**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **Washington,
D.C. 20549**
 
 **FORM
10-KSB**
 
 (Mark
One)
 [X]
 ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF
1934
 
 For the
fiscal year ended December
31, 2004
 
 [
]
 TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
transition period from [ ] to [ ]
 
 Commission
file number 333-91988
 
 **HOTEL
      OUTSOURCE MANAGEMENT INTERNATIONAL INC.**(Name
      of Small Business Issuer in its charter)**Delaware**
    **13-4167393**(State
      of Incorporation)
    (IRS
      Identification Number)**80
      Wall Street, Suite 815,****New
      York, New York**
    **10005**(Address
      of principal executive offices)
    (Zip
      Code)
 
 Issuer's
telephone number (212) 344-1600
 
 Securities
registered pursuant to Section 12(b) of the Act:
 
 Name
      of each exchange on whichTitle
      of each class
    registered0
    0
 
 
 
 Securities
registered pursuant to Section 12(g) of the Act:
 
 **Common
Stock, par value $0.001**
 (Title of
Class)
 
 Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 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 [ ]
 
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
 
 State
issuer's revenues for its most recent fiscal year. $1,647,000.
 
 State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates of computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days:
 
 **16,895,382
shares at $0.50** **(1)** **= $8,447,691**
 
 (1)
Average of bid and ask closing prices on March 15, 2005
 
 **(APPLICABLE
ONLY TO CORPORATE REGISTRANTS)**
 
 State the
number of shares outstanding of each of the Issuer’s classes of common stock, as
of the latest practicable date:
 
 28,874,880
common shares issued and outstanding as of March 30, 2005
 
 **DOCUMENTS
INCORPORATED BY REFERENCE**
 
 See index
to exhibits
 
 Transitional
Small Business Disclosure Format (Check One): Yes [ ] No [X]
 
  
  **FORM
10-KSB**
 
 **HOTEL
OUTSOURCE MANAGEMENT INTERNATIONAL INC.**
 
 **PART
I.**
 
 **ITEM
1.       DESCRIPTION OF BUSINESS**
 
 **General**
 
 Hotel
Outsource Management International, Inc. is a holding company for several
subsidiaries which distribute, market, and operate computerized mini-bars in
hotels located in Israel, Jordan, the United States, Europe, and South Africa.
Hotel Outsource Management International, Inc. and its subsidiaries may
collectively be referred to as HOMI.
 
 HOMI,
through its wholly owed subsidiary, Bartech Mediterranean Ltd., is the exclusive
distributor of automatic computerized mini-bars manufactured by Bartech Systems
International, Inc., a Delaware corporation, in Israel, Jordan, Turkey and South
Africa. In April 2003, HOMI entered into an agreement with Bartech E.M.E.A.
SARL, a wholly owned subsidiary of Bartech Systems, Inc. in which it was agreed
that Bartech E.M.E.A. SARL may only offer its outsource operations in Europe and
all the territories in which Bartech E.M.E.A. SARL is active and/or sells
mini-bars either directly or indirectly, through HOMI or its subsidiaries, and
that HOMI must use Bartech mini-bars in its outsource operations anywhere
Bartech E.M.E.A. SARL is active or sells Bartech mini-bars, either directly or
indirectly. Bartech Systems International, Inc. and its wholly owned subsidiary
may be referred to collectively as BSI.
 
 The
mini-bars purchased by HOMI from BSI shall be referred to as Bartech mini-bars.
Bartech mini-bars contain proprietary software, sensors and an interface to a
hotel's property management system. Bartech mini-bars interface with hotel
computers to track items removed from the mini-bars, which can decrease losses
from hotel mini-bars. HOMI believes that Bartech mini-bars also enhance
efficiency and reduce labor costs.
 
 HOMI has
a United States subsidiary, Hotel Outsource Services, Inc. (HOS), through which
it conducts all of its business in the United States. HOS has the exclusive
right to outsource Bartech mini-bars in the United States. HOS has no outsource
rights in other countries other than the United States.
 
 In
February 2004, HOMI formed subsidiaries in Luxemburg, Germany and Italy through
which it shall conduct its European operations.
 
 As of
December 31, 2004, HOMI owned and operated approximately 4,800 Bartech mini-bars
in 15 hotels.
 
 The
principal offices of HOMI are located at 80 Wall Street, Suite 815, New York,
New York 10005.
  **Our
Strategy**
 
 HOMI's
objective is to grow its customer base in the United States, Israel, South
Africa and within Europe, where we currently operate, and to expand our
outsource operations eventually to other countries as well. Our main focus is on
upscale hotels located in major cities and near airports. In the event we
endeavor to enter into agreements in new countries or territories, we will have
to negotiate agreements with those hotels. There is no guarantee that we will be
able to enter into any new exclusive agreements with additional hotels. We are
currently negotiating agreements with several hotels in Europe and
Australia.
  **Corporate
History**
 
 HOMI was
incorporated under the laws of the State of Delaware on November 9, 2000 under
the name Benjamin Acquisitions, Inc. On December 28, 2001 the company acquired
Bartech Mediterranean Ltd., an Israeli corporation. On January 8, 2002, the
company amended its certificate of incorporation to change its name to Hotel
Outsource Management International, Inc. HOMI had no operations prior to the
acquisition of BTM. BTM was incorporated in Israel in 1997. From inception to
January 1999 BTM's sole business was serving as distributor of Bartech's
mini-bars.
 
 In June
1998, BTM assigned its exclusive distribution rights for Turkey and the Turkish
Republic of Cyprus to Protel Bilgisayar Limited Sirket. According to the
agreement entered into between the two parties, BTM was to receive 5% of all
sales revenues generated in this territory between June 1, 1998 and May 31,
1999; 5.5% of sales revenues generated between June 1, 1999 and May 31, 2000 and
6% of sales revenues generated after June 1, 2000. These commissions are to be
paid within 15 days of the completion of a Bartech mini-bar installation. A 30
day delay in payment gives BTM the right to terminate the assignment agreement.
 
 In 1999,
BTM (through Remstone Limited, a British Virgin Islands corporation) and Daniel
Golan (through Ice Maiden International Ltd.) formed Batim Bartech with each
party owning 50% of that company. BTM now owns 60% of Batim Bartech, while Ice
Maiden owns 40%. Following HOMI's acquisition of BTM, Ice Maiden became a
shareholder Of HOMI.
 
 In
January 1999, BTM began its first outsource operation in Israel.
 
 Since
2000, BTM had sought a way to penetrate the U.S. market for computerized
mini-bars. Management of BTM believed that such penetration would best be
facilitated by merging with or being acquired by a United States corporation.
BAI had shown an interest in acquiring BTM and negotiations began. BAI raised
$650,000 in a private placement offering once BTM was identified as an
acquisition candidate. Most of this money was later loaned to BTM. The
acquisition was consummated in December 2001. Prior to the acquisition the
control persons of BAI were Joseph Stabholz and Avraham Bahry, and the control
persons of BTM were Jacob Ronnel, Ariel Almog and Benzion Perko. The price of
the acquisition was set through arms length negotiations; no third party
opinions were received. Prior to the acquisition, BAI had 10,000,000 shares of
common stock outstanding, including the 6,500,000 shares issued in the $650,000
private placement offering. In the acquisition, BTM shareholders received a
total of 12,000,000 shares of common stock in exchange for their shares of BTM.
Pre-existing shareholders maintained their shareholdings in BAI. Pre-existing
BAI shareholders received no consideration in this acquisition. Prior to the
acquisition of BTM, BAI shareholders held shares in a company without
operations. As a result of the acquisition, pre-existing BAI shareholders now
hold shares of an operating company.
 
 In 2001,
BTM, through its wholly owned subsidiary, Hila International Corp., and BSI
formed Hotel Outsource Services, Inc., a Delaware corporation owned 70% by Hila
and 30% by BSI. HOS is the exclusive outsource operator of Bartech mini-bars in
the United States. HOS has no distribution rights in countries other than the
United States. HOS began operations in July 2002. Exclusive of its in interest
in HOS, BSI's relationship with HOMI and its subsidiaries is that of a
manufacturer and distributor. Because both our sales and outsource operations
utilize Bartech mini-bars exclusively, we are dependent on BSI, the quality of
its products, and its financial viability.
 
 In April
2003 HOMI and Bartech E.M.E.A. SARL entered into an agreement whereby HOMI has
the exclusive rights to use Bartech mini-bars in its outsource operations in
Europe and anywhere Bartech E.M.E.A. SARL sells Bartech mini-bars, either
directly or indirectly. Additionally, pursuant to this agreement, HOMI must
utilize Bartech mini-bars in all of its outsource operations in the same
territories.
 
 HOMI is
the exclusive distributor of Bartech mini-bars in Israel, Jordan, Turkey and
South Africa. We have the exclusive rights to outsource operations of Bartech
mini-bars in the United States, and as of April 2003, worldwide. We have
assigned our exclusive rights in Turkey and the Turkish Republic of Cyprus to a
third party. We receive a commission on all sales revenues generated in Turkey
and the Turkish Republic of Cyprus. To date, HOMI and its subsidiaries have
entered into contracts with 15 major hotels to provide the hotel rooms with
mini-bars, as well as to operate and service the mini-bars. HOMI, through its
subsidiaries, intends to continue to develop the outsource operation program
throughout the world. For us to operate in additional countries and/or
territories, we will need to negotiate with new hotels. We are currently
negotiating several new agreements in Europe.
 
 **We
currently operate in 15 hotels in 6 countries.**
 
 HOMI
continues to form new subsidiaries in each new country in which it operates.
 
 In 2004,
HOMI, entered into five new outsource agreements for a total of 1,279 mini-bars.
These hotels are located in Germany, Italy, Malta and the United
States.
 
 In 2004,
a hotel in which we operate changed management and as a result, our agreement
was terminated in 2005. This represents a loss of 180 mini-bars.
 
 **Industry
Background**
 
 The
concept of in-room sales of food, beverages and other small non-perishable goods
has existed for many years in the hotel industry. Traditionally, two primary
means of selling in-room consumable goods have been used within the lodging
industry- the "honor" system and the "vending machine" system. The honor system
utilizes a small refrigerator and a form listing all items available for
purchase within the refrigerator. Each day, the guest completes the form
detailing items purchased during their stay. The following day, a hotel employee
will remove the form from the room and manually add the invoice to the guest
room charges. The vending machine system utilizes a refrigerator similar to the
honor system, but the interior of the refrigerator resembles a traditional
vending machine, comprised of plastic doors to access the goods. With this kind
of system, product choice is made by pressing the selected button or by entering
a specified code on an attached keyboard. By opening the section containing the
product or entering the code on the keyboard, a command is sent from the room to
the property management system and the appropriate amount is added to the
guest's room charges.
 
 Management
believes the honor system often results in losses attributable to non-reported
or disputed selections by guests, and does not provide a central control for
refilling, and requires manual inventory of each room, whether or not items are
consumed. We estimate that these systems often require at least two trips for
inventory management; one to ascertain goods consumed and one to restock the
goods consumed. Management believes the vending machine system presents a
mechanical, machine-like appearance, which often conflicts with the aesthetics
of a full service-lodging establishment and has a chilling effect on impulse
purchases. HOMI also believes that the vending machine system does not provide
an adequate selection of items to chose from, which potentially leads to guest
dissatisfaction and loss of incremental revenue opportunities. Although the
vending machine system avoids extra trips, the machines are mechanical and
require a relatively expensive maintenance contract.
 
