma net loss from
  discontinued operations                                                                                                      |  |              | (1,595 | )    |   | (1,855 | )
| |  |                                                                                                                                                        |  |              |        |      |   |        |  
| |  |                                                                                                                                                        |  |              |        |      |   |        |  
| |  | Pro forma net loss                                                                                                                                     |  | $            | (3,789 | )    | $ | (2,144 | )
| |  |                                                                                                                                                        |  |              |        |      |   |        |  
| |  |                                                                                                                                                        |  |              |        |      |   |        |  
| |  | Basic and diluted net loss
  per share from continuing operations, as reported                                                                         |  | $            | (0.36  | )    | $ | (0.04  | )
| |  |                                                                                                                                                        |  |              |        |      |   |        |  
| |  |                                                                                                                                                        |  |              |        |      |   |        |  
| |  | Basic and diluted net loss
  per share from discontinued operations, as reported                                                                       |  | $            | (0.28  | )    | $ | (0.40  | )
| |  |                                                                                                                                                        |  |              |        |      |   |        |  
| |  |                                                                                                                                                        |  |              |        |      |   |        |  
| |  | Basic and diluted net loss
  per share, as reported                                                                                                    |  | $            | (0.64  | )    | $ | (0.44  | )
| |  |                                                                                                                                                        |  |              |        |      |   |        |  
| |  |                                                                                                                                                        |  |              |        |      |   |        |  
| |  | Basic and diluted net loss
  per share, including the effect of share-based compensation expense                                                       |  | $            | (0.67  | )    | $ | (0.46  | )
| |  |                                                                                                                                                        |  |              |        |      |   |        |  

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

F-27

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD. 
AND ITS SUBSIDIARIES  
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- | --------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            | u.                                      | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | v.                                      | Impact of
  recently issued accounting pronouncements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | In June
  2006, the FASB issued Interpretation 48 (FIN 48), Accounting for
  Uncertainty in Income Taxes (FIN 48), an interpretation of FASB Statement
  109, Accounting for Income Taxes. The Interpretation addresses the
  determination of whether tax benefits claimed or expected to be claimed on a
  tax return should be recorded in the financial statements. Under FIN 48, the
  Company may recognize the tax benefit from an uncertain tax position only if
  it is more likely than not that the tax position will be sustained on
  examination by the tax authorities, based on the technical merits of the
  position. The tax benefits recognized in the financial statements from such a
  position should be measured based on the largest benefit that has a greater
  than fifty percent likelihood of being realized upon ultimate settlement. FIN
  48 also provides guidance on de-recognition, classification, interest and
  penalties on income taxes, accounting in interim periods and requires
  increased disclosures. FIN 48 applies to all tax positions related to income
  taxes subject to SFAS 109. This includes tax positions considered to be
  routine as well as those with a high degree of uncertainty. FIN 48 specifically
  prohibits the use of a valuation allowance as a substitute for de-recognition
  of tax positions. The provisions of FIN 48 are effective beginning January 1,
  2007. The Company is currently assessing the impact that FIN 48 will have on
  its consolidated financial statements.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | In September
  2006, the Financial Accounting Standards Board (FASB) issued SFAS 157,
  Fair Value Measurements (SFAS 157). This Standard defines fair value,
  establishes a framework for measuring fair value in generally accepted
  accounting principles and expands disclosures about fair value measurements.
  SFAS 157 is effective for financial statements issued for fiscal years
  beginning after November 15, 2007 and interim periods within those fiscal
  years. The Company is currently assessing the impact that SFAS 157 will have
  on its consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-28

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|----------- | --------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         | In February
  2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets
  and Financial Liabilities (SFAS 159). SFAS 159 permits companies to choose
  to measure certain financial instruments and certain other items at fair
  value. The Standard requires that unrealized gains and losses on items for
  which the fair value option has been elected be reported in earnings. SFAS
  159 is effective for financial statements issued for fiscal years beginning
  after November 15, 2007 and interim periods within those fiscal years,
  although earlier adoption is permitted. The Company is currently assessing
  the impact that SFAS 159 will have on its consolidated financial statements

|            |                                                          |  |                |     |      |   |     | 
|----------- | -------------------------------------------------------- |  | -------------- | --- | ---- | - | --- | 
|NOTE 3:    | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES          
|            |                                                          |  | December
  31, |    
|            |                                                          |  |                |    
|            |                                                          |  | 2006           |     | 2005 |  
|            |                                                          |  |                |     |      |  
|            |                                                          |  |                |     |      |   |     | 
|            | Government
  authorities  Income tax advances and V.A.T |  | $              | 279 |      | $ | 295 | 
|            | Advances to
  suppliers                                  |  |                | 296 |      |   | -   | 
|            | Other                                                    |  |                | 283 |      |   | 209 | 
|            |                                                          |  |                |     |      |   |     | 
|            |                                                          |  |                |     |      |   |     | 
|            |                                                          |  | $              | 858 |      | $ | 504 | 
|            |                                                          |  |                |     |      |   |     | 

|            |                                                 |  |   |       |  |   |       | 
|----------- | ----------------------------------------------- |  | - | ----- |  | - | ----- | 
|NOTE 4:    | INVENTORIES                                    
|            | Raw
  materials (including packaging materials) |  | $ | 117   |  | $ | 107   | 
|            | Products in
  progress                          |  |   | 3     |  |   | 56    | 
|            | Finished
  products                             |  |   | 3,897 |  |   | 3,157 | 
|            |                                                 |  |   |       |  |   |       | 
|            |                                                 |  |   |       |  |   |       | 
|            |                                                 |  | $ | 4,017 |  | $ | 3,320 | 
|            |                                                 |  |   |       |  |   |       | 

| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
  inventories are presented net of provision for technological obsolescence and
  slow moving items of $100 and $100 as of December 31, 2006 and 2005,
  respectively.

F-29

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                      
|----------- | ---------------------
|NOTE 5:    | MARKETABLE SECURITIES

The following
is a summary of securities:

|                     |  |                  |   |                            |   |                             |  |                                   |   |                  |   |                            |  |                             |       |                                   |   |   |  |   |   |  |   |       | 
|-------------------- |  | ---------------- | - | -------------------------- | - | --------------------------- |  | --------------------------------- | - | ---------------- | - | -------------------------- |  | --------------------------- | ----- | --------------------------------- | - | - |  | - | - |  | - | ----- | 
|                     |  | December
  31,   |  
|                     |  |                  |  
|                     |  | 2006             |   | 2005                       |  
|                     |  |                  |   |                            |  
|                     |  | Amortized
  cost |   | Gross
  unrealized
  gains |   | Gross
  unrealized
  losses |  | Estimated
  fair
  market
  value |   | Amortized
  cost |   | Gross
  unrealized
  gains |  | Gross
  unrealized
  losses |       | Estimated
  fair
  market
  value |  
|                     |  |                  |   |                            |   |                             |  |                                   |   |                  |   |                            |  |                             |       |                                   |  
|Available-for-sale:  |  |                  |   |                            |   |                             |  |                                   |   |                  |   |                            |  |                             |       |                                   |   |   |  |   |   |  |   |       | 
|                     |  |                  |   |                            |   |                             |  |                                   |   |                  |   |                            |  |                             |       |                                   |   |   |  |   |   |  |   |       | 
|Corporate debentures |  | $                | - |                            | $ | -                           |  | $                                 | - |                  | $ | -                          |  | $                           | 1,332 |                                   | $ | 1 |  | $ | - |  | $ | 1,333 | 
|                     |  |                  |   |                            |   |                             |  |                                   |   |                  |   |                            |  |                             |       |                                   |   |   |  |   |   |  |   |       | 

|            |                              
|----------- | -----------------------------
|NOTE 6:    | INVESTMENT IN OTHER COMPANIES

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Investment
  in Surf Communication Systems Ltd.:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | In November
  2001, the Company invested $1,000 as part of a private placement in Surf
  Communication Systems Ltd. (Surf). At the same time, the Company converted
  its convertible loan in the amount of $1,042 (principal and accrued interest)
  into Preferred shares of Surf at an exercise price equal to Surfs fair value
  as determined in the investment agreement. As a result of this private
  placement, the Companys holding in Surf was diluted to 17%. Accordingly, the
  investment was accounted based on the cost accounting method.                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | In March
  2003, the Company engaged with Catalyst Investors L.P. (Catalyst), in order
  to purchase additional 191,548 series C Preferred shares of Surf. In
  consideration, the Company issued to Catalyst 633,102 Ordinary shares, at a
  purchase price of $2.77, aggregating to $1,755 and incurred transaction cost
  of $155. The value of the Ordinary shares issued was determined based on the
  average market price of the Companys Ordinary shares over the period
  including two days before and after the terms of the transaction were agreed
  to and announced.                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | As a result
  of this investment, the Company had the ability to exercise significant
  influence over Surf. As a result, the investment in Surf had become qualified
  to be accounted for under the equity method. According to APB 18, when an
  investment qualifies for use of the equity method, the investor should adopt
  the equity method of accounting by adjusting retroactively the investment,
  results of operations (current and prior periods presented), and retained
  earnings, in a manner consistent with the accounting for a step-by-step acquisition
  of a subsidiary.                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | 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.