 We
believe that the Bartech mini-bars we sell and/or operate address these
shortcomings by providing fully computerized management system for open display
mini-bars. Bartech mini-bars contain an automated control and management system
that monitors the movements of all items in the mini-bar. Bartech mini-bars
provide interfaces to the hotel's property management system. Furthermore, the
system generates a refill report so that the attendant will only go to those
rooms that require stocking. Accordingly, revenues are reported accurately and
the unit is restocked timely. In our experience, the average hotel utilizing
traditional mini-bar systems requires one employee for approximately every 100
rooms to monitor and manage mini-bar activity. Through utilization of the
Bartech mini-bar, customers report that they can increase the number of rooms
that one employee can manage to more than 300.
  **Customers
and Markets**
 HOMI
currently markets and sells Bartech mini-bars to full-service hotels in 6
countries. These target hotels typically have a minimum of 100 rooms. Target
customers in the full-service sector encompass deluxe, luxury, upscale and
mid-scale establishments. According to Smith Travel Research, the U.S.
full-service sector represented roughly 1.8 million hotel rooms in 2000. Smith
Travel Research estimates that the number of new units under construction will
increase in major metropolitan cities, specifically San Francisco, Las Vegas,
Orlando, Chicago, New York, Washington D.C., Miami, and Los Angles. As of
December 31, 2004, HOMI, through its operating U.S. subsidiary, HOS, has
outsource operation programs as follows:

Hyatt
      Regency
    San
      Francisco
    Operational
    802Stanhope
      Park Hyatt
    New
      York
    Canceled
      in 2005
    180Grand
      Hyatt
    Seattle
    Operational
    425Hilton
    Seattle
    Operational
    237Mayflower
    Washington
    Commence
      in 2005
    657Hyatt
      Regency
    Boston
    Commence
      in 2005
    498Total
    
    
    2,799

In
January 2005, because of a change in management at the Stanhope Park Hyatt,
HOS’s contract with that hotel was cancelled. HOMI believes that these contracts
will facilitate further sales in the United States cities. HOMI through HOS, is
looking to further penetrate the U.S. market. However, as with any new concept,
there is substantial risk that the marketplace may not accept the potential
benefits of the technology utilized in this products. Market acceptance of BSI's
products will depend, in large part, upon our ability to demonstrate the
performance advantages and cost-effectiveness of our products over competing
products. There can be no assurance that we will be able to market our
technology successfully or that our current or future products will be accepted
in the marketplace which could hinder our sales.
 
 We depend
on the occupancy level of the hotels in which we operate mini-bars; low
occupancy levels may result in low sales revenues.
 
 There
seems to be a direct correlation between a hotel's occupancy level and the
quantity of purchases made by guests from a hotel's mini-bars. As a result, our
sales revenues are dependent on hotel occupancy levels. The failure of a hotel
to attract a large number of guests could result in a corresponding decrease in
revenues by HOMI.
  **Products**
 
 HOMI
purchases its mini-bars from BSI. The Bartech automatic mini-bars look like
ordinary refrigerators, but their operation is controlled by a secure and
automatic computer system.
 
 The
mini-bars were originally developed by BSI in 1988 to meet the specifications of
Hilton International. The first units were installed in the Hilton hotel in
Geneva. The open display and optional "dry section" allow a wide range of items
to be offered to hotel guests. The units can accommodate up to 42 different
types of drinks and snacks and can hold up to 60 items. Capacities vary from 40
liters to 75 liters. BSI has 86 different models to fit varying cabinet sizes.
Door, cabinet finish, volumes, styles and dry sections can be custom ordered
based on a hotel's needs.
 
 The
Bartech mini-bar marketed and operated by HOMI is an automated system containing
proprietary software, sensors and interface to the hotel's property management
system. HOMI believes that the Bartech system enables HOMI's customers to manage
their inventory of in-room consumables more effectively, enhance service
efficiency, reduce labor cost, and potentially increase revenue per available
room.
 
 Bartech
mini-bars contain software which allows them to interface directly with a
hotel's own billing system. Data transmission can be by means of the telephone
wires or co-axial antennae cable. System software controls billing, automatic
refill reports, lists of rooms with credit or without credit, listing of
anomalies, price and inventory management, cash flow reports and stock analysis.
The systems control stock rotating and product expiration dates, which helps
when ordering new stock and enables stock to be rotated or discounted prior to
expiration. The computer system also controls the energy consumed by each unit
by reference to time of day, season, maintenance, and can automatically activate
defrosting. Energy consumption may be reduced approximately 40% through this
system.
 
 Bartech
mini-bars interface with a hotel's central computer and provide automatic
invoicing, reducing shrinkage (loss or theft) from approximately 20%-30% to
approximately 2%.
 
 The
traditional mini-bar is a refrigerator with a lock. Hotel guests are supposed to
report any United States to the front desk upon check out. Although mini-bar
prices are very high, yielding gross margins of approximately 60%, our own
informal research indicates that hotels rarely make a profit from the
traditional "honor" mini-bar systems. Guests may not be honest in declaring
their United States and/or hotel staff may remove items from the mini-bar.
 
 Bartech
mini-bars considerably reduce labor costs as one minibar attendant can refill
more than 300 Bartech mini-bars as opposed to one attendant per 90 - 100 manual
mini-bars. The Bartech system provides inventory controls which we believe
mitigate product waste from expiration.
 
 In order
to comply with regulations related to the sale of alcoholic beverages in the
United States and South Africa, we work under each hotel's license to sell
alcohol. The hotel purchases the alcohol to be filled in our mini-bars, and we
reimburse the hotel. On average, alcoholic beverages represent only 15-25% of
mini-bar sales. Israel does not require a license to sell alcoholic beverages in
hotel rooms. In the United States, we operate in a similar way. Currently, we
are working Under the Hotel’s alcohol license. We cannot guarantee a hotel's
compliance with Applicable regulations, and because we operate under a hotel's
license, we do not incur costs of meeting regulatory compliance. Failure of a
hotel to comply with these regulations would result in our inability to sell
alcohol in our mini-bars, which would result in a decrease in our sales
revenues.
  **Strategy**
 
 HOMI's
objective is to grow its customer base, especially in the United States during
the first stage, and later on, in other countries. To date, we have engaged in
three types of agreements with hotels: (a) sales agreements where HOMI purchases
mini-bars from BSI at distributors' prices and then resells them to hotels at
end-user prices; (b) agreements where HOMI purchases, installs and operates
mini-bars in a hotel and shares the mini-bar revenues with the hotel in agreed
upon ratios; and (c) agreements with hotels which already have mini-bars, but in
which HOMI earns a fee for managing those mini-bars. While we are looking to
develop all three arms of this business, our primary focus is on our
installation, operation and revenue sharing agreements. HOMI refers to this
revenue sharing plan as its "Outsource Operation Program." We intend to enter
into long term, 9-10 year, outsource operation program agreements with
additional hotels. HOMI intends to develop its outsource operation program of
Bartech mini-bars in the United States through HOS, and to offer the outsource
operation program in other countries as well. HOMI intends to purchase the
Bartech mini-bars from BSI and to operate under exclusive outsourcing contracts
with major hotels. HOS has the exclusive right to outsource operations of
Bartech mini-bars in the United States. Our main focus is on upscale hotels
located in major cities and near airports. To date, HOMI and its subsidiaries
have entered into such contracts with eleven hotels: five hotels located in
Israel, three hotels located in South Africa, and three hotels located in the
United States.
 
 Mini-bars Sales
 Since
inception of BTM in 1997, we have sold 830 mini-bars to hotels in Israel and 800
mini-bars to hotels in Turkey. These were Bartech mini-bars that we purchased
from BSI, then re-sold. Since we began our outsource operation program in 1999,
our strategy has been focused primarily on our outsource operation program.
  **Outsource
Operation Program**
 
 HOMI is
aware that many hotels do not want to pay upfront for their mini-bars, and many
do not want to allocate resources to operate mini-bars either. As a result, HOMI
has developed its outsource operation program which is designed to minimize the
hotels' expenses. The Outsource Operation Program is an integral part of HOMI's
sales and marketing strategy in the United States and HOMI and BSI are offering
it to hotels in the United States.
 
 This
program has been successfully implemented by HOMI's subsidiaries since 1999, in
Israel and South Africa, and began in the United States in July 2002 and Europe
in 2003. Since Bartech's computerized mini-bar system will register the mini-bar
revenues automatically and accurately, it enables us to share the revenues with
the hotel in a precise and accurate manner, with a strict control on sales and
inventory.
 
 The
outsource operation program requires HOMI to purchase the mini-bars and install
and operate them. The net revenues from all mini-bar purchases are divided
between HOMI and the hotel. The exact terms may vary from hotel to hotel.
 
 We
believe additional hotels will be interested in entering into outsource
operation agreements with us for the following reasons:
 
 §
    No
      capital expenditure for the hotel
 §
    Another
      revenue stream
 §
    No
      labor expenses and no operating costs
 §
    No
      purchase of goods and no inventory management
 §
    Added
      service to guests, improved competitive edge
 §
    No
      downside: hotel is taking no risks, financial or other
 §
    Hotel
      has the option to purchase the system (allows for "wait and
      see")
 §
    Outsourcing
      allows the hotel to focus on major revenue sources
 §
    Quality
      of service: we specialize in the field
 §
    Increased
      control and management, extensive reporting
 §
    No
      maintenance by hotel
 §
    Constant
      technical and technological upgrade
 
 **Agreements
with Hotels**
 
 The
following are the basic terms of the outsource operation program contracts HOMI
has entered into with several hotels and intends to enter into with additional
hotels.
 
 §
    HOMI
      purchases the mini-bars from BSI and installs them in the hotels and
      ensures that they are interfaced with the hotel's computer system;
 
 §
    HOMI
      maintains ownership of the mini-bars;
 
 §
    The
      hotel provides the cabinet into which the mini-bar is placed, at its own
      cost;
 
 §
    The
      hotel provides all wiring necessary for the mini-bars to interface with
      the hotel's computer system;
 
 §
    HOMI
      purchases the goods to be filled in the mini-bars; it refills and operates
      and maintains the mini-bars;
 
 §
    The
      personnel operating and maintaining the mini-bars are HOMI employees or
      hotel employees paid by HOMI;
 
 §
    The
      hotel supplies all glasses, bottle openers, trays and other accessories
      for the mini-bars, and replaces such accessories on a daily basis;
 
 §
    The
      hotel grants HOMI access to the guests' rooms at least two times per day;
 
 §
    The
      hotel provides written instructions and descriptions to its guests with
      respect to operation and location of the mini-bars;
 
 §
    The
      hotel collects the revenues from all mini-bar purchases and distributes
      HOMI's portion. The revenue splits vary between 95% for HOMI and 5% for
      the hotel and 85% for HOMI and 15% for the hotel;
 
 §
    The
      pricing of the products stocked in the mini-bar is determined mutually by
      HOMI and the hotel;
 
 §
    The
      term of the contract is usually 9-10 years, and may thereafter be extended
      on a year-to-year basis;
 
 §
    The
      hotel has an option to purchase the Bartech system starting from the end
      of the third year of the operation;
 
 §
    Net
      revenues from all mini-bar purchases are allocated between the hotel and
      HOMI on a monthly basis;
 
 §
    The
      hotel will provide HOMI office and storage space within the hotel for a
      base of operations.
 
 §
    The
      agreements may be terminated upon written notice of breach of the
      agreement by the other party.
 
 **Competition**
 
 Presently,
our main competitors in the United States are Minibar Systems, Inc. and
eRoomSystem Technologies, both of which offer outsourcing or revenue sharing
programs. Other companies, such as club Minibar, offer outsourcing programs
utilizing manual mini-bars. We are also competing with certain options offered
by BSI.
 
 BSI
offers four different options to its potential customers in the United States:
 
 1. DIRECT
SALE. Some major hotel chains have preferred vendor or exclusive vendor
agreements with BSI. Should the hotel owners have the available cash-flow to
purchase the system, they will often prefer this option, as they usually will be
able to repay the system after only 3 years of operation. But as Bartech is a
very expensive system, generally a lot of hotels do not have the resources to
purchase it. In addition, for a long time, manual mini-bars have been associated
with creating a lot of work with little profit or even losses. Many hotels will
still prefer for a third party to take the operating burden and risk.
 
 2.
LEASING. This allows a hotel to lease the mini-bars directly from BSI. A hotel
which leases its mini-bars is responsible for all day-to-day operations
concerning the mini-bars, and all costs involved with such operations.
 