F-30

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                                      
|----------- | -------------------------------------
|NOTE 6:    | INVESTMENT IN OTHER COMPANIES (Cont.)

| |  |                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                                                                                                                             
| |  |                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Moreover,
  following the private placement in Surf, the Companys voting rights have
  been diluted to 8.7% of the total voting rights in Surf. 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.
| |  |                                                                                                                                                                                                                                                                                                                                                                                      
| |  | 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                      |       | 2004 |  
|                                                |  |                           |       |      |  
|                                                |  |                           |       |      |   |       | 
|Revenues                                        |  | $                         | 2,055 |      | $ | 2,762 | 
|                                                |  |                           |       |      |   |       | 
|                                                |  |                           |       |      |   |       | 
|Cost of sales                                   |  | $                         | 660   |      | $ | 700   | 
|                                                |  |                           |       |      |   |       | 
|                                                |  |                           |       |      |   |       | 
|Operating expenses from continuing
  operations |  | $                         | 3,694 |      | $ | 4,037 | 
|                                                |  |                           |       |      |   |       | 
|                                                |  |                           |       |      |   |       | 
|Net loss                                        |  | $                         | 2,334 |      | $ | 1,971 | 
|                                                |  |                           |       |      |   |       | 

| |    |                                                      
| | -- | -----------------------------------------------------
| | b. | The
  Companys investments in companies comprise of:

|                                |  |                |       |      |   |       | 
|------------------------------- |  | -------------- | ----- | ---- | - | ----- | 
|                                |  | December
  31, |      
|                                |  |                |      
|                                |  | 2006           |       | 2005 |  
|                                |  |                |       |      |  
|                                |  |                |       |      |   |       | 
|Surf Communication Systems Ltd. |  | $              | 983   |      | $ | 722   | 
|                                |  |                |       |      |   |       | 
|Qualmax Inc. (1)                |  |                | 5,619 |      |   | 4,690 | 
|                                |  |                |       |      |   |       | 
|New World Brands Inc. (1)       |  |                | 1,480 |      |   | -     | 
|                                |  |                |       |      |   |       | 
|                                |  |                |       |      |   |       | 
|                                |  | $              | 8,082 |      | $ | 5,412 | 
|                                |  |                |       |      |   |       | 
|                                |  |                |       |      |   |       | 
|(1)     See
  Note 1d.         

F-31

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                              
|----------- | -----------------------------
|NOTE 7:    | PROPERTY, PLANT AND EQUIPMENT

|                                 |  |                |       |      |   |       | 
|-------------------------------- |  | -------------- | ----- | ---- | - | ----- | 
|                                 |  | December
  31, |      
|                                 |  |                |      
|                                 |  | 2006           |       | 2005 |  
|                                 |  |                |       |      |  
|Cost:                            |  |                |       |      |   |       | 
|Computers and software           |  | $              | 1,697 |      | $ | 1,683 | 
|Office furniture and equipment   |  |                | 458   |      |   | 448   | 
|Leasehold improvements and plant |  |                | 1,116 |      |   | 1,116 | 
|Vehicles                         |  |                | 89    |      |   | 89    | 
|                                 |  |                |       |      |   |       | 
|                                 |  |                |       |      |   |       | 
|                                 |  |                | 3,360 |      |   | 3,336 | 
|                                 |  |                |       |      |   |       | 
|Accumulated depreciation:        |  |                |       |      |   |       | 
|Computers and software           |  |                | 1,569 |      |   | 1,511 | 
|Office furniture and equipment   |  |                | 301   |      |   | 288   | 
|Leasehold improvements and plant |  |                | 906   |      |   | 816   | 
|Vehicles                         |  |                | 64    |      |   | 54    | 
|                                 |  |                |       |      |   |       | 
|                                 |  |                |       |      |   |       | 
|                                 |  |                | 2,840 |      |   | 2,669 | 
|                                 |  |                |       |      |   |       | 
|                                 |  |                |       |      |   |       | 
|Depreciated cost                 |  | $              | 520   |      | $ | 667   | 
|                                 |  |                |       |      |   |       | 

Depreciation
expenses amounted to $171, $317 and $294 for the years ended December 31, 2006,
2005 and 2004, respectively.

|            |                   
|----------- | ------------------
|NOTE 8:    | CUSTOMER LIST, NET

|                          |  |                |       |      |   |       | 
|------------------------- |  | -------------- | ----- | ---- | - | ----- | 
|                          |  | December
  31, |      
|                          |  |                |      
|                          |  | 2006           |       | 2005 |  
|                          |  |                |       |      |  
|Cost:                     |  |                |       |      |   |       | 
|Customer list             |  | $              | 2,010 |      | $ | 2,010 | 
|                          |  |                |       |      |   |       | 
|                          |  |                |       |      |   |       | 
|Accumulated amortization: |  |                |       |      |   |       | 
|Customer list             |  |                | 381   |      |   | 174   | 
|                          |  |                |       |      |   |       | 
|                          |  |                |       |      |   |       | 
|Amortized cost            |  | $              | 1,629 |      | $ | 1,836 | 
|                          |  |                |       |      |   |       | 

Amortization
expenses amounted to $207, $157 and $17 for the years ended December 31, 2006,
2005 and 2004, respectively.

Estimated
amortization expenses for the years ended:

|            |  |                |       | 
|----------- |  | -------------- | ----- | 
|            |  | December
  31, |      
|            |  |                |      
|            |  |                |       | 
|2007        |  | $              | 207   | 
|2008        |  |                | 207   | 
|2009        |  |                | 207   | 
|2010        |  |                | 207   | 
|2011 - 2014 |  |                | 801   | 
|            |  |                |       | 
|            |  |                |       | 
|            |  | $              | 1,629 | 
|            |  |                |       | 

F-32

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS
  SUBSIDIARIES                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                                                                                                            
|----------- | -----------------------------------------------------------------------------------------------------------
|NOTE 9:    | GOODWILL                                                                                                   
|            |                                                                                                            
|            | Goodwill
  attributed to operating segments for the years ended December 31, 2006 and
  2005 is as follows:

| |                                            |  |                       |      |                      |   |       |  |   |       |  
| | ------------------------------------------ |  | --------------------- | ---- | -------------------- | - | ----- |  | - | ----- | -
| |                                            |  | Software 
  solutions |      | Supplychainsolutions |   | Total | 
| |                                            |  |                       |      |                      |   |       | 
| |                                            |  |                       |      |                      |   |       |  |   |       |  
| | Balance as of January 1, 2005              |  | $                     | 903  |                      | $ | 666   |  | $ | 1,569 |  
| |                                            |  |                       |      |                      |   |       |  |   |       |  
| | Foreign currency translation
  adjustments |  |                       | -    |                      |   | 4     |  |   | 4     |  
| | Exercise of options in Odem                |  |                       | -    |                      |   | 282   |  |   | 282   |  
| | Disposal of the communication
  segment    |  |                       | (903 | )                    |   | -     |  |   | (903  | )
| |                                            |  |                       |      |                      |   |       |  |   |       |  
| |                                            |  |                       |      |                      |   |       |  |   |       |  
| | Balance as of December 31, 2005            |  | $                     | -    |                      | $ | 952   |  | $ | 952   |  
| |                                            |  |                       |      |                      |   |       |  |   |       |  
| |                                            |  |                       |      |                      |   |       |  |   |       |  
| | Balance as of December 31, 2006            |  | $                     | -    |                      | $ | 952   |  | $ | 952   |  
| |                                            |  |                       |      |                      |   |       |  |   |       |  