 3.
REVENUE SHARE. This program is different than our outsource operation as BSI (or
a third party) will finance the equipment, but the hotel will operate the
system. Consequently, the hotel is still involved in the day-to-day operation.
The hotel will purchase the goods and employ the attendants and the hotel has a
theoretical risk of having an operating loss during a slow period.
 
 4.
OUTSOURCE OPERATION PROGRAM, offered exclusively through HOS with no financial
risk whatsoever to the hotel.
 
 As a
result of BSI's other options, even if a hotel has chosen the Bartech system, we
still need to compete with the other plans offered by BSI. Our initial goal
following a full introduction of the outsource program is a 25% - 33% market
share of all Bartech sales in the United States. That may be the equivalent of
approximately 4,000 new outsourced units per year. We intend to gradually
increase our market penetration, and our exposure in the market, and believe
that the outsourcing program will increase in popularity and sales.
 
 Automatic
or computerized mini-bars are a relatively new concept. As a result, we are
still competing with traditional or manual mini-bars, which, although they cost
more money to run due to unreported sales or shrinkage, are less expensive to
purchase. There is no competition with other vendors of computerized mini-bars
in Israel or South Africa, as BTM, or its subsidiaries, is the only distributor
of computerized mini-bars in those countries. The arrival of other companies
offering similar products might force us to decrease our prices in order to
remain competitive. Further, we are still substantiating our position in the
market and could face competitive disadvantages if forced to compete with better
known and/or better funded companies. In Turkey, our primary competitor is
Electrolux Corp. In the United States, our competitors are Automatic Minibar
Systems Ltd. (AMS) and eroom Systems, Inc. Their prices are competitive with
ours. AMS offers outsource operation programs similar to the programs offered by
HOS. We believe that in the United States, Bartech mini-bars are the
best-selling open-display automatic mini-bar and our use of the Bartech
mini-bars in our outsource operations may give us a competitive advantage. We
intend to continue to offer high quality service and to concentrate on marketing
our company so as to remain competitive with other companies.
  **Intellectual
Property**
 
 HOMI
holds no patents, trademarks, service marks or other intellectual property for
the Bartech mini-bars or its outsource operations.
  **Employees**
 
 As of
December 31, 2004, HOMI and its subsidiaries had 13 full time employees.
 
 
 **ITEM
2.** **DESCRIPTION
OF PROPERTY**
 
 HOMI's
operations are based primarily at hotels in which we conduct our outsource
operations. Most of these hotels allow us to utilize office space free of
charge. We also maintain small offices in Tel Aviv, Johannesburg, San Francisco
and New York.
 
 HOMI's
headquarters are located at 80 Wall Street, Suite 815, New York, New York, in
the offices of Schonfeld & Weinstein, L.L.P., at no cost to HOMI. Schonfeld
& Weinstein, L.L.P. is counsel to HOMI and is a shareholder of HOMI. Until
September 2004, BTM's headquarters were located at 25 HaMered Street, Tel Aviv,
Israel. The monthly rent was $2,800. HOMI leased the space on a month to month
basis from a company controlled by Mr. Benzion Perko, a controlling shareholder
of HOMI. BTM’s headquarters are currently located at 4 Raul Wallenberg Street,
Tel Aviv, Israel, with a monthly rent of $400. This office is leased from a
unaffiliated third party. HOMI also leases a virtual office at 116 West 23rd
Street, New York, New York from Select Office Suites, an unrelated third party,
for $100 per month on a month-to-month basis. HOS has its headquarters at 1
Enbarcadaro Center, Suite 500, San Francisco, California 94111. The monthly rent
is $500. Most of HOS's operations are conducted from the office we utilize at
the Hyatt Regency San Francisco. In South Africa, Batim Bartech operates from an
office in Johannesburg for monthly rent of $350. We do not intend to acquire or
lease any other facilities in the near future. The office space provided us by
the hotel is also used to store goods to be placed in the mini-bars and spare
parts for the mini-bars. We do not keep any Bartech mini-bars in stock. Instead,
we order them on an as needed basis. They are shipped directly from BSI to the
hotel. BSI manufactures the Bartech mini-bars in Italy. As we enter into
additional outsource operation programs, we will be receiving office space
within those hotels from which to conduct our operations.
 
 
 **ITEM
3.** **LEGAL
PROCEEDINGS**
 
 HOMI is
not a party to any pending legal proceedings.
 
 
 **ITEM
4** . **SUBMISSION
OF MATTERS TO VOTE OF SECURITY HOLDERS**
 
 On
December 21, 2004, HOMI held its annual shareholders meeting. An Information
Statement for such meeting was filed the Commission. At the annual meeting, the
following persons were elected as directors, each to serve a one year term:
Jacob Ronnel; Ariel Almog; Rodia Mihali; Avraham Bahry; Boaz Tamir, New Jersey
State Senator Robert W. Singer; and Jules M. Polak.
 
 Other
matters that were voted upon at the meeting were (1) to amend HOMI’s certificate
of amendment to increase the authorized capital of the Company from 30,000,000
shares of common stock to 100,000,000 shares of common stock; (2) to amend
HOMI’s by-laws to allow directors to be compensated from HOMI for serving as
directors; and (3) to nominate the accounting firm of Kingery & Crouse as
HOMI’s independent auditors. Each item was approved with the unanimous vote of
all 16,673,796 shares represented at the meeting.
 
 **PART
II.**
  **ITEM
5.**  **MARKET
FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTER**
 
 **Market
For Common Stock**
 As of
March 30, 2005, HOMI has 28,874,880 shares of common stock outstanding held by a
total of 111 shareholders. No dividends have been declared as of March 30,
2005.
 
 Our
common stock has been listed on the Over-the-Counter Bulletin Board, or "OTC
Bulletin Board" since February 2004 under the symbol "HOUM.OB."
 
 First
      QuarterHigh
      Bid $1.10
    Low
      Bid $1.00Second
      QuarterHigh
      Bid $1.50
    Low
      Bid $0.48Third
      QuarterHigh
      Bid $0.80
    Low
      Bid $0.48Fourth
      QuarterHigh
      Bid $0.80
    Low
      Bid $0.45
 
 In
February 2004, the board of directors approved a series of agreements with seven
persons by which in return for services rendered to HOMI in the past and in the
future they were issued 1,000,000 shares at no consideration. These shares were
issued pursuant to a Form S-8 registration statement.
 
 In March
2004, two shareholders, Rodia Mihali and Avraham Bahry, extended to the company
additional loans amounting to $600,000 for the purpose of purchase of additional
mini-bars. These loans were converted into shares as part of the rights offering
the company held in July 2004. Rodia Mihali and Avraham Bahry are both now
directors of HOMI.
 
 In May
2004, HOMI approved the conversion of loans extended to HOMI shareholders and
others amounting to $414,000 into 828,000 shares of restricted common stock. In
addition, two individuals, Rodia Mihali and Avraham Bahry, invested $110,000 in
return for 220,000 common shares.
 
 On July
10, 2004, HOMI commenced an offering to its existing shareholders, pursuant to
which each shareholder was offered the right to purchase one share of HOMI
common stock for every 5.566 shares of common stock held as of July 10, 2004. A
total of 4,500,180 shares were offered. The purchase price was $0.33 per share.
The shares of common stock issued in this rights offering are restricted from
transfer. This offering expired on August 12, 2004. HOMI raised $936,000
including the conversion of the loans extended to the company by Rodia Mihali
and Avraham Bahry in December 2004, and issued 2,834,358 shares of common
stock.
 
 In
September 2004, Benzion Perko lent HOMI $150,000. In October 2004 HOMI converted
this loan, plus a previous loan of $250,000, into 952,381 shares of common
stock.
 
 All of
these share offerings were made pursuant to Section 4(2) of the Securities Act
of 1933. There were no general solicitations or advertisements. All such shares
bear legends restricting their transfer.
 
 In
November 2004, HOMI entered into agreements with Rodia Mihali and Avraham Bahry
pursuant to which each agreed to lend HOMI $350,000. These loans are for a
maximum of six months, to be repaid no later than May 2005, and bear interest at
10% per annum. HOMI may repay all or part of these loans, plus accrued interest,
through the issuance of its common stock at $.25 per share. These loans are
secured by a general lien and security interest over all of HOMI’s assets, but
subordinate to all pre-existing liens. Additionally, Ariel Almog, an officer,
director and shareholder; Jacob Ronnel, an officer, director and shareholder;
and Benzion Perko, a shareholder of HOMI, have pledged a collective total of
2,000,000 of their shares of HOMI common stock as collateral for these
loans.
   **ITEM
6.** **MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION**
 
 The
following discussion and analysis provides information that we believe is
relevant to an assessment and understanding of our results of operations and
financial condition for the year ended December 31, 2004. The following
discussion should be read in conjunction with the financial statements for the
period ended December 31,2004.
 
 **Forward-Looking
Statements**
 
 This annual
report contains forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as “may,” “will,”
“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential” or “continue” or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors that may cause our or out
industry’s actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking
statements.
 
 Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements.  Except as required by applicable law, including the
securities laws of the United States, we do not intend to update any of the
forward-looking statements to conform these statements to actual
results.
 
 Our
financial statements are stated in United States Dollars (US$) and are prepared
in accordance with accounting principles generally accepted in the United States
America. In this annual report, unless otherwise specified, all dollar
amounts are expressed in United States dollars.
 
 As used
in this yearly report, the terms "we", "us", "our", and "HOMI" mean Hotel
Outsource Management International, Inc. and its subsidiaries, unless otherwise
indicated.
 
 **Accounting
Policies**
 
 In
connection with the issuance of Securities and Exchange Commission FR-60, the
following disclosure is provided to supplement the Company’s accounting policies
in regard to significant areas of judgment. Management of the Company is
required to make certain estimates and assumptions during the preparation of
consolidated financial statements in accordance with accounting principles
generally accepted in the United States. These estimates and assumptions impact
the reported amount of assets and liabilities and disclosures of contingent
assets and liabilities as of the date of the consolidated financial statements.
These estimates also impact the reported amount of net earnings during any
period. Actual results could differ from those estimates. Because of the size of
the financial statement elements to which they relate, some of our accounting
policies and estimates have a more significant impact on our financial
statements than others.
 
 **Long-Lived
Assets**
 
 We assess
the recoverability of the carrying value of long-lived assets periodically. If
circumstances suggest that long-lived assets may be impaired, and a review
indicates that the carrying value will not be recoverable, as determined based
on the projected undiscounted future cash flow, the carrying value is reduced to
its estimated fair value. The determination of cash flow is based upon
assumptions and forecasts that may not occur. As of December 31, 2004 the
Company’s balance sheet includes $4.1 million of fixed assets, net. The
Company has completed its impairment test as of January 1, 2005 and has
concluded that no impairment write-off is necessary.
 
 **Overview**
 
 Hotel
Outsource Management International, Inc. was incorporated on November 9, 2000
under the name Benjamin Acquisitions, Inc. pursuant to the laws of Delaware.
Hotel Outsource Management International, Inc. may be referred to as HOMI. On
December 28, 2001, HOMI acquired Bartech Mediterranean Ltd., an Israeli
corporation which sells, markets and operates computerized mini-bars placed in
certain up-scale hotels. Bartech Mediterranean is now a wholly owned subsidiary
of HOMI. Bartech Mediterranean may be referred to as BTM.
 
 HOMI is a
holding company for several subsidiaries which distribute, market, and operate
computerized mini-bars in hotels located in Israel, Europe, the United States,
and South Africa. Unless stated otherwise HOMI shall refer to the parent company
and all of its subsidiaries.
 
 HOMI,
through its wholly owed subsidiary, BTM, is the exclusive distributor of
automatic computerized mini-bars manufactured by Bartech Systems International,
Inc., a Delaware corporation, in Israel, Europe, Turkey and South Africa. In
April 2003, HOMI entered into an agreement with Bartech E.M.E.A. SARL, a wholly
owned subsidiary of Bartech Systems, Inc. in which it was agreed that Bartech
E.M.E.A. SARL can only offer its
outsource operations in Europe and all the territories in which Bartech E.M.E.A.
SARL is active and/or sells mini-bars either directly or indirectly, through
HOMI or its subsidiaries, and that HOMI must use Bartech mini-bars in its
outsource operations anywhere Bartech E.M.E.A. SARL is active or sells Bartech
mini-bars, either directly or indirectly. Bartech Systems International, Inc.
and its wholly owned subsidiary may be referred to collectively as
BSI.
 
 The
mini-bars purchased by HOMI from BSI shall be referred to as Bartech mini-bars.
Bartech mini-bars contain proprietary software, sensors and an interface to a
hotel's property management system. Bartech mini-bars interface with hotel
computers to track items removed from the mini-bars, which can decrease losses
from hotel mini-bars. HOMI believes that Bartech mini-bars also enhance
efficiency and reduce labor costs.
 
 Our
revenues are derived from the purchase and operation of Bartech mini-bars
through our outsource program, and management fees for operating “installed
base” mini-bars.
 
 HOMI has
a United States subsidiary, Hotel Outsource Services, Inc. (HOS), through which
it conducts all of its business in the United States. HOS has the exclusive
right to outsource Bartech mini-bars in the United States. HOS has no outsource
rights in other countries other than the United States.
 
 **Contracts
With Hotels**
 
 As of
December 31, 2004, HOMI operated approximately 4,800 Bartech mini-bars in
15hotels.
 
 As of
December 31, 2004, HOS operated minibars in 4 hotels in the United States, a
total of 1,594 hotel rooms. On November 30, 2004, HOS received a notice from The
Stanhope, Park Hyatt NY of a change in the hotel’s ownership and its intension
to end its agreement with HOS. As a result of this decision, Hyatt ceased its
management of the hotel and terminated its agreement with HOS on January 15,
2005. Hyatt paid HOS $275,000 upon termination as consideration for the minibars
located in such hotel.
 
 In
February 2004, a wholly owned subsidiary in Luxembourg was formed and commenced
its operations in Europe through 2 subsidiaries in Germany and Italy. The
subsidiary in Germany signed an agreement regarding installation of 130 minibars
in a hotel in Munich, which and commenced operations in April 2004.
 
 In June
2004, HOMI’s German the subsidiary signed an agreement with the Arabella
Sheraton Munich to take over the management and operate minibars in 643 rooms in
that hotel. Operation in the hotel commenced in June 2004.
 
 In June
2004, HOMI’s Italian subsidiary signed an outsource operation agreement with the
Sheraton Diana Milan to operate minibars in 106 rooms in that hotel. Operations
commenced in September 2004.
 
 In the
quarter ending September 30, 2004 HOS signed 3 agreements with hotels in
Seattle, Boston and Washington to install and operate minibars in 1,585 rooms.
These installations were completed by the end of the first quarter of
2005.
 
 In
October 2004, HOMI’s Italian subsidiary signed an agreement to install and
operate 250 minibars in the Radisson hotel in Malta. Installation was completed
in the first quarter of 2005.
 
 In
February 2005 HOMI’s Italian subsidiary signed an agreement to install and
operate 282 minibars in the Meridian hotel in Malta. Installation is expected to
be completed in the second quarter of 2005.
 
 For the
twelve months ended December 31, 2003 and 2004 we achieved revenues of
$1,026,000 and $1,647,000, respectively, from our outsource programs. These
revenues come from the sale of products in the mini-bars. According to our
agreements with hotels in which we conduct our outsource programs, the hotels,
which collect the revenues generated from our mini-bars, deduct their portion of
the revenues before distributing the remainder to us.
 
 For the
year ended December 31, 2004, we received 26% of our revenues from operations in
Israel, 22% from operations in South Africa, 10% from our operation in Europe
and 42% from operations in the United States. For the year ended December 31,
2003, we received 44% of our revenues from operations in Israel, 23% from South
Africa, and 33% from operations in the United States. In 2004, no single
customer accounted for more than 31% of our total revenues. Our three largest
customers accounted for a collective total of 55.1% of our revenues in
2004.
 
 The
company records revenue from sale of products on a net income method, i.e.,
after the hotel's portion of the income is paid.
 
 **Expenses**
 
 Expenses
incurred in our outsource operations are as follows:
 (1)
    the
      purchase of the Bartech computerized mini-bars system to be installed in
      hotels. This capital expense is charged to property and equipment and
      depreciated over the period of the contracts with the hotels (8-10
      years);
 
 (2)
    the
      purchase of the products to be placed in the mini-bars. We purchase these
      products from various vendors. Sometimes the hotel will purchase the
      alcoholic beverages to be placed in the mini-bars and we reimburse the
      hotel for such purchases;
 
 (3)
    labor
      costs of the mini-bar attendants;
 
 (4)
    management,
      administration and marketing;
 
 (5)
    finance
      expenses.
 
 **Financing
Agreement**
 
 On
February 28, 2005, HOMI entered into a financing agreement with Solog Mifalei
Srigah Ltd., a public limited company whose stock is traded on the Tel-Aviv
Stock Exchange.
 
 Pursuant
to the Solog Financing Agreement, HOMI has been granted a loan facility by
Solog, which will allow HOMI to draw down up to $10,000,000, in such amounts and
at such times as required in accordance with its operations, during the two year
term of the financing agreement. For the term of this Solog financing agreement,
Solog has delivered a contingent undertaking not to provide other entities in
HOMI’s industry with financing, and HOMI has delivered a contingent undertaking
not to obtain external, third party, non-convertible debt financing from any
party other than Solog.
 
 The
Financing will be in the form of loans to HOMI and/or its subsidiaries, which
will be repaid at a monthly rate, principal plus interest, of $15 per $1,000 of
principal, assuming a 9-year loan period. If the loan period is less than 9
years, the interest rate will be reduced accordingly. The loans will correspond
in length to the terms of the outsource operation agreements which HOMI and/or
its subsidiaries have entered, or will enter, into with hotels, and the specific
purpose of the Financing is to enable HOMI and/or its subsidiaries to purchase,
and/or refund and/or operate the minibars at such hotels.
 
 The Loans
will be secured by a lien on all minibars in respect of which the Loan was
received, and a security interest and assignment of a portion of HOMI’s and/or
its subsidiaries’ monthly revenues from those minibars, in the amount required
to pay each month’s repayments on all outstanding Loans, principal plus
interest.
 
 For each
$1,000,000 of Financing that has been completed by Solog, Solog will be entitled
to receive non-assignable, non-transferable options to purchase 300,000 shares
of HOMI’s common stock, at a price of $0.65 per share, exercisable by cash
payment upon 45 days’ advance written notice, at any time within a period ending
on the third anniversary of the date of the Solog Financing
Agreement.
 
 RESULTS
OF OPERATIONS
 
 YEAR
ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003.
 
 HOMI
(CONSOLIDATED)
 
 **Revenues**
 
 For the
years ended December 31, 2003 and 2004, HOMI had revenues of $1,026,000 and
$1,647,000, respectively, an increase of $621,000 or 60.5%. The increase in
sales is the result of HOMI's commencement of outsource operations in several
new hotels in the United States and Europe.
 
 **Net
Loss**
 
 Net loss
decreased from $804,000 to $732,000, a decrease of 9 % in the
respective twelve-month periods. The decrease in net loss is the result of an
increase in revenues and a decrease in expenses.
 
 **Gross
Profit**
 
 Gross
profit increased from $308,000 to $488,000, or 58.4% for the years ended
December 31, 2003 and 2004, respectively.  As a precentage of revenue,
gross profit margins remained at 30%.
 
 **Cost
Of Goods Sold And Operating Expenses**
 
 Cost of
sales, before consideration of depreciation expense, for the years
ended December 31, 2003 and 2004 were $501,000 and $797,000 respectively, an
increase of $296,000 or 59.08%, as a result of increase in revenues. As a
percentage of gross revenues the cost of sales decreased slightly from 48.8% to
48.4%. Depreciation expense for the years ended December 31, 2003 and 2004 was
$217,000 and $362,000, respectively, an increase of $145,000, or 66.8%. 
However, as a percentage of revenues, depreciation expense remained relatively
stable.
 
 General
and administrative expenses increased from $815,000 to $960,000, or 17.8% for
the years ended December 2003 and 2004, respectively, due to expansion of our
business into five new hotels, and an increase in salaries. As a percentage of
revenues, general and administrative expenses increased from 79.4% to
58.3%.
 
 Selling
and Marketing expenses increased from $118,000 to $243,000, or 105.9%. These
selling and marketing expenses were incurred in connection with the expansion of
our network, primarily in Europe.
 
 Operating
loss increased from $625,000 for the years ended December 31, 2003 to $715,000
for the similar period in 2004. Operating loss as a percentage of revenues
decreased from 61% to 43%.
 
 For the
years ended December 31, 2003 and 2004 we had $187,000 and $67,000 in financial
expenses, respectively, a decrease of $120,000, or 179.1%.
 
 For the
year ended December 31, 2003 we had other expenses of $97,000, and for the years
ended December 31, 2004, we have other expense of $2,000.
 
 **Liquidity
And Capital Resources**
 
 Since our
inception, we have been dependent on investment capital as our primary source of
liquidity. We had an accumulated deficit at December 31, 2004 of $(2,295,000).
 During year ended December 31, 2004, we incurred a net loss of $(732,000).
During the year ended December 31, 2003, we incurred a net loss of $(804,000).
 
 During
the year ended December 31, 2004, our cash and cash equivalents increased,
primarily as a result of cash from certain shareholders subscribing to a private
placement rights offering. The primary use of cash was for the purchase of
additional mini-bars and our continued operations.
 
 On
December 31, 2004, HOMI had long term liabilities of $837,000 for long term
loans from other banks and others (including $611,000 from shareholders),
$307,000 current maturities, and short-term bank credit of $359,000.  The
Company believes this amount of cash plus cash that will be generated from
operations and the new credit facility entered in 2005, will be adequate to meet
its nedds for the rest of 2005.
 
 On
December 31, 2004, HOMI had cash and cash equivalents of $263,000, and bank
deposits of $34,000.
 
 In 2004
the company financed its operations as follows:
 
 (1)
    $936,000
      (including the conversion of $600,000 of debt) from HOMI's rights offering
      which occurred between July and August
2004;
 
 (2)
    $322,000
      from BSI's investment in HOS. We used this money to purchase Bartech
      mini-bars and as working capital for HOS;
 
 (3)
    $225,000
      from new investors;
 
 (4)
    In
      September 2004 a shareholder lent the Company $150,000. In October 2004
      the company converted this loan, plus a previous loan of $250,000 into
      952,381 shares of common stock;
 
 (5)
    In
      November 2004 two shareholders agreed to loan the company an additional
      $700,000.As of December 31,2004 the amount is
$712,000.
 
 The total
amount of shareholders loans as of December 31, 2004 was $1,331,000, of which
$611,000 are long-term loans and $720,000 are short-term loans.  HOMI has
the right to repay all or part of the short-term loans, plus accrued interest,
through the issuance of Company common stock at a price of $0.25 per share. The
loans are secured by a general lien and security interest over all of HOMI’s
assets, which will be subordinate to all pre-existing liens on the assets.
Additionally, three shareholders pledged a collective total of 2,000,000 of
their shares in the Company as collateral for the $700,000 of loans received by
HOMI in November 2004.
 
 **Off
Balance Sheet Arrangements**
 
 HOMI has
no sifnificant off balance sheet arrangements.
 
 **Inflation**
 
 We do not
believe that inflation has had a significant impact on our consolidated results
of operations or financial condition.
 
 **International
Tax Implications**
 
 HOMI's
subsidiaries in Israel are subject to a 35% corporate tax rate. The South
African subsidiary is subject to a 30% corporate tax rate.
 
 Pursuant
to the Income Tax (Inflationary Adjustments) Law - 1985, results for tax
purposes in Israel are measured in real terms, in accordance with changes in the
Israeli Consumer Price Index.
 
 As of
December 31, 2004, HOMI’s subsidiaries in Israel had approximately $836,000 net
operating loss carry forwards. As of December 31, 2004, HOS had approximately
$851,000 net operating loss carry forwards. As of December 31, 2004, Batim
Bartech had approximately $82,000 net operating loss carry forwards. The loss
carry forwards in Israel and South Africa have no expiration date, whereas the
net operating loss carry forwards incurred in the United States expire at
various times through December 31, 2024.
 