|            |                      
|----------- | ---------------------
|NOTE 10:   | SHORT-TERM BANK LOANS

|            |                                                                                   |  |                              |      |                |   |       |  |   |       | 
|----------- | --------------------------------------------------------------------------------- |  | ---------------------------- | ---- | -------------- | - | ----- |  | - | ----- | 
|            |                                                                                   |  | Weighted 
  interest 
  rate |      | December
  31, |  
|            |                                                                                   |  |                              |      |                |  
|            |                                                                                   |  | %                            |      | 2006           |   | 2005  | 
|            |                                                                                   |  |                              |      |                |   |       | 
|            |                                                                                   |  |                              |      |                |   |       |  |   |       | 
|            | NIS                                                                               |  |                              | 7.42 |                | $ | 2,931 |  | $ | 2,271 | 
|            |                                                                                   |  |                              |      |                |   |       |  |   |       | 
|            |                                                                                   |  |                              |      |                |   |       |  |   |       | 
|            | Regarding collateral given to insure short-term credit and loans, see
  Note 12c. | 
|            |                                                                                   |  |                              |      |                |   |       |  |   |       | 
|NOTE 11:   | ACCRUED EXPENSES AND OTHER LIABILITIES                                            | 

| |                                              |  |                |     |      |   |       | 
| | -------------------------------------------- |  | -------------- | --- | ---- | - | ----- | 
| |                                              |  | December
  31, |    
| |                                              |  |                |    
| |                                              |  | 2006           |     | 2005 |  
| |                                              |  |                |     |      |  
| |                                              |  |                |     |      |   |       | 
| | Government of Israel  royalties
  and V.A.T |  | $              | 319 |      | $ | 306   | 
| | Provision for warranty                       |  |                | 73  |      |   | 73    | 
| | Professional
  services                      |  |                | 255 |      |   | 84    | 
| | Accrued expenses                             |  |                | -   |      |   | 738   | 
| | Other                                        |  |                | 352 |      |   | 205   | 
| |                                              |  |                |     |      |   |       | 
| |                                              |  |                |     |      |   |       | 
| |                                              |  | $              | 999 |      | $ | 1,406 | 
| |                                              |  |                |     |      |   |       | 

F-33

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS
  SUBSIDIARIES                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                      |                                                                                                 
|----------- | -------------------- | ------------------------------------------------------------------------------------------------
|NOTE 12:   | LONG-TERM BANK LOANS
|            |                      |                                                                                                 
|            | a.                   | Classified
  by linkage terms and interest rates, the total amount of the loans is as
  follows:

| |                               |  |                              |      |                |   |      |  |   |    | 
| | ----------------------------- |  | ---------------------------- | ---- | -------------- | - | ---- |  | - | -- | 
| |                               |  | Weighted 
  interest 
  rate |      | December
  31, |  
| |                               |  |                              |      |                |  
| |                               |  | %                            |      | 2006           |   | 2005 | 
| |                               |  |                              |      |                |   |      | 
| |                               |  |                              |      |                |   |      |  |   |    | 
| | NIS linked to the Israeli CPI |  |                              | 7.95 |                | $ | 18   |  | $ | 33 | 
| | NIS                           |  |                              | 6.95 |                |   | -    |  |   | 12 | 
| |                               |  |                              |      |                |   |      |  |   |    | 
| |                               |  |                              |      |                |   |      |  |   |    | 
| |                               |  |                              |      |                |   | 18   |  |   | 45 | 
| | Less  current maturities     |  |                              |      |                |   | 18   |  |   | 28 | 
| |                               |  |                              |      |                |   |      |  |   |    | 
| |                               |  |                              |      |                |   |      |  |   |    | 
| |                               |  |                              |      |                | $ | -    |  | $ | 17 | 
| |                               |  |                              |      |                |   |      |  |   |    | 

| |    |                                                                                 
| | -- | --------------------------------------------------------------------------------
| | b. | The loans
  mature in the following years subsequent to the balance sheet dates:

| |                                 |  |                |    | 
| | ------------------------------- |  | -------------- | -- | 
| |                                 |  | December
  31, |   
| |                                 |  |                |    | 
| |                                 |  |                |    | 
| | First year (current maturities) |  | $              | 18 | 
| |                                 |  |                |    | 

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                       
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------
|            | c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Odem has
  registered fixed pledges on its real estate, plant, equipment and vehicles.
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                       
|NOTE 13:   | 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). According to 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 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.

F-34

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS
  SUBSIDIARIES                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13:   | LONG-TERM CONVERTIBLE NOTE (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | 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 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 grater than the share price at the commitment date, no
  beneficial conversion feature exists.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | In March
  2005, the Investor elected to convert $308 of the Convertible 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 Convertible 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F-35

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS
  SUBSIDIARIES                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13:   | LONG-TERM CONVERTIBLE NOTE (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | 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. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | The maturity
  of the loans is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| |                                 |  |              |       |      |   |       | 
| | ------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
| |                                 |  | December 31, |      
| |                                 |  |              |      
| |                                 |  | 2006         |       | 2005 |  
| |                                 |  |              |       |      |  
| |                                 |  |              |       |      |   |       | 
| | First year (current maturities) |  | $            | 1,139 |      | $ | 326   | 
| | Second year                     |  |              | 1,104 |      |   | 663   | 
| | Third year                      |  |              | 331   |      |   | 496   | 
| |                                 |  |              |       |      |   |       | 
| |                                 |  |              |       |      |   |       | 
| |                                 |  |              | 2,574 |      |   | 1,485 | 
| | Less  discount                 |  |              | 264   |      |   | 238   | 
| |                                 |  |              |       |      |   |       | 
| |                                 |  |              |       |      |   |       | 
| |                                 |  | $            | 2,310 |      | $ | 1,247 | 
| |                                 |  |              |       |      |   |       | 

F-36

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                                        |              |                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- | -------------------------------------- | ------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 14:   | COMMITMENTS AND CONTINGENT LIABILITIES
|            |                                        |             
|            | a.                                     | Commitments:
|            |                                        |             
|            |                                        | 1.           | Royalty
  commitments:                                                                                                                                                                                                                       
|            |                                        |              |                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                        |              | a)                                                                                                                                                                                                                                            | Under the
  Companys research and development agreements with the Office of the Chief
  Scientist (OCS) and pursuant to applicable laws, the Company is required to
  pay royalties at the rate of 3.5% of sales of products developed with funds
  provided by the OCS, up to an amount equal to 100% of the research and
  development grants (dollar-linked) received from the OCS. The obligation to
  pay these royalties is contingent upon actual sales of the products.
  Royalties payable with respect to grants received under programs approved by
  the OCS after January 1, 1999, are subject to interest on the U.S.
  dollar-linked value of the total grants received at the annual rate of LIBOR
  applicable to U.S. dollar deposits at the time the grants are received.
|            |                                        |              |                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                        |              |                                                                                                                                                                                                                                               | As of
  December 31, 2006, the Company has an outstanding contingent obligation to
  pay royalties in the amount of approximately $3,430, 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 of LIBOR.                                                                                                                                                                                                                                                                                                                                                                        
|            |                                        |              |                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                        |              |                                                                                                                                                                                                                                               | As of
  December 31, 2006, the Company has an outstanding contingent obligation to
  pay royalties of $89 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
  2007, 2008 and 2009 are $39, 14 and $14 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 2008. The maximum breach of contract fees can amount to $40.
|            |                                        |             
|            |                                        |              | Lease
  payments for the facilities occupied by the Company and the Companys motor
  vehicles in 2006, 2005 and 2004 amounted to $343, $408 and $385,
  respectively.                                                                       