 As of
December 31, 2004, HOMI and it subsidiaries have provided valuation allowances
of $344,000 in respect of deferred tax assets, resulting from tax loss and
temporary differences.
 
 
 **ITEM
7.**  **FINANCIAL
STATEMENTS**
  The
response to this is enclosed in a separate section of this report, see page
F-1.
 
 **ITEM
      8.**
    **CHANGES
      AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**
 
 Disclosed
in Form 8-K filed on March 18, 2004, and Form 8-K filed on December 23,
2004.
 
 
 **ITEM
      8A.**
    **CONTROLS
      AND PROCEDURES**
 
 Under the
supervision and with the participation of our management, including our
Principal Executive Officer and Principal Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the “Exchange Act)).  Based on that evaluation, our Principal
Executive Officer and Principal Financial Officer concluded that, as of the end
of the period covered by this report, our disclosure controls and procedures are
adequately designed to ensure that information required to be disclosed by us in
the reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the applicable
rules and forms. During the period covered by this Annual Report on Form 10-KSB,
there was no change in our internal control over financial reporting (as defined
in Rule 13a-15(f) under the Exchange Act) that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
 ****
 ****
 **ITEM
8B.**  **OTHER
INFORMATION**
 
 Not
applicable
 
 
 **PART
III**
 ****
 **ITEM
9.**  **DIRECTORS
AND EXECUTIVE OFFICERS**
     **Directors
and Executive Officers**
 
 Our Board
of Directors and executive officers and their respective ages as of March 30,
2004 are set forth in the table below. Each of the directors of HOMI will serve
until the next annual meeting of shareholders or until his successor is elected
and qualified.
 
 Also
provided is a brief description of the business experience of each director and
executive officer and the key personnel during the past three years and an
indication of directorships (if any) held by each director in other companies
subject to the reporting requirements under the Federal securities
laws.
 
 **HOMI**
 
 NAME
    AGE
    POSITIONJacob
      Ronnel
    48
    CEO,
      President, DirectorAriel
      Almog
    37
    COO,
      Secretary, DirectorSigal
      Grinboim
    40
    CFOAvraham
      Bahry
    59
    ChairmanRodia
      Mihali
    63
    DirectorSenator
      Robert Singer
    57
    DirectorJules
      Polak
    58
    DirectorBoaz
      Tamir
    52
    Director
 
 
 **BTM**
 
 NAME
    AGE
    POSITIONJacob
      Ronnel
    48
    CEO,
      DirectorAriel
      Almog
    37
    COO,
      Director
  
 **HOS**
 
 NAME
    AGE
    POSITIONJacob
      Ronnel
    48
    CEO,
      President, DirectorAriel
      Almog
    37
    COO,
      Secretary, Director
 
 
 **HILA**
 
 NAME
    AGE
    POSITIONJacob
      Ronnel
    48
    CEO,
      President, DirectorAriel
      Almog
    37
    COO,
      Secretary, Director
 
 
 **BATIM
BARTECH**
 
 NAME
    AGE
    POSITIONAriel
      Almog
    37
    COO,
      DirectorDaniel
      Golan
    60
    CEO,
      DirectorJacob
      Ronnel
    48
    President,
      Director
 
 **Biographies**
 
 **Jacob
Ronnel** , 48, has
been Chief Executive Officer, President and a director of HOMI since December
28, 2001, director and Chief Executive Officer, of Bartech Mediterranean Ltd.
since May 1997 where he became a managing director in March 1998; CEO, President
and a director of Hila since its inception in 2001; President and a director of
Batim Bartech since inception in 1999 and director and chief executive officer
of Hotel Outsource Services, Inc. since September 2001. From July 1997 to
September 1997, Mr. Ronnel was a consultant to and provisional manager of
Brookside Investments, Ltd. From 1996 to 2002, he was a consultant for Kassel
Financial Consultants, located in Israel. Mr. Ronnel obtained a degree in
International Hotel Administration from Ecole Hoteliere de LaUnited Statesnne,
Switzerland.
 
 **Ariel
Almog** , 37, has
been Chief Operating Officer, secretary and director of HOMI since December 28,
2001. He has been Chief Operating Officer and a director of Bartech
Mediterranean Ltd. since May 1997 and a general manager since March 1998, COO,
secretary and a director of Hila since its inception in 2001, COO and a director
of Batim Bartech since inception in 1999 and a director and chief operating
officer of Hotel Outsource Services, Inc. since September 2001. From 1996 to
1998, Mr. Almog was an owner of a franchise Apropo Cafe restaurant in Israel. He
received a Bachelor of Business Administration and Marketing from Schiller
International University (American University, Paris, France).
 
 **Daniel
Golan** , 30, has
been Chief Executive Officer and a director of Batim Bartech since 1999. He has
served as a marketing consultant for various businesses since 1998. From 1988 to
1998 he practiced law in Tel Aviv. From 1984 to 1988 he served as counselor for
economic and commercial affairs in the Israeli embassy in South Africa. Mr.
Golan received degrees in economics, statistics and law from the Hebrew
University in Jerusalem.
 
 **Sigal
Grinboim** , 40, has
been Chief Financial Officer of HOMI since December 2004. From 2003 to 2004, Ms.
Grinboim was a partner at Romano & Co., an accounting firm located in
Israel. From 1997 to 2002, Ms. Grinboim was Chief Financial Officer of Amos
Gazit Ltd, an international import and export company located in Israel. She is
a certified public accountant and has a degree in Business Management and
Accounting from Tel Aviv University.
 
 **Rodia
Mihali** , 63, has
been a director of HOMI since February 2004. For the past 20 years, he has
served as a consultant for various businesses in the United States and
Europe.
 
 **Avraham
Bahry** , 59, has
been Chairman of HOMI since December 2004. Mr. Bahry established Mul-T-Lock
Ltd., an Israeli corporation, in 1973, which he grew into a multi-national
holding company in the business of products and services for the protection of
life and property. Mr. Bahry sold Mul-T-Lock Ltd. in 1999 and has worked as a
consultant since then.
 
 **Boaz
Tamir** , 52, has
been a director of HOMI since December 2004. Mr. Tamir is a founding partner of
Montefiore Partners Venture Capital fund, and Ronald Group (Environment), a
consulting firm. Dr. Tamir also founded and directed, with PWLL Accountants,
Ya’ad Business Development Ltd., a consulting company. He was the founder and
chief executive officer of Be-Connected, a telecommunications company. Dr. Tamir
received a Ph.D in Business Administration and Political Economy from
MIT.
 
 **Senator
Robert W. Singer** , 57, has
been a director of HOMI since December 2004. Senator Singer is a member of the
New Jersey State Senate where he is a member of the Senate Health, Human
Services and Senior Citizens Committee, of which he was co-chairman from 2002 to
2003. Since 1997, Senator Singer has been a member of the Senate Commerce
Committee. He was Republican Senate Majority Leader from 2002 to 2003. Prior to
being elected to the New Jersey State Senate, Senator Singer was member of the
New Jersey General Assembly from 1986-1989 and 1992-1993. Senator Singer has
been Vice Chairman of the Ocean County Board of Health since 1999, a member of
the Board of Trustees of Georgian Court College since 2002, and Chairman of the
Lakewood Municipal Utilities Authority since 1999.
 
 **Jules
M. Polak** , 58, has
been a director of HOMI since December 2004. Mr. Polak has been a principal of
Jules Polak Business Consulting Ltd. since 2000. From 1993 to 2000, he was Chief
Executive Officer of Golden Pages Israel, the yellow pages publisher of Israel.
He has been a director of several privately held companies in
Israel.
 
 **Compliance
with Section 16(a) of the Exchange Act**
 
 There
were no officers, directors and/or beneficial owners of 10% or more of HOMI’s
common stock that have not filed on a timely basis reports required by Section
16(a) of the Securities Exchange Act of 1934 during prior fiscal
years.
 
 **Code
of Ethics**
 
 HOMI has
adopted a code of ethics that applies to its principal executive officers,
principal financial officer and principal accounting officer. HOMI will provide
any person without charge, upon request, a copy of such code of ethics and
explain the manner in which such request may be made.
 
 **Audit
Committee Financial Expert**
 
 HOMI’s
board of directors has determined that HOMI has one financial expert serving on
its audit committee: Mr. Boaz Tamir. Mr. Tamir is an independent
director.
 
 
 **ITEM.
      10**
    **EXECUTIVE
      COMPENSATION**
 
 Name
      And
      Principal
      Position
    Year
    Annual
      Compensation
    Long-Term
      Compensation
    All
      Other Compen-sation
      ($)Salary
      ($)
    Bonus
      ($)
    Other
      Annual
      Compen-
      sation
      ($)
    AwardsRestricted
      Stock
      Award(s)
      ($)
    Securities
      Underlying Options/ SARs
      ($)Jacob
      Ronnel
    2002
    $61,920CEO,
      President
    2003
    $100,0002004(1)
    $100,000
    
    
    
    
    $13,491Ariel
      Almog
    2002
    $117,500COO,
      Secretary
    2003
    $130,2002004(2)
    $161,000Daniel
      Golan(3)
    2002
    $24,000CEO
      of Batim
    2003
    $41,000Bartech
    2004
    $58,000Sigal
      Grinboim
    2002
    N/ACFO
    2003
    N/A2004
    $20,000Avraham
      Bahry
    2002
    N/AChairman
    2003
    N/A2004
    $5,000Rodia
      Mihali
    2002
    N/A2003
    $02004
    $33,000
 
 (1)
    In
      2004, Mr. Ronnel’s salary was paid as follows: BTM- $24,497; HOS-$39,996;
      HOMI- $48,998. According to the employment agreement entered into by Jacob
      Ronnel and HOS which commenced June 2002, Mr. Ronnel shall serve as Chief
      Executive Officer at $80,000 per year; however, Mr. Ronnel received only
      50% of his base salary ($40,000 per year) until June 2003, and resumed his
      $80,000 per year salary in July 2003. Mr. Ronnel is entitled to an annual
      performance-based bonus. HOS may terminate this agreement upon 90 days
      written notice.
 
 (2)
    Mr. Almog’s entire salary was paid by HOS. Pursuant to Ariel
      Almog's employment agreement with HOS, Mr. Almog is to receive an annual
      base salary of $80,000 per year as Chief Operating Officer, commencing
      June 2002. Mr. Almog will be entitled to annual performance-based bonuses.
      Mr. Almog also receives $1,000 per month for medical insurance, matching
      401(k) contributions up to 5% of his base salary, a housing allowance of
      between $2,500 and $2,700 per month, $1,300 per month child education
      allowance, a car, and a one-time relocation allowance of $5,000. HOS may
      terminate this employment agreement upon 90 days written notice.
      Commencing in April 2002, Mr. Almog has been receiving an annual gross
      salary of $80,000 per year from HOS, plus up to $70,000 in expenses from
      HOS.
 
 (3)
    From
      January 2002 to July 2003, Daniel Golan received an annual salary of
      $24,000 from Batim Bartech. Since in August 2003, Mr. Golan has been
      receiving an annual salary of $41,000.
 
 HOMI
intends to adopt an Employee Stock Option Plan for management and key employees
in which between 2,000,000 and 3,000,000 options would be issued. However as of
the date of this report, no such plan has been adopted.
 
 **Directors
Compensation**
 
 Directors
will be reimbursed for the expenses they actually incur in attending board
meetings. Directors will not be paid a fee for their service or attendance at
board. HOMI has agreed issue Mr. Rodia Mihali options to purchase up to
1,000,000 shares of HOMI common stock at $.50 per share. These options shall be
issued 40,000 per month for 25 months and expire 30 days after the last
issuance. As of March 30, 2005, Mr. Mihali had been issued 520,000 options. None
of these options have been exercised. Mr. Avraham Bahry and Mr. Rodia Mihaili
each have consulting agreements with HOMI, pursuant to which each is to receive
$75,000 per year commencing January 1, 2005.
  **ITEM
      11:**
    **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**
 ****
 **Principal
Stockholders**
 
 The
following table sets forth certain information known to HOMI with respect to
beneficial ownership of HOMI common stock as of December 31, 2004, the number
and percentage of outstanding shares of common stock beneficially owned by each
person who beneficially owns:
 
 more than
5% of the outstanding shares of our common stock; each of our officers and
directors; and all of our officers and directors as a group.
 
 Except as
otherwise noted, the persons named in this table, based upon information
provided by these persons, have sole voting and investment power with respect to
all shares of common stock owned by them.
 
 
 
 Names
      and Address of Beneficial Owner
    Number
      of Shares Beneficially Owned
    %
      Beneficially OwnedJacob
      Ronnel
      21
      Hasvoraim Street
      Tel
      Aviv, Israel
    2,276,917
    7.9%Ariel
      Almog
      224
      Maypoint Drive,
      San
      Raphael, CA
    2,726,917
    9.4%Blackborn
      Consulting (1999) LTD.(1)
      25
      HaMerad Street
      Tel
      Aviv, Israel
    3,201,917
    11.1%Daniel
      Golan(2)
      406c
      Sandhurst Gardens
      Sandton
      Johannesburg, South Africa
    200,000
    .7%Rodia
      Mihali
      21
      Neher St
      Munich,
      Germany
    2,545,645(3)
    8.8%Sigal
      Grinboum
      7
      Barazani Street
      Ramat
      Aviv, Israel
    0
    0%Avraham
      Bahry
      1
      Gan Hashikmin Street
      Ganei-Yehuda-Savion,
      Israel
    1,315,000
    4.5%Jules
      Polak
      4
      Kiriati Street
      Ramat
      Gan, Israel
    0
    0%Boaz
      Tamir
      10
      Hoaranim Street
      Zichron-Yaacov,
      Israel
    0
    0%Robert
      W. Singer
      2110
      West County Line Road
      Jackson,
      New Jersey
    0
    0%All
      officers and directors as a
      group
      (10 people)(3)
    12,226,396
    42.5%(2)
 
 (1)
    The
      beneficial owner of the securities held by Blackborn Consulting is Mr.
      Benzion Perko, 17 Alterman Street, Kfar-Saba, Israel.
 
 (2)
    Mr.
      Golan owns these shares through Ice Maiden International Ltd., of which he
      is the beneficial owner.
 
 (3)
    Includes
      options to purchase 600,000 common stock exercisable over the next 60 days
      held by Rodia Mihali.
 ****
 ****
 ****
 **ITEM
12:** ****  **CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.**
 
 Cassel
Economic and Financial Consultants Ltd. accrued $79,274 and $37,239 for the
years ended December 31, 2003 and 2004, respectively, for rent of executive
offices and office services. Benzion Perko, a controlling shareholder of HOMI,
is the control person of Cassel Economic and Financial Consultants Ltd. The
outstanding liability as of December 31, 2004 is $0.
 
 In the
year ended December 31, 2004, Mr. Benzion Perko lent HOMI a total of $557,000
through two companies which he controls: Paroz Promotion and Investing Ltd and
Coventry Promotion and Investing Ltd. The outstanding balance as of December 31,
2004 was $0.
 
 In the
year ended December 31, 2004, Calderstone Investment Ltd., a shareholder of
HOMI, lent HOMI $33,960, none of which was outstanding at December 31, 2004.
 
 In 2003,
a subsidiary of HOMI loaned Daniel Golan (through Batim Homes Ltd) RAND 23,285
(approximately $3,500). This loan was repaid in March 2004. Additionally, in
2003, Daniel Golan, a shareholder of HOMI, and director and officer of Batim
Bartech lent Batim Bartech $16,000. As of December 31, 2004 the balance owed is
RAND 1,515,158 (approximately $299,000).
 
 On
December 1, 2003, Jacob Ronnel and Ariel Alomg, officers and directors of HOMI,
each loaned the company $150,000. Interest on this loan accrues 4% per annum.
The loans and interest are due on December 1, 2008.
 
 In
February 2004 HOMI signed a consultancy agreement with Benzion Perko. In
consideration of the services rendered by Mr. Perko, HOMI issued to 500,000
shares at a deemed value of $150,000. In addition HOMI was to pay Mr. Perko a
monthly consulting fee of $3,000 plus VAT. This agreement was terminated in
September 2004.
 
 In March
2004, HOMI entered into an agreement with Mr. Avraham Bahry, a shareholder of
HOMI, and Mr. Rodia Mihali, a director and shareholder of HOMI, pursuant to
which Mr. Bahry and Mr. Mihali lent the Company $300,000 bearing interest at the
annual rate of LIBOR for six months plus 1%. This loan which was due June 30,
2004, was converted into shares of HOMI’s common stock in right offering dated
July 2004. Mr. Bahry has since been elected a director of the
company.
 
 In May
2004, HOMI approved the conversion of $414,000 of debt into 828,000 shares of
HOMI common stock. Of the loans converted, $299,000 were loans to HOMI by
shareholders.
 
 On July
10, 2004, HOMI commenced an offering to its existing shareholders pursuant to
which each shareholder was offered the right to purchase one share of HOMI
common stock for every 5.566 shares of common stock held as of July 10, 2004. A
total of 4,500,180 shares were offered at $.33 per share. All shares bear
legends restricting their transfer. This offering expired on August 12, 2004.
HOMI raised a total of $936,000 including conversion of the March 2004 loan to
HOMI by Avraham Bahry and Rodia Mihali. A total of 2,834,358 shares were
issued.
 
 In
September 2004, Mr. Benzion Perko lent HOMI $150,000. In October 2004, HOMI
converted this loan plus an existing loan of $250,000 into 952,381 shares of
common stock.
 
 In
November 2004, HOMI entered into agreements with Avraham Bahry and Rodia Mihali
pursuant to which each agreed to lend HOMI $350,000. The terms of the loan are 6
months, due and payable May 2005, and accrue interest at 10% per annum. The
loans may be converted into common stock at $.25 per share and are secured by a
general lien and security interest on all of the company’s assets, subordinate
to all pre-existing liens. Additionally, Jacob Ronnel, Ariel Almog and Benzion
Perko pledged a collective total of 2,000,000 of their HOMI common shares as
collateral for these loans.
 
 On
February 28, 2005, Hotel Outsource Management International, Inc. entered into a
financing agreement with Solog Mifalei Srigah Ltd. (“Solog”), a public limited
company whose stock is traded on the Tel-Aviv Stock Exchange. Pursuant to this
financing agreement, HOMI has been granted a loan facility by Solog, which will
allow HOMI to draw down up to $10,000,000, in such amounts and at such times as
required in accordance with its operations, during the two year term of the
financing agreement. For the term of the Solog financing agreement, Solog has
delivered a contingent undertaking not to provide other entities in HOMI’s
industry with financing, and HOMI has delivered a contingent undertaking not to
obtain external, third party, non-convertible debt financing from any party
other than Solog.
 
 The
financing will be in the form of loans to HOMI and/or its subsidiaries, which
will be repaid at a monthly rate, principal plus interest, of $15 per $1,000 of
principal, assuming a 9 year loan period. If the loan period is less than 9
years, the interest rate will be reduced accordingly. The loans will correspond
in length to the terms of the outsource operation agreements which HOMI and/or
its subsidiaries have entered, or will enter, into with hotels, and the specific
purpose of the financing is to enable HOMI and/or its subsidiaries to purchase,
and/or refund and/or operate the minibars at such hotels.
 
 The loans
will be secured by a lien on all minibars in respect of which the loan was
received, and a security interest and assignment of a portion of HOMI’s and/or
its subsidiaries’ monthly revenues from those minibars, in the amount required
to pay each month’s repayments on all outstanding loans, principal plus
interest.
 
 For each
$1,000,000 of financing that has been completed by Solog, Solog will be entitled
to receive non-assignable, non-transferable options to purchase 300,000 shares
of HOMI’s common stock, at a price of $0.65 (sixty-five cents) per share,
exercisable by cash payment upon 45 days’ advance written notice, at any time
within a period ending on the third anniversary of the date of the financing
agreement.
 ****
 ****
 **ITEM
13.**  **EXHIBITS**
 
 (a)
    Exhibits
      required by Item 601 of Regulation S-B
 
  2.1
    Acquisition
      Agreement between Benjamin Acquisitions, Inc. and Bartech Mediterranean
      International, Ltd.(1)(2)3.1
    Certificate
      of Incorporation(1)(2)3.1A
    Certificate
      of Amendment to Certificate of Incorporation(1)(2)3.2
    By-Laws(1)(2)10.1
    BTM-BSI
      Agreement for Israel, Jordan and Turkey(1)(3)10.2
    BTM-BSI
      Agreement for South Africa(1)(3)10.3
    HOS-BTM
      Stock Purchase Agreement((1)3)10.4
    HOS-BTM
      Stockholders' Agreement(1)(3)10.5
    HOS-BTM
      Option(1)(3)10.6
    HOS
      Purchase Option Agreement(1)(3)10.7
    Bank
      Leumi Credit Agreement(1)(3)10.8
    Bank
      Leumi Promissory Note(1)(3)10.9
    Bank
      Leumi Security Agreement(1)(3)10.10
    Assignment
      by BTM to Protel Bilgisayar Limited Sirketi(1)(3)10.11
    Agreement
      between BTM and Intercontinental Hotels Corporation(1)(4)10.12
    Strategic
      Alliance between Bartech E.M.E.A SARL and HOMI(1)(6)10.13
    Consulting
      Agreement between BTM and Muscum Holding Corp.(1)(5)10.14
    Employment
      Agreement between HOS and Ariel Almog(1)(5)10.15
    Employment
      Agreement between HOS and Jacob Ronnel(1)(5)10.16
    Agreement
      with Rodia Mihali(1)(6)10.17
    Loan
      Agreement by and between HOMI and Jacky Ronnel dated December 1,
      2003(1) (7)10.18
    Loan
      Agreement by and between HOMI and Ariel Almog dated December 1,
      2003(1)
      (7)10.19
    Loan
      Agreement by and between HOMI and Avraham Bahry and Rodia Mihali dated
      March 1, 2003(1)
      (7)10.20
    Financing
      Agreement between HOMI and Solog Mifalelei Srigah Ltd. dated February 28,
      200510.21
    Loan
      Agreement by and between HOMI and Avraham Bahry and Rodia Mihali dated
      November 2004.14.0
    Code
      of Ethics(8)21.0
    Subsidiaries(3)31.1
    Certification
      of Jacob Ronnel pursuant to Rule 13q-14(a) of the Securities Exchange Act
      of 193431.2
    Certification
      of Sigal Grinboim pursuant to Rule 13q-14(a) of the Securities Exchange
      Act of 193432.1
    Certification
      of Jacob Ronnel required by Rule 13a-14(b) under the Securities Exchange
      Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United
      States Code (18 U.S.C. 1350)32.2
    Certification
      of Jacob Ronnel required by Rule 13a-14(b) under the Securities Exchange
      Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United
      States Code (18 U.S.C. 1350)
 
 (1)
    Incorporated
      by reference.
 (2)
    Incorporated
      by reference from initial filing of registration statement on Form SB-2
      filed July 7, 2002.
 (3)
    Incorporated
      by reference from Amendment No. 1 to registration statement on Form SB-2
      filed October 15, 2002.
 (4)
    Incorporated
      by reference from Amendment No. 2 to registration statement on Form SB-2
      filed January 21, 2003.
 (5)
    Incorporated
      by reference from Amendment No. 3 to registration statement on Form SB-2
      filed July 3, 2003.
 (6)
    Incorporated
      by reference from Amendment No. 4 to registration statement on Form SB-2
      filed August 6, 2003.
 (7)
    Incorporated
      by reference from Form 8-K filed April 8,
2004.
 (8)
    Incorporated
      by reference from Form 10-KSB filed on April 16,
2004.
 