F-37

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                                                |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- | ---------------------------------------------- | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 14:   | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|            |                                               
|            | b.                                             | 1. | In July
  2002, the Company received a claim letter from a car leasing vendor, under
  which it claims that the Companys termination notice of the leasing
  agreement in March 2002 constitutes a breach of the agreement and the vendor
  is demanding compensation in which the nominal claim amount is of $292. No
  legal proceeding has yet been filed. At this stage, according to the
  Companys legal counsel assessment, the prospects of vendor to prevail and
  recover a significant amount seem remote. The financial statements do not
  include any provision in that regard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                                |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                                | 2. | In 1998, as
  part of PacInfo Share Purchase Agreement between the Company and Mr. Lee and
  Ms. Lee (the Sellers), the Company may be obligated to grant the Sellers a
  loan on a full recourse basis for certain tax payments the Sellers may be
  liable for and reimburse the Sellers for certain interest on taxes that they
  may owe, currently estimated at approximately $2 million. The Company will
  receive a security interest in shares of the Company that the Sellers holds
  at the time of the loan with a fair market value as of the date of the loan
  of at least 125% of the amount of the loan as security for the repayment of
  the loan. It is possible that the windup of PacInfo during 2002 and 2003 may
  have triggered such a tax event for the Sellers, which would result in an
  obligation by the Company to lend the Sellers such amount and to reimburse them
  for interest expenses incidental to the tax event. Based on the Companys
  legal counsel opinion and management estimation, no provision was recorded.
|            |                                                |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                                | 3. | In April 2006, BOSâNOVA EURL, a
French company and former distributor of the Company, served the Company with a claim
filed with the French Trade Tribunal alleging breach of exclusive distributor rights in
France and asserting ownership to certain intellectual property rights in the
Companys products. The plaintiff 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. The Company assesses the prospects of claim to
prevail and recover a significant amount, as remote. The financial statements include
provision in the respect. (See also Note 20).                                                                                                                                                                                                                                                                            

F-38

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------- | -------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | SHAREHOLDERS EQUITY
|            |                     
|            | a.                   | Private
  placement:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                      | In June
  2005, the Company completed a private placement for the Companys Ordinary
  shares. The Company issued to the investors 953,743 Ordinary shares at a
  purchase price of $2.30 per share, for a consideration of approximately $2,040
  (net of $154 of issuance expenses).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                      | The private
  placement included warrants of 572,219 for Ordinary shares. The exercise
  price of the warrants is $2.50 per Ordinary share during the first year from
  their issue date, and increasing to $2.75 per Ordinary share and $3.03 per
  Ordinary share, on the first and second anniversaries of the issue date,
  respectively. The warrant is exercisable, in whole or in part during a period
  of three years from issuance of the warrants. Pursuant to its undertaking in the
  Registration Rights Agreement, the Company filed with the Securities and
  Exchange Commission a registration statement on Form F-3 covering the
  Ordinary shares (including those underlying the warrants). The registration
  statement became effective with no delay on February 8, 2006.
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                      | The
  Companys outstanding warrants to shareholders as of December 31, 2006 are as
  follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| |                 |  |                                  |  |                              |  |                        |   |                       |   |  |  |  |         |  |  |             |  |  | 
| | --------------- |  | -------------------------------- |  | ---------------------------- |  | ---------------------- | - | --------------------- | - |  |  |  | ------- |  |  | ----------- |  |  | 
| | Issuance
  date |  | Warrants
  for
  Ordinary shares |  | Exercise
  price
  per share |  | Warrants
  exercisable |   | Exercisable
  through |  
| |                 |  |                                  |  |                              |  |                        |   |                       |  
| |                 |  |                                  |  |                              |  |                        |   |                       |   |  |  |  |         |  |  |             |  |  | 
| | June 2005       |  |                                  |  | 441,785                      |  |                        | $ | (*                    | ) |  |  |  | 441,785 |  |  | June
  2008 | 
| | July 2005       |  |                                  |  | 130,434                      |  |                        | $ | (*                    | ) |  |  |  | 130,434 |  |  | June
  2008 | 
| |                 |  |                                  |  |                              |  |                        |   |                       |   |  |  |  |         |  |  |             |  |  | 
| |                 |  |                                  |  |                              |  |                        |   |                       |   |  |  |  |         |  |  |             |  |  | 
| |                 |  |                                  |  | 572,219                      |  |                        |   |                       |   |  |  |  | 572,219 |  |  |             | 
| |                 |  |                                  |  |                              |  |                        |   |                       |   |  |  |  |         |  |  |             |  |  | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                    
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | *)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | The exercise
  price of the warrants is $2.50 per Ordinary share during the first year from
  their issue date, and increasing to $2.75 per Ordinary share and $3.03 per
  Ordinary share, on the first and second anniversaries of the issue date.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | b. | Stock option
  plans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                    
| |    | In May 2003,
  the Companys shareholders approved the adoption of the 2003 Stock Option
  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 2003 Stock Option 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 the 2003 Stock
  Option Plan, to 1,500,000. Any option which is canceled or forfeited before
  expiration, will become available for future grants.

F-39

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                              |                                                                                                                                                                                                                                                                                                                                                               
|----------- | ---------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | SHAREHOLDERS EQUITY (Cont.)
|            |                              |                                                                                                                                                                                                                                                                                                                                                               
|            |                              | As of
  December 31, 2006, an aggregate 200,073 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 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
  employee option activity under the Companys stock option plans as of
  December 31, 2006, 2005 and 2004 and changes for the years then ended are as
  follows:                                                                                                                                                                                

|                                         |  |                         |         |                                       |   |                     |  |                                       |          |                     |   |                                       |  |  |         |   |   |       | 
|---------------------------------------- |  | ----------------------- | ------- | ------------------------------------- | - | ------------------- |  | ------------------------------------- | -------- | ------------------- | - | ------------------------------------- |  |  | ------- | - | - | ----- | 
|                                         |  | Year ended December 31, |        
|                                         |  |                         |        
|                                         |  | 2006                    |         | 2005                                  |   | 2004                | 
|                                         |  |                         |         |                                       |   |                     | 
|                                         |  | Number
  of options     |         | Weighted
  average
  exercise
  price |   | Number
  of options |  | Weighted
  average
  exercise
  price |          | Number
  of options |   | Weighted
  average
  exercise
  price | 
|                                         |  |                         |         |                                       |   |                     |  |                                       |          |                     |   |                                       | 
|                                        
|Options outstanding at beginning of year |  |                         | 400,250 |                                       | $ | 4.77                |  |                                       | 430,576  |                     | $ | 9.47                                  |  |  | 426,252 |   | $ | 11.93 | 
|Changes during the year:                 |  |                         |         |                                       |   |                     |  |                                       |          |                     |   |                                       |  |  |         |   |   |       | 
|Granted                                  |  |                         | 535,237 |                                       | $ | 2.67                |  |                                       | 107,000  |                     | $ | 2.91                                  |  |  | 92,500  |   | $ | 0.54  | 
|Exercised                                |  |                         | (68,747 | )                                     | $ | 1.98                |  |                                       | (25,088  | )                   | $ | 2.00                                  |  |  | -       |   | $ | -     | 
|Forfeited or cancelled                   |  |                         | (44,080 | )                                     | $ | 10.68               |  |                                       | (112,238 | )                   | $ | 21.66                                 |  |  | (88,176 | ) | $ | 11.97 | 
|                                         |  |                         |         |                                       |   |                     |  |                                       |          |                     |   |                                       |  |  |         |   |   |       | 
|                                         |  |                         |         |                                       |   |                     |  |                                       |          |                     |   |                                       |  |  |         |   |   |       | 
|Options outstanding at end of year       |  |                         | 822,660 |                                       | $ | 3.36                |  |                                       | 400,250  |                     | $ | 4.77                                  |  |  | 430,576 |   | $ | 9.47  | 
|                                         |  |                         |         |                                       |   |                     |  |                                       |          |                     |   |                                       |  |  |         |   |   |       | 
|                                         |  |                         |         |                                       |   |                     |  |                                       |          |                     |   |                                       |  |  |         |   |   |       | 
|Options exercisable at end of year       |  |                         | 162,423 |                                       | $ | 7.29                |  |                                       | 217,750  |                     | $ | 7.40                                  |  |  | 248,790 |   | $ | 5.49  | 
|                                         |  |                         |         |                                       |   |                     |  |                                       |          |                     |   |                                       |  |  |         |   |   |       | 

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The
  weighted-average date of grant fair value of options granted during the years
  ended December 31, 2006, 2005 and 2004 were $1.45, $2.13 and $2.58,
  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | As of
  December 31, 2006, there was $611 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 1.5 years.                                                                                                                                                                                                                                                                                                         
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | On November
  18, 2004, upon acquisition of Odem, the Company granted 73,000 options to one
  of Odems key employee. Each option can be exercised to purchase one Ordinary
  share of the Company without consideration. The options vest at the end of
  three years from the date of grant and expire ten years from the date of the
  grant. The market price of the Companys shares on the date of grant was
  $2.5. Accordingly, the Company recorded in the year ended December 31, 2005,
  a compensation expense of $62. This expense was included as part of general
  and administrative expenses.

F-40

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                              |                                                                                                                                                                                                                                                                                                                                                                      
|----------- | ---------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:   | SHAREHOLDERS EQUITY (Cont.)
|            |                              |                                                                                                                                                                                                                                                                                                                                                                      
|            |                              | 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.
|            |                              |                                                                                                                                                                                                                                                                                                                                                                      
|            |                              | On May 18,
  2006, the shareholders approved to grant a bonus of 21,666 Ordinary shares to
  the Chairman of the Companys Board at no consideration. The fair value of
  the shares granted was $60 at the date of grant.                                                                                                                                           
|            |                              |                                                                                                                                                                                                                                                                                                                                                                      
|            |                              | Except for
  these options, all other options granted to employees in 2006, 2005 and 2004,
  have an exercise price equal to or higher than the market value of the
  Ordinary shares at the date of grant.                                                                                                                                                          
|            |                              |                                                                                                                                                                                                                                                                                                                                                                      
|            |                              | The options
  granted to employees outstanding as of December 31, 2006 have been separated
  into ranges of exercise prices, as follows:                                                                                                                                                                                                                             

| |                             |  |                                                     |         |                                       |   |                                                             |  |                                                     |      |                                                                  |  |         |  |   |       | 
| | --------------------------- |  | --------------------------------------------------- | ------- | ------------------------------------- | - | ----------------------------------------------------------- |  | --------------------------------------------------- | ---- | ---------------------------------------------------------------- |  | ------- |  | - | ----- | 
| | Range of
  exercise
  price |  | Options
  outstanding
  as of
  December 31,
  2006 |         | Weighted
  average
  exercise
  price |   | Weighted
  average
  remaining
  contractual
  life (years) |  | Options
  exercisable
  as of
  December 31,
  2006 |      | Weighted
  average
  exercise
  price of
  options
  exercisable | 
| |                             |  |                                                     |         |                                       |   |                                                             |  |                                                     |      |                                                                  | 
| |                             |  |                                                     |         |                                       |   |                                                             |  |                                                     |      |                                                                  |  |         |  |   |       | 
| | $ 0                         |  |                                                     | 73,000  |                                       | $ | 0.00                                                        |  |                                                     | 7.99 |                                                                  |  | -       |  | $ | 0.00  | 
| | $ 1.84-2.00                 |  |                                                     | 67,961  |                                       | $ | 1.89                                                        |  |                                                     | 3.00 |                                                                  |  | 67,961  |  | $ | 1.89  | 
| | $ 2.28-3.08                 |  |                                                     | 628,237 |                                       | $ | 2.70                                                        |  |                                                     | 5.18 |                                                                  |  | 41,000  |  | $ | 2.46  | 
| | $ 6.8                       |  |                                                     | 26,137  |                                       | $ | 6.80                                                        |  |                                                     | 1.34 |                                                                  |  | 26,137  |  | $ | 6.80  | 
| | $ 18.00                     |  |                                                     | 750     |                                       | $ | 18.00                                                       |  |                                                     | 2.36 |                                                                  |  | 750     |  | $ | 18.00 | 
| | $ 28.00                     |  |                                                     | 26,575  |                                       | $ | 28.00                                                       |  |                                                     | 1.35 |                                                                  |  | 26,575  |  | $ | 28.00 | 
| |                             |  |                                                     |         |                                       |   |                                                             |  |                                                     |      |                                                                  |  |         |  |   |       | 
| |                             |  |                                                     |         |                                       |   |                                                             |  |                                                     |      |                                                                  |  |         |  |   |       | 
| |                             |  |                                                     | 822,660 |                                       | $ | 3.36                                                        |  |                                                     | 5.01 |                                                                  |  | 162,423 |  | $ | 7.29  | 
| |                             |  |                                                     |         |                                       |   |                                                             |  |                                                     |      |                                                                  |  |         |  |   |       | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c. | Options
  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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The
  compensation expenses that have been recorded in the consolidated financial
  statements regarding these stock options for the years ended December 31,
  2006, 2005 and 2004 were $116, $348 and $117 respectively.                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | On May 18,
  2006, the shareholders approved to grant a bonus of 65,000 Ordinary shares to
  the Companys former President and CEO at no consideration. The fair value of
  the shares granted was $180 at the date of grant.                                                                                                                                                                                                                                                                                             

F-41

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                              |                                                                                                   
|----------- | ---------------------------- | --------------------------------------------------------------------------------------------------
|NOTE 15:   | SHAREHOLDERS EQUITY (Cont.)
|            |                              |                                                                                                   
|            |                              | The
  Companys outstanding options to service providers as of December 31, 2006
  are as follows:

| |                |  |                                 |         |                            |   |                       |  |                     |         |  |                               | 
| | -------------- |  | ------------------------------- | ------- | -------------------------- | - | --------------------- |  | ------------------- | ------- |  | ----------------------------- | 
| | Issuance date  |  | Options for
  Ordinary
  shares |         | Exercise price
  per share |   | Options
  exercisable |  | Exercisable through |        
| |                |  |                                 |         |                            |   |                       |  |                     |        
| |                |  |                                 |         |                            |   |                       |  |                     |         |  |                               | 
| | October 2002   |  |                                 | 75,000  |                            | $ | 4.00                  |  |                     | 75,000  |  | June 2011                     | 
| | January 2004   |  |                                 | 216,282 |                            | $ | 3.00                  |  |                     | 216,282 |  | May 2013                      | 
| | June 2004      |  |                                 | 130,000 |                            | $ | 4.04                  |  |                     | 130,000 |  | June 2011                     | 
| | March 2005     |  |                                 | 10,000  |                            | $ | 3.08                  |  |                     | 10,000  |  | March 2007                    | 
| | March 2005     |  |                                 | 10,000  |                            | $ | 3.08                  |  |                     | 3,334   |  | March 2010                    | 
| | June 2005      |  |                                 | 20,000  |                            | $ | 3.08                  |  |                     | 15,002  |  | June 2010                     | 
| | September 2005 |  |                                 | 73,052  |                            | $ | 4.04                  |  |                     | 73,052  |  | September 2012                | 
| | March 2006     |  |                                 | 10,000  |                            | $ | 2.30                  |  |                     | 10,000  |  | December 2010                 | 
| | May 2006       |  |                                 | 187,100 |                            | $ | 2.68                  |  |                     | -       |  | May 2010 - through
  May 2012 | 
| | August 2006    |  |                                 | 48,701  |                            | $ | 5.30                  |  |                     | 48,701  |  | August 2013                   | 
| | August 2006    |  |                                 | 24,351  |                            | $ | 4.04                  |  |                     | 24,351  |  | August 2013                   | 
| |                |  |                                 |         |                            |   |                       |  |                     |         |  |                               | 
| |                |  |                                 |         |                            |   |                       |  |                     |         |  |                               | 
| |                |  |                                 | 804,486 |                            |   |                       |  |                     | 605,722 |  |                               | 
| |                |  |                                 |         |                            |   |                       |  |                     |         |  |                               | 

|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|----------- | --------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 16:   | 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%.                                                                                         
|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                 | The Odem
  operation is subject to regular income tax rate while the Company and BOScom
  enjoy the status of an Approved Enterprise, as described below.                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | b.              | Tax benefits
  under the Law for the Encouragement of Capital Investments, 1959 (the
  Investment Law):                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                 | The
  Companys production facilities have been granted an Approved Enterprise
  status under the Investment Law, with respect to four separate investment
  programs. According to the Investments Law, the Company has elected to
  receive for the first program state-guaranteed loans and grants and for the
  second and third programs, the Company has elected to receive only
  state-guaranteed loans. As for the fourth program, the Company has elected
  the alternative benefits and has waived Government grants in return for a
  tax exemption.