 ****
 **ITEM
14.**  **PRINCIPAL
ACCOUNTANT FEES AND SERVICES.**
 
 **Audit
Fees**
 
 The
aggregate fees billed for the years ended December 31, 2003 and December 31,
2004 for professional services rendered by HOMI’s independent auditors for the
audits and review of financial statements contained in Forms 10-QSB were $35,000
and $43,200, respectively. All services provided by independent accountants were
approved by the audit committee of HOMI.
 
 **Audit-Related
Fees**
 
 The
aggregate fees billed in the years ended December 31, 2003 and December 31, 2004
for assurance and related services by our independent auditors that were
reasonably related to the performance of the audit or review of HOMI’s financial
statements and which were $0 and $0, respectively.
 
 **Tax
Fees**
 
 The
aggregate fees billed for the years ended December 31, 2003 and December 31,
2004 for professional services rendered by the principal accountant for tax
compliance, tax advice and tax planning were $0 and $0, respectively. The
nature of these services was consultation and preparation of tax
returns.
 
 **All
Other Fees**
 The
aggregate fees billed in the years ended December 31, 2003 and December 31, 2004
were $0 and $0, respectively. Theses fees were related to reviews of HOMI’s
filings and other advisory services related to the requirements under the
Sarbanes Oxley Act.
 
 **Audit
Committee Pre-Approval Policies and Procedures**
 The Audit
Committee is directly and solely responsible for oversight, engagement and
termination of any independent auditor employed by the company for the purpose
of preparing or issuing an audit report or related work.
 
 T he
Committee meets with the independent auditor prior to the audit and discusses
the planning and staffing of the audit; ****
 
 Approves
in advance the engagement of the independent auditor for all audit services and
non-audit services and approve the fees and other terms of any such engagement;
and
 
 Obtains
periodically from the independent auditor a formal written statement of the
matters required to be discussed by Statement of Auditing Standards No. 61, as
amended, and, in particular, describing all relationships between the auditor
and the Company, and discusses with the auditor any disclosed relationships or
services that may impact auditor objectivity and independence.
 
 
  
  **SIGNATURES**
 
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
 
 
 HOTEL
      OUTSOURCE MANAGEMENT INTERNATIONAL, INC.Dated:
      April 14, 2005
    By:
    /s/
      Jacob RonnelJacob
      Ronnel, President
 
 In
accordance with the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
 
 
 /s/ Jacob Ronnel
    
    /s/ Ariel AlmogJacob
      Ronnel, President, Director
    
    Ariel
      Almog, Secretary, DirectorDated:
    April 14, 2005
    Dated:
    April 14, 2005/s/ Sigal Grinboim
    
    /s/ Rodia MihaliSigal
      Grinboim, Chief Financial Officer
    
    Rodia
      Mihali, DirectorDated:
    April 14, 2005
    Dated:
    April 14, 2005/s/ Avraham Bahry
    
    /s/ Jules PollakAvraham
      Bahry, Director
    
    Jules
      Pollak, DirectorDated:
    April
      14, 2005
    Dated:
    April 14, 2005/s/ Boaz Tamir
    
    /s/ Robert W. SingerBoaz
      Tamir, Director
    
    Robert
      W. Singer, DirectorDated:
    April 14, 2005
    Dated:
    April 14, 2005
 
 
  **HOTEL
OUTSOURCE MANAGEMENT**
 
 **INTERNATIONAL
INC.**
 
 **AND
SUBSIDIARIES**
 
 
 
 
 **CONSOLIDATED
FINANCIAL STATEMENTS**
 **AS
OF AND FOR THE YEARS ENDED**
 **DECEMBER
31, 2004 AND 2003**
 
 
 
 
 
 **INDEX**
 
 **Page****Reports
      of Independent Registered Public Accounting Firms**
    **2,
      3****Consolidated
      Balance Sheets**
    **4-5****Consolidated
      Statements of Operations**
    **6****Statements
      of Changes in Shareholders' Equity**
    **7****Consolidated
      Statements of Cash Flows**
    **8-9****Notes
      to the Consolidated Financial Statements**
    **10-29**
 
 
 
 
 - - **-
- - - - - - - - - - - - - -**
 
 
   
 
  
  *REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM*
 
 *To
the Board of Directors and Stockholders of Hotel Outsource Management
International Inc.* *and
subsidiaries*
 
 *We
have audited the accompanying balance sheet of Hotel Outsource Management
International Inc.* *and
subsidiaries* *(the
“Company”), as of December 31, 2004, and the related statements of operations,
changes* *in
shareholders’* *equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.*
 
 *We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.*
 
 *In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2004, and the results of its operations and cash flows for the year then ended
in conformity with accounting principles generally accepted in the United States
of America.*
 
 *KINGERY
& CROUSE, P.A. s/s*
 
 *April
14, 2005*
 *Tampa,
FL*
 
 2801 WEST
BUSCH BOULEVARD, SUITE 200, TAMPA, FLORIDA 33618
 PHONE:
813.874.1280 ■ FAX:
813.874.1292 ■
WWW.TAMPACPA.COM




**INDEPENDENT
AUDITORS’ REPORT**


**to
the Shareholders of**
 
 **HOTEL
OUTSOURCING MANAGEMENT INTERNATIONAL INC.**
 
 **(Formerly:
Benjamin Acquisition Inc.)**
 
 
 We have
audited the accompanying consolidated balance sheet of Hotel Outsourcing
Management International Inc. (Formerly: Benjamin Acquisition Inc.) (the
"Company") and its subsidiaries as of December 31, 2003 and the related
consolidated statements of operations, changes in stockholders’ equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
 
 
 We
conducted our audits in accordance with auditing standards generally accepted in
the 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. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
 
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company and
its subsidiaries as of December 31, 2003 and the consolidated results of their
operations and cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States.
 
 
 ***“Staley,
Okada & Partners”***
 
 
 Vancouver,
      Canada
    
    Staley,
      Okada and PartnersMarch
      30, 2004














**HOTEL
OUTSOURCE MANAGEMENT**
 **INTERNATIONAL
INC. AND SUBSIDIARIES**








**CONSOLIDATED
BALANCE SHEETS**


**US
Dollars in thousands**








**December
      31,**
    
    **December
      31,****Note**
    
    **2003**
    
    **2004**ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
    
    
    137
    
    263Short-term
      bank deposits
    
    
    19
    
    34Trade
      receivables
    
    
    195
    
    270Related
      party receivables
    3
    
    23
    
    87Other
      accounts receivable
    
    
    97
    
    270Inventory
    
    
    98
    
    170569
    
    1,094LONG-TERM
      INVESTMENTS AND RECEIVABLES:Investments
      in an affiliated company
    4
    
    13
    
    21Severance
      pay fund
    
    
    23
    
    13Trade
      receivables
    
    
    47
    
    -83
    
    34PROPERTY
      AND EQUIPMENT, NET:
    5
    
    2,489
    
    4,017OTHER
      ASSETS - CONTRACT RIGHTS
    6
    
    56
    
    573,197
    
    5,202





See notes
to the consolidated financial statements.


****
 ****
 **HOTEL
OUTSOURCE MANAGEMENT**
 **INTERNATIONAL
INC. AND SUBSIDIARIES**


**CONSOLIDATED
BALANCE SHEETS**


**US
Dollars in thousands (except share data)**








**December
      31,**
    
    **December
      31,****Note**
    
    **2003**
    
    **2004**LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Short-term
      bank credit
    7
    
    347
    
    359Current
      maturities of long-term loans
    9
    
    365
    
    307Due
      to Bartech Systems International
    10
    
    288
    
    735Other
      related party loans
    15
    
    573
    
    712Trade
      payables
    
    
    130
    
    200Other
      accounts payable and accrued expenses
    8
    
    115
    
    2211,818
    
    2,534LONG-TERM
      LIABILITIES:Long-term
      loans from banks and shareholders
    9
    
    1,029
    
    837Accrued
      severance pay
    
    
    25
    
    13Deferred
      taxes
    14
    
    19
    
    481,073
    
    898COMMITMENTS
      AND CONTINGENT LIABILITIES
    10MINORITY
      INTEREST
    
    
    233
    
    500SHAREHOLDERS'
      EQUITY:Share
      capital -
    11Preferred
      stock of $ 0.001 par value -
      Authorized:
      5,000,000 shares as of December 31, 2004 and 2003;
      Issued
      and outstanding: 0 shares as of December 31, 2004 and 2003;
      Common
      stock of $ 0.001 par value -
      Authorized:
      100,000,000 shares as of December 31, 2004 and 30,000,000 shares as of
      December 31, 2003;
      Issued
      and outstanding: 28,834,880 shares as of December
      31,
      2004 and 23,000,000 shares as of December 31, 2003;
    
    
    23
    
    29Additional
      paid-in capital
    
    
    1,579
    
    3,491Accumulated
      other comprehensive income
    
    
    34
    
    45Accumulated
      deficit
    
    
    (1,563)
    
    (2,295)73
    
    1,2703,197
    
    5,202





See notes
to the consolidated financial statements.


****
 **HOTEL
OUTSOURCE MANAGEMENT**
 **INTERNATIONAL
INC. AND SUBSIDIARIES**


**CONSOLIDATED
STATEMENTS OF OPERATIONS**


**US
Dollars in thousands (except share and per share data)**








**Year
      ended December 31,****Note**
    
    **2003**
    
    **2004**Revenues
    
    12
    
    1,026
    
    1,647Cost
      of revenues
    
    
    
    (501)
    
    (797)Depreciation
    
    
    
    (217)
    
    (362)Gross
      profit
    
    
    
    308
    
    488Operating
      expenses:Selling
      and marketing
    
    
    
    (118)
    
    (243)General
      and administrative
    
    
    
    (815)
    
    (960)Operating
      loss
    
    
    
    (625)
    
    (715)Financial
      expenses, net
    
    13
    
    (187)
    
    (67)Other
      expenses, net
    
    
    
    (97)
    
    (2)Loss
      before taxes on income
    
    
    
    (909)
    
    (784)Tax
      provision (benefit) (on income)
    
    14
    
    24
    
    (11)(885)
    
    (795)Equity
      in earnings (losses) of an affiliated company
    
    
    
    -
    
    8Minority
      interest in losses of unconsolidated subsidiaries, net
    
    
    
    81
    
    55Net
      loss
    
    
    
    (804)
    
    (732)Basic
      and diluted net loss per share
    
    
    
    (0.036)
    
    (0.029)Weighted
      average number of shares used in computing basic and diluted net loss per
      share
    
    
    
    22,512,329
    
    25,605,107





See notes
to the consolidated financial statements.