F-42

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|----------- | ----------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 16:   | TAXES ON INCOME (Cont.)
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                         | The Company
  is also a Foreign Investors Company, as defined by the above mentioned law,
  and as such, is entitled to a 10-year period of benefits and to an additional
  reduction in tax rates, up to 10% or 25% (based on the percentage of foreign
  ownership in each taxable year).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                         | Income from
  the second, third and fourth programs, which commenced operations in 1992,
  1994, 1997, respectively, may be exempt from income tax for a period of ten
  years commencing with the first year in which they generate taxable income.
  During 2002, as part of the transfer of operations from the Company to
  BOScom, all tax benefits that were related to the Approved Enterprise of
  the Company were transferred to BOScom. In addition, since 2002, the
  Companys investments are not subject to the Approved Enterprise program.
  Accordingly, taxable income generated in that period will be split according
  to the assets ratio method into a taxable income that is entitled to the
  benefits of the Approved Enterprise and into an income that will be taxed
  at the regular corporate tax rate as described in article a above.
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                         | BOScom also
  has a production facility, which was granted an Approved Enterprise status
  and had a separate investment program. BOScom elected to receive the
  alternative benefits. Income derived from BOScoms investment programs,
  which commenced operations in 1997 and 2002, may be exempt from income tax
  for a period of ten years commencing with the first year in which taxable
  income is generated.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                         | The period
  of tax benefits detailed above is subject to limits of the earlier of 12
  years from commencement of production, or 14 years from receiving the
  approval. Accordingly, the period of benefits relating to all investment
  programs expire in 2001 through 2014.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                         | The entitlement
  to the above benefits is conditional upon the Companys and BOScoms
  fulfilling the conditions stipulated by the above law, regulations published
  thereunder and the instruments of approval for the specific investments in
  Approved Enterprises. In the event of failure to comply with these
  conditions, the benefits may be canceled and the Company and BOScom may be
  required to refund the amount of the benefits, in whole or in part, including
  interest. The management believes that the companies are meeting the
  aforementioned conditions.                                                                                                                                                                                                                                                                                  
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                         | The
  tax-exempt income attributable to the Approved Enterprise can be
  distributed to shareholders without imposing tax liability on the Company
  only upon the complete liquidation of the Company. In the event of a
  distribution of such tax-exempt income as a cash dividend in a manner other
  than in the complete liquidation of the Company and BOScom, the Company and
  BOScom will be required to pay tax at the rate of 10% to 25% on the amount
  distributed (based on the percentage of foreign ownership in each taxable
  year). In addition, these dividends will be subject to 15% withholding tax.                                                                                                                                                                                                                                              
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                         | As of
  December 31, 2006, the Company and BOScom have not yet utilized any tax
  benefit since they have not generated any taxable income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-43

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- | ----------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 16:   | TAXES ON INCOME (Cont.)
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                         | If the
  Company and BOScom derive income from sources other than an Approved
  Enterprise, such income will be taxable at the regular corporate tax rate as
  described in a above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                         | On April 1,
  2005, an amendment to the Investment Law came into effect (the Amendment)
  and has significantly changed the provisions of the Investment Law. The
  Amendment limits the scope of enterprises which may be approved by the
  Investment Center by setting criteria for the approval of a facility as an
  Approved Enterprise, such as provisions generally requiring that at least
  25% of the Approved Enterprises income will be derived from export.
  Additionally, the Amendment enacted major changes in the manner in which tax
  benefits are awarded under the Investment Law so that companies no longer
  require Investment Center approval in order to qualify for tax benefits.
  However, the Investment Law provides that terms and benefits included in any
  certificate of approval already granted will remain subject to the provisions
  of the Investment Law as they were on the date of such approval. Therefore,
  the Israeli subsidiarys existing Approved Enterprise will generally not be
  subject to the provisions of the Amendment. As a result of the amendment,
  tax-exempt income generated under the provision of the new law will subject
  the Company to taxes upon distribution or liquidation and the Company may be
  required to record deferred tax liability with respect to such tax-exempt
  income. As of December 31, 2006, the Company did not generate income subject
  to the provision of the new law.
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | c.                      | Loss
  carryforward:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                         | Domestic
  (Israel):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                         | The Company
  and its Israeli subsidiary have accumulated losses for Israel income tax
  purposes as of December 31, 2006, in the amount of approximately $30,985.
  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, 2006, the U.S. subsidiaries which were classified as
  discontinued operations had U.S. Federal and State net operating loss
  carryforward of approximately $10,265, that can be carried forward and offset
  against taxable income and expire through 2022. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                         | As of
  December 31, 2006, BOS UK had net operating loss carryforward of
  approximately $3,500. In February 2006, the Company filed with the UK
  Companies House an application to dissolve BOS UK.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F-44

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS
  SUBSIDIARIES                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                         |                                                                                                                                                                                                                                                                                                                    
|----------- | ----------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 16:   | TAXES ON INCOME (Cont.)
|            |                         |                                                                                                                                                                                                                                                                                                                    
|            | 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, |        
| |                                                      |  |                |        
| |                                                      |  | 2006           |         | 2005 |  
| |                                                      |  |                |         |      |  
| | Assets in respect of:                                |  |                |         |      |   |         |  
| |                                                      |  |                |         |      |   |         |  
| | Property, plant and equipment                        |  | $              | 3       |      | $ | 3       |  
| | Allowances and provisions                            |  |                | 296     |      |   | 865     |  
| | Net operating loss carryforward                      |  |                | 10,674  |      |   | 9,350   |  
| |                                                      |  |                |         |      |   |         |  
| |                                                      |  |                |         |      |   |         |  
| |                                                      |  |                | 10,973  |      |   | 10,218  |  
| | Liabilities in respect of
  intangible assets        |  |                | (422    | )    |   | (486    | )
| |                                                      |  |                |         |      |   |         |  
| |                                                      |  |                |         |      |   |         |  
| | Net deferred tax assets before
  valuation allowance |  |                | 10,551  |      |   | 9,732   |  
| | Valuation allowance (1)                              |  |                | (10,936 | )    |   | (10,187 | )
| |                                                      |  |                |         |      |   |         |  
| |                                                      |  |                |         |      |   |         |  
| | Net deferred tax liability                           |  | $              | (385    | )    | $ | (455    | )
| |                                                      |  |                |         |      |   |         |  

| |     |                                                                                                                                                                                                                                                                                                                                          
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The Company
  has provided valuation allowances for BOS, BOScom and Quasar 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.

| |                             |  |                |      |      |   |      |  
| | --------------------------- |  | -------------- | ---- | ---- | - | ---- | -
| |                             |  | December
  31, |     
| |                             |  |                |     
| |                             |  | 2006           |      | 2005 |  
| |                             |  |                |      |      |  
| | Presented in balance sheet: |  |                |      |      |   |      |  
| |                             |  |                |      |      |   |      |  
| | Current assets              |  | $              | 14   |      | $ | 13   |  
| | Long-term assets            |  |                | 23   |      |   | 18   |  
| | Current liabilities         |  |                | (60  | )    |   | (64  | )
| | Long-term liabilities       |  |                | (362 | )    |   | (422 | )
| |                             |  |                |      |      |   |      |  
| |                             |  |                |      |      |   |      |  
| | Net deferred tax liability  |  | $              | (385 | )    | $ | (455 | )
| |                             |  |                |      |      |   |      |  
| |                             |  |                |      |      |   |      |  
| | Net deferred tax  domestic |  | $              | (385 | )    | $ | (455 | )
| |                             |  |                |      |      |   |      |  

F-45

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS
  SUBSIDIARIES                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                         |                                                           
|----------- | ----------------------- | ----------------------------------------------------------
|NOTE 16:   | TAXES ON INCOME (Cont.)
|            |                         |                                                           
|            | e.                      | Tax benefits (taxes on income) are comprised as
  follows:

| |          |  |                           |     |      |   |      |   |   |     |  
| | -------- |  | ------------------------- | --- | ---- | - | ---- | - | - | --- | -
| |          |  | Year ended
  December 31, |    
| |          |  |                           |    
| |          |  | 2006                      |     | 2005 |   | 2004 |  
| |          |  |                           |     |      |   |      |  
| |          |  |                           |     |      |   |      |   |   |     |  
| | Current  |  | $                         | (17 | )    | $ | (259 | ) | $ | (63 | )
| | Deferred |  |                           | 106 |      |   | 55   |   |   | 43  |  
| |          |  |                           |     |      |   |      |   |   |     |  
| |          |  |                           |     |      |   |      |   |   |     |  
| |          |  | $                         | 89  |      | $ | (204 | ) | $ | (20 | )
| |          |  |                           |     |      |   |      |   |   |     |  
| |          |  |                           |     |      |   |      |   |   |     |  
| | Domestic |  | $                         | 106 |      | $ | (74  | ) | $ | (20 | )
| | Foreign  |  |                           | (17 | )    |   | (130 | ) |   | -   |  
| |          |  |                           |     |      |   |      |   |   |     |  
| |          |  |                           |     |      |   |      |   |   |     |  
| |          |  | $                         | 89  |      | $ | (204 | ) | $ | (20 | )
| |          |  |                           |     |      |   |      |   |   |     |  

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

| |                                                                                                     |  |   |        |   |   |     |   |   |     |  
| | --------------------------------------------------------------------------------------------------- |  | - | ------ | - | - | --- | - | - | --- | -
| | Income
  (loss) before taxes on income from operating activities related to continuing
  operations |  | $ | (1,682 | ) | $ | 167 |   | $ | 147 |  
| |                                                                                                     |  |   |        |   |   |     |   |   |     |  
| |                                                                                                     |  |   |        |   |   |     |   |   |     |  
| | Statutory
  tax rate                                                                                |  |   | 31     | % |   | 34  | % |   | 35  | %
| |                                                                                                     |  |   |        |   |   |     |   |   |     |  
| |                                                                                                     |  |   |        |   |   |     |   |   |     |  
| | Provision
  at statutory tax rate                                                                   |  |   | (521   | ) |   | 57  |   |   | 51  |  
| | Non-deductible
  expenses                                                                           |  |   | 21     |   |   | 219 |   |   | 16  |  
| | Deferred
  taxes on losses reserves and allowances for which a valuation allowance was
  provided   |  |   | 411    |   |   | (72 | ) |   | (47 | )
| |                                                                                                     |  |   |        |   |   |     |   |   |     |  
| |                                                                                                     |  |   |        |   |   |     |   |   |     |  
| | Taxes
  on income (tax benefit)                                                                     |  | $ | (89    | ) | $ | 204 |   | $ | 20  |  
| |                                                                                                     |  |   |        |   |   |     |   |   |     |  

| |    |                                                                                                
| | -- | -----------------------------------------------------------------------------------------------
| | g. | Tax
  assessments:                                                                             
| |    |                                                                                                
| |    | BOS and
  BOScom have final assessments through 2000. Odem has final assessment through
  2004.

F-46

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS
  SUBSIDIARIES                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                                                       |                                  
|----------- | ----------------------------------------------------- | ---------------------------------
|NOTE 17:   | SUPPLEMENTARY INFORMATION TO STATEMENTS OF OPERATIONS
|            |                                                       |                                  
|            | a.                                                    | Financial income (expenses), net:

| |                                                           |  |                           |      |      |   |      |   |   |      |  
| | --------------------------------------------------------- |  | ------------------------- | ---- | ---- | - | ---- | - | - | ---- | -
| |                                                           |  | Year ended
  December 31, |     
| |                                                           |  |                           |     
| |                                                           |  | 2006                      |      | 2005 |   | 2004 |  
| |                                                           |  |                           |      |      |   |      |  
| | Financial
  income:                                       |  |                           |      |      |   |      |   |   |      |  
| | Interest
  on bank deposits and marketable securities     |  | $                         | 73   |      | $ | 57   |   | $ | 98   |  
| | Other
  (mainly foreign currency translation income)      |  |                           | 65   |      |   | -    |   |   | 100  |  
| |                                                           |  |                           |      |      |   |      |   |   |      |  
| |                                                           |  |                           |      |      |   |      |   |   |      |  
| |                                                           |  |                           | 138  |      |   | 57   |   |   | 198  |  
| |                                                           |  |                           |      |      |   |      |   |   |      |  
| | Financial
  expenses:                                     |  |                           |      |      |   |      |   |   |      |  
| | In
  respect of long-term bank loans and convertible note |  |                           | (694 | )    |   | (427 | ) |   | (324 | )
| | Other
  (mainly foreign currency translation losses)      |  |                           | (70  | )    |   | (78  | ) |   | (32  | )
| |                                                           |  |                           |      |      |   |      |   |   |      |  
| |                                                           |  |                           |      |      |   |      |   |   |      |  
| |                                                           |  |                           | (764 | )    |   | (505 | ) |   | (356 | )
| |                                                           |  |                           |      |      |   |      |   |   |      |  
| |                                                           |  |                           |      |      |   |      |   |   |      |  
| |                                                           |  | $                         | (626 | )    | $ | (448 | ) | $ | (158 | )
| |                                                           |  |                           |      |      |   |      |   |   |      |  

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

| |                                                                  |  |   |        |   |   |        |   |   |        |  
| | ---------------------------------------------------------------- |  | - | ------ | - | - | ------ | - | - | ------ | -
| | Numerator for basic and
  diluted net earnings (loss) per share: |  |   |        |   |   |        |   |   |        |  
| | Loss from continuing
  operations                                |  | $ | (1,593 | ) | $ | (2,010 | ) | $ | (198   | )
| | Income (loss) from
  discontinued operations                     |  |   | 1,685  |   |   | (1,595 | ) |   | (1,855 | )
| |                                                                  |  |   |        |   |   |        |   |   |        |  
| |                                                                  |  |   |        |   |   |        |   |   |        |  
| | Net earnings (loss) available
  to Ordinary shareholders         |  | $ | 92     |   | $ | (3,605 | ) | $ | (2,053 | )
| |                                                                  |  |   |        |   |   |        |   |   |        |  

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

| |                                                                                |  |   |       |   |   |       |   |   |       |  
| | ------------------------------------------------------------------------------ |  | - | ----- | - | - | ----- | - | - | ----- | -
| | Weighted average Ordinary
  shares outstanding (in thousands)                  |  |   | 6,675 |   |   | 5,616 |   |   | 4,631 |  
| |                                                                                |  |   |       |   |   |       |   |   |       |  
| | Diluted weighted average
  shares outstanding (in thousands)                   |  |   | 6,793 |   |   | 5,616 |   |   | 4,631 |  
| |                                                                                |  |   |       |   |   |       |   |   |       |  
| | Basic and diluted net loss
  per share from continuing operations              |  | $ | (0.24 | ) | $ | (0.36 | ) | $ | (0.04 | )
| |                                                                                |  |   |       |   |   |       |   |   |       |  
| | Basic and diluted net
  earnings (loss) per share from discontinued operations |  | $ | 0.25  |   | $ | (0.28 | ) | $ | (0.40 | )
| |                                                                                |  |   |       |   |   |       |   |   |       |  
| | Basic and diluted net
  earnings (loss) per share                              |  | $ | 0.01  |   | $ | (0.64 | ) | $ | (0.44 | )
| |                                                                                |  |   |       |   |   |       |   |   |       |  

F-47

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS
  SUBSIDIARIES                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                                      
|----------- | -------------------------------------
|NOTE 18:   | SEGMENTS AND GEOGRAPHICAL INFORMATION

| |                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                    
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------
| | Commencing
  2006 and subsequent to the disposal of the communication segment in 2006 and
  the acquisitions of Odem and Quasar, the Company manages its business with
  two reportable segments, consisting of the software solutions segment
  (previously named the connectivity segment) and the supply chain solutions
  segment (previously named the electronic components segment).
| |                                                                                                                                                                                                                                                                                                                                                                                            
| | 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 2006, 2005 and 2004 were as follow:

| |                           |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| | ------------------------- |  | ----------------- | ----- | -------------------------- | - | --------------- | - | ------------ | ------ | - |  | - | ------
| |                           |  | Softwaresolutions |       | Supply
  chain
  solutions |   | Not
  allocated |   | Consolidated |       
| |                           |  |                   |       |                            |   |                 |   |              |       
| | 2006                      |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| |                           |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| | Revenues                  |  | $                 | 2,058 |                            | $ | 18,859          |   | $            | -      |   |  | $ | 20,917
| |                           |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| | Gross profit              |  | $                 | 1,341 |                            | $ | 3,376           |   | $            | -      |   |  | $ | 4,717 
| |                           |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| | Operating loss            |  | $                 | (35   | )                          | $ | (64             | ) | $            | (957   | ) |  | $ | (1,056
| |                           |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| | Assets related to segment |  | $                 | 243   |                            | $ | 13,700          |   | $            | 10,586 |   |  | $ | 24,529
| |                           |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| | 2005                      |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| |                           |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| | Revenues                  |  | $                 | 3,926 |                            | $ | 20,253          |   | $            | (80    | ) |  | $ | 24,099
| |                           |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| | Gross profit              |  | $                 | 2,425 |                            | $ | 3,820           |   | $            | -      |   |  | $ | 6,245 
| |                           |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| | Operating income (loss)   |  | $                 | 235   |                            | $ | 727             |   | $            | (702   | ) |  | $ | 260   
| |                           |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| | Assets related to segment |  | $                 | 391   |                            | $ | 11,535          |   | $            | 10,720 |   |  | $ | 22,646
| |                           |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| | 2004                      |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| |                           |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| | Revenues                  |  | $                 | 5,011 |                            | $ | 1,908           |   | $            | -      |   |  | $ | 6,919 
| |                           |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| | Gross profit              |  | $                 | 2,933 |                            | $ | 327             |   | $            | -      |   |  | $ | 3,260 
| |                           |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| | Operating income (loss)   |  | $                 | 1,009 |                            | $ | 66              |   | $            | (770   | ) |  | $ | 305   
| |                           |  |                   |       |                            |   |                 |   |              |        |   |  |   |       
| | Assets related to segment |  | $                 | 616   |                            | $ | 8,880           |   | $            | 10,592 |   |  | $ | 22,088

F-48

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS
  SUBSIDIARIES                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                                                
|----------- | -----------------------------------------------
|NOTE 18:   | SEGMENTS AND GEOGRAPHICAL INFORMATION
  (Cont.)

| |    |                                                                                                                                      
| | -- | -------------------------------------------------------------------------------------------------------------------------------------
| | b. | The
  following presents total revenues and long-lived assets for the years 2006,
  2005 and 2004 based on the location of customers:

| |                     |  |                         |        |                        |   |                  |  |                        |        |                  |   |                        |  |   |       |  |   |       | 
| | ------------------- |  | ----------------------- | ------ | ---------------------- | - | ---------------- |  | ---------------------- | ------ | ---------------- | - | ---------------------- |  | - | ----- |  | - | ----- | 
| |                     |  | Year ended December 31, |       
| |                     |  |                         |       
| |                     |  | 2006                    |        | 2005                   |   | 2004             | 
| |                     |  |                         |        |                        |   |                  | 
| |                     |  | Total
  revenues        |        | Long-lived
  assets *) |   | Total
  revenues |  | Long-lived
  assets *) |        | Total
  revenues |   | Long-lived
  assets *) | 
| |                     |  |                         |        |                        |   |                  |  |                        |        |                  |   |                        | 
|
| | United
  States     |  | $                       | 2,848  |                        | $ | -                |  | $                      | 3,439  |                  | $ | -                      |  | $ | 3,251 |  | $ | -     | 
| | Far
  East          |  |                         | 2,019  |                        |   | -                |  |                        | 6,083  |                  |   | -                      |  |   | 701   |  |   | -     | 
| | Europe              |  |                         | 1,173  |                        |   | -                |  |                        | 1,171  |                  |   | -                      |  |   | 600   |  |   | -     | 
| | Israel
  and others |  |                         | 14,877 |                        |   | 3,101            |  |                        | 13,406 |                  |   | 3,455                  |  |   | 2,367 |  |   | 3,745 | 
| |                     |  |                         |        |                        |   |                  |  |                        |        |                  |   |                        |  |   |       |  |   |       | 
|
| |                     |  | $                       | 20,917 |                        | $ | 3,101            |  | $                      | 24,099 |                  | $ | 3,455                  |  | $ | 6,919 |  | $ | 3,745 | 
| |                     |  |                         |        |                        |   |                  |  |                        |        |                  |   |                        |  |   |       |  |   |       | 

| |    |                                                                                                                                                                                                                                              |                                                                                         
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------
| |    | 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, |   
| |                                                                                                          |  |                         |   
| |                                                                                                          |  | 2006                    |    | 2005 |  | 2004 |  
| |                                                                                                          |  |                         |    |      |  |      |  
|
| | Customer A                                                                                               |  |                         | 7  | %    |  | 11   | % |  | 46 | %
| |                                                                                                          |  |                         |    |      |  |      |   |  |    |  
|
| | Customer B                                                                                               |  |                         | 24 | %    |  | 16   | % |  | -  |  
| |                                                                                                          |  |                         |    |      |  |      |   |  |    |  
| |                                                                                                          |  |                         |    |      |  |      |   |  |    |  
| | Major
  customers debt balances as of December 31, 2006 and 2005 are $6,530 and
  $1,433, respectively.

F-49

---

---



|                                                           
|-----------------------------------------------------------
|B.O.S. BETTER ONLINE SOLUTIONS LTD.                        
|AND ITS
  SUBSIDIARIES                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except for share and share data)

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 19:   | RELATED PARTIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | M&A
  Addendum to the Service Agreement of Cukierman & Co.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | 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.
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | The payments
  the Company paid according to the Service Agreement are:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| |                                                                                                                        |  |                |     |      |   |     | 
| | ---------------------------------------------------------------------------------------------------------------------- |  | -------------- | --- | ---- | - | --- | 
| |                                                                                                                        |  | December
  31, |    
| |                                                                                                                        |  |                |    
| |                                                                                                                        |  | 2006           |     | 2005 |  
| |                                                                                                                        |  |                |     |      |  
| |                                                                                                                        |  |                |     |      |   |     | 
| | Business development                                                                                                   |  | $              | 120 |      | $ | 109 | 
| | Success fee in respect of issuance of
  convertible loan,
  investment in Odem and private placements                  |  |                | 75  |      |   | 397 | 
| |                                                                                                                        |  |                |     |      |   |     | 
| |                                                                                                                        |  |                |     |      |   |     | 
| |                                                                                                                        |  | $              | 195 |      | $ | 506 | 
| |                                                                                                                        |  |                |     |      |   |     | 
| |                                                                                                                        |  |                |     |      |   |     | 
| | Current
  liabilities in respect of related parties as of December 31, 2006 and 2005
  were $13 and $23, respectively.
| |                                                                                                                       

|         |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |  |  |  |  | 
|-------- | ---------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|NOTE 20: | SUBSEQUENT EVENT
|         |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         | a.               | Right
  offering:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                  | On March 11,
  2007, the Company announced that the registration statement previously filed
  by BOS with the Securities and Exchange Commission and the Israel Securities
  Authority, has been declared effective on March 8, 2007. All of the Companys
  shareholders, who own shares as of March 19, 2007, the record date, will be
  entitled to participate in a $5 million right offering, and receive one right
  for each 3.3724 Ordinary shares owned on the record date. Each right will
  entitle the holder to purchase one Ordinary share, at a subscription price of
  $2.50.
|         |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         | b.               | BOSâNOVA EURL lawsuit
(UNAUDITED):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                  | On September 18, 2007,  the French Trade  Tribunal  rejected the Companys  assertion
that  jurisdiction  is with the Israeli  courts. The Company   appealed  this
decision.                                                                                                                                                                                                                                                                                                                                                                                                                

F-50

---

---