**HOTEL
OUTSOURCE MANAGEMENT**
 **INTERNATIONAL
INC. AND SUBSIDIARIES**




**STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY**


**US
Dollars in thousands (except shares data)**








**Number
      of**
      **Shares
      of Common**
      **Stock**
    
    **Share**
      **capital**
    
    **Additional
      paid-in capital**
    
    **Accumulated
      other comprehensive income**
    
    **Accumulated**
      **deficit**
    
    **Other
      Comprehensive loss**
    
    **Total**Balance
      as of January 1, 2003
    
    22,000,000
    
    22
    
    867
    
    10
    
    (759)
    
    -
    
    140Issuance
      of shares
    
    1,000,000
    
    1
    
    499
    
    -
    
    -
    
    -
    
    500Capital
      Reserve in accord with issuance of shares to consultants
    
    -
    
    -
    
    213
    
    -
    
    -
    
    -
    
    213Foreign
      currency translation adjustments
    
    -
    
    -
    
    -
    
    24
    
    -
    
    24
    
    24Net
      loss
    
    -
    
    -
    
    -
    
    -
    
    (804)
    
    (804)
    
    (804)Total
      comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    (780)Balance
      as of December 31, 2003
    
    23,000,000
    
    23
    
    1,579
    
    34
    
    (1,563)
    
    
    
    73Issuance
      of shares
    
    4,834,880
    
    5
    
    1,826
    
    -
    
    -
    
    -
    
    1,831Issuance
      of shares to consultants
    
    1,000,000
    
    1
    
    86
    
    -
    
    -
    
    -
    
    87Foreign
      currency translation adjustments
    
    -
    
    -
    
    -
    
    11
    
    -
    
    11
    
    11Net
      loss
    
    -
    
    -
    
    -
    
    -
    
    (732)
    
    (732)
    
    (732)Total
      comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    (721)Balance
      as of December 31, 2004
    
    28,834,880
    
    29
    
    3,491
    
    45
    
    (2,295)
    
    
    
    1,270





See notes
to the consolidated financial statements















**HOTEL
OUTSOURCE MANAGEMENT**
 **INTERNATIONAL
INC. AND SUBSIDIARIES**


**CONSOLIDATED
STATEMENTS OF CASH FLOWS**


**US
Dollars in thousands**


**Year
      ended December 31,****2003**
    
    **2004****CASH
      FLOWS FROM OPERATING ACTIVITIES:**Net
      loss
    
    (804)
    
    (732)Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
    
    224
    
    370Compensation
      expense resulting from shares granted
    
    213
    
    87Increase
      (decrease) in accrued severance pay, net
    
    1
    
    (2)Accrued
      interest and linkage difference on loans, net
    
    66
    
    (42)Equity
      in losses (earnings) of an affiliated company
    
    -
    
    (8)Loss
      on sale of property and equipment
    
    -
    
    -Minority
      interest in losses of subsidiaries, net
    
    (81)
    
    (55)Deferred
      income taxes, net
    
    (4)
    
    23Increase
      in inventory
    
    (12)
    
    (62)Increase
      in trade receivables
    
    (18)
    
    (16)Decrease
      (increase) in related parties
    
    88
    
    (64)Decrease
      (increase) in other accounts receivable
    
    (78)
    
    (134)Increase
      in trade payables
    
    25
    
    57Increase
      (decrease) in other accounts payable and accrued expenses
    
    (32)
    
    117Net
      cash used in operating activities
    
    (412)
    
    (461)**CASH
      FLOWS FROM INVESTING ACTIVITIES:**Purchase
      of property and equipment
    
    (826)
    
    (1,308)Proceeds
      from sale of property and equipment
    
    -
    
    -Short-term
      bank deposits, net
    
    7
    
    (14)Short-term
      loans to a shareholder
    
    -
    
    -Net
      cash used in investing activities
    
    (819)
    
    (1,322)**CASH
      FLOWS FROM FINANCING ACTIVITIES:**Issuance
      of shares, net
    
    500
    
    1,508Issuance
      of shares to minority in subsidiary
    
    154
    
    322Payment
      of receivables on account of shares
    
    -
    
    -Proceeds
      from long-term loans from banks and others
    
    197
    
    -Repayment
      of long-term loans from banks and others
    
    (294)
    
    (351)Proceeds
      from loans from shareholders, net
    
    522
    
    458Short-term
      bank credit, net
    
    119
    
    (36)Net
      cash provided by financing activities
    
    1,198
    
    1,901Effect
      of exchange rate changes on cash and cash equivalents
    
    8
    
    8Increase
      (Decrease) in cash and cash equivalents
    
    (25)
    
    126Cash
      and cash equivalents at the beginning of the year
    
    162
    
    137Cash
      and cash equivalents at the end of the year
    
    137
    
    263





See notes
to the consolidated financial statements.







**HOTEL
OUTSOURCE MANAGEMENT**
 **INTERNATIONAL
INC. AND SUBSIDIARIES**


**CONSOLIDATED
STATEMENTS OF CASH FLOWS**


**US
Dollars in thousands**





**Supplemental
      cash flow activities:**
    **Year
      ended December 31,****2003**
    
    **2004**(a)
    Non-cash
      transactions:Purchase
      of property and equipment
    
    288
    
    735Loans
      from shareholders converted into shares
    
    -
    
    323(b)
    Cash
      paid during the year for interest
    
    121
    
    79





See notes
to the consolidated financial statements.







HOTEL OUTSOURCE MANAGEMENT
 INTERNATIONAL INC. AND SUBSIDIARIES
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 **US
Dollars in thousands**





**NOTE
      1:-**
    **GENERAL****AND
      NATURE OF OPERATIONS**





a.
    Hotel
      Outsource Management International Inc. ("HOMI") was incorporated under
      the laws of Delaware on November 9, 2000. The Company changed its name
      from Benjamin Acquisitions Inc. in February
2002





Pursuant
      to the terms of an Agreement and Acquisition Plan (hereinafter - "the
      Agreement") dated December 28, 2001 between HOMI, Bartech Mediterranean
      Ltd. ("Bartech Med") and its shareholders, HOMI issued 12 million shares
      to the shareholders of Bartech Med in exchange for all of the outstanding
      share capital of Bartech Med, thus converting Bartech Med into a wholly
      owned subsidiary of HOMI.





HOMI
      had been inactive since inception, and was only involved in raising
      capital from investments. Prior to signing the Agreement, HOMI granted
      Bartech Med convertible loans that were converted into Bartech Med capital
      upon signing the Agreement. The acquisition plan between HOMI and Bartech
      Med was an acquisition by a non-operating corporation (HOMI) of an
      operating company (Bartech Med) that resulted in the owners and management
      of the operating company having operating control (54.5%) of the combined
      company subsequent to the transaction. The transaction has been accounted
      for as a "reverse acquisition" whereby Bartech Med (the accounting
      acquirer) is deemed to have acquired HOMI (the legal acquirer). Because
      HOMI was a non-operating shell company with nominal assets and Bartech Med
      was a private operating company, the acquisition was recorded as the
      issuance of stock for the net monetary assets of HOMI, accompanied by a
      recapitalization and no goodwill or other intangible assets were
      recorded.





HOMI
      registered 7,566,032 shares on the OTCBB and commenced trading on February
      25, 2004.





b.
    Bartech
      Med was incorporated under the laws of Israel in 1997 and is a provider of
      services to hotels. Bartech Med is the exclusive distributor of Bartech
      Systems International and Bartech EMEA SARL (together: "Bartech Int.") in
      Israel. Bartech Int. is a manufacturer of computerized minibars for
      hotels. Since inception, Bartech Med has sold and installed computerized
      minibars in hotels.





In 1999,
Bartech Med expanded its scope of operations to purchasing minibars and signing
exclusive outsources agreements with hotels for the provision and operation of
the minibars. The hotels receive a monthly commission computed as a percentage
of the revenues. In addition, Bartech Med operates through subsidiaries and
affiliates. For a description of Bartech Med’s subsidiaries and affiliates see
Note 1c.





Bartech
Med and its subsidiaries are dependent upon a sole supplier (Bartech Int.) to
provide minibars custom built to client specifications. Failure of this supplier
to supply Bartech Med with products in a timely and satisfactory manner or
termination of the exclusivity agreement could adversely affect the financial
condition and operating results of Bartech Med.





Hereinafter,
HOMI and Bartech Med will be referred to as "the Company".


**HOTEL
OUTSOURCE MANAGEMENT**
 **INTERNATIONAL
INC. AND SUBSIDIARIES**
  **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **US
Dollars in thousands**




c.
    Subsidiaries
      and Affiliates of the Company:





1.
    Commencing
      with the end of 1999, a 50% owned Israeli affiliate operates minibars in
      one hotel in Israel.





2.
    A
      wholly owned Israeli subsidiary operated minibars in one hotel in Eilat,
      Israel. In June 2003, the wholly owned subsidiary terminated the contract
      with the hotel and has been inactive since.





3.
    Commencing
      with the year 2000, a 50% owned affiliate commenced operations in South
      Africa. As of December 31, 2004, this company operates minibars in 3
      hotels in Johannesburg and Cape Town (868 hotel rooms). Bartech Med’s
      holdings in this affiliate are via its 100% ownership of a company
      incorporated in the British Virgin Islands.





On
      October 1, 2001, the Company purchased an additional 10% of the shares of
      the affiliate in South Africa increasing its ownership interest to 60%.
      Henceforth, operations of the subsidiary have been included in the
      consolidated financial statements of the Company. Since this acquisition
      was completed after June 30, 2001, it is subject to the accounting under
      Statement of Financial Accounting Standard ("SFAS") No. 141 "Business
      Combination" and SFAS No. 142 "Goodwill and Other Intangible
      Assets".





4.
    Commencing
      with the year 2001, through a wholly owned United States subsidiary, the
      Company formed a 70% owned subsidiary (hereinafter - "HOS") and commenced
      outsource operations in the United States. The remaining 30%isheld
      by BartechSystems
      International-
      the Company’s major suppliers of minibars (see Note
  10c).





As of
December 31, 2004, HOS operates minibars in 4 hotels in the United States (1,594
hotel rooms). HOS received on November 30, 2004 a letter from The Stanhope, Park
Hyatt NY advising that the owner of the property known as The Stanhope Park
Hyatt NY (“Hotel”), has notified Hyatt Corporation of its sale of the property
to a new owner who intends \ed to cease
Hotel operations, and therefore end the Hyatt Management Agreement. As a result
of this decision, Hyatt ceased its management of the hotel on January 15,
2005 and
terminated its contract with HOS. According
to the agreement between HOS and the Hyatt, in
January 2005, the Hyatt purchased the minibars (which had a net book value of
approximately $ 187,500 as of
December 31, 2004) for $275,000. The
payment was received in January 2005.





In the
quarter ending September 30, 2004 HOS signed 3 agreements with hotels in
Seattle, Boston and Washington to install and operate minibars in 1,585 rooms.
These installations were completed by the end of the first quarter of 2005.





5.  In
February 2004, a wholly owned subsidiary in Luxembourg was formed and commenced
its operations in Europe through 2 subsidiaries in Germany and
Italy.











**HOTEL
OUTSOURCE MANAGEMENT**
 INTERNATIONAL
INC. AND SUBSIDIARIES
 
 **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **US
Dollars in thousands**


The
subsidiary in Germany signed an agreement regarding installation of 130 minibars
in a hotel in Munich and commencement of operations started in the beginning of
April 2004.





In June
2004 the subsidiary in Germany signed an agreement with the Arabella Sheraton
Munich to take over the management and operate minibars in 543 rooms in that
hotel. Operations in the hotel commenced in June 2004.





In June
2004 the subsidiary in Italy signed an outsource operation agreement with the
Sheraton Diana Milan to install and operate minibars in 106 rooms in that hotel.
The subsidiary in Italy commenced operations in the hotel in September 2004. The
agreement is due till August 2005 with an option for an extension.





In
October 2004 the subsidiary in Italy signed an agreement to install and operate
250 minibars in the Hyatt hotel in Malta, installation is to be completed in the
first quarter of 2005.





In
February 2005 the subsidiary in Italy signed an agreement to install and operate
282 minibars in the Meridian hotel in Malta, installation is to be completed in
the second quarter of 2005.





**NOTE
      2:-**
    **SIGNIFICANT
      ACCOUNTING POLICIES**





The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States ("US
GAAP").





a.
    Use
      of estimates:





The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. The reported amounts of
revenues and expenses during the reporting period may be affected by the
estimates and assumptions management is required to make. Estimates that are
critical to the accompanying consolidated financial statements arise from
management’s belief that all of the Company’s long-lived assets are recoverable
and that depreciable lives on the mini-bars are reasonably stated. The markets
for the Company’s products are characterized by competition, evolving standards
and price competition, all of which could impact the future realizability of the
Company’s assets. Estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the consolidated financial statements in
the period they are determined to be necessary.





b.
    Financial
      statements in US dollars:





The
majority of the Company's sales are in dollars or in dollar linked currencies.
In addition, the majority of the Company's financing is received in US dollars.
Accordingly, the Company has determined the US dollar as the currency of its
primary economic environment and thus, its functional and reporting currency.
Non-dollar transactions and balances have been remeasured into US dollars in
accordance with Statement of Financial Accounting Standard No. 52 "Foreign
Currency Translation" ("SFAS No. 52"). All transaction gains and









**HOTEL
OUTSOURCE MANAGEMENT**
 INTERNATIONAL
INC. AND SUBSIDIARIES
 
 **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **US
Dollars in thousands**


losses
from the remeasurement of monetary balance sheet items denominated in non-dollar
currencies are reflected in the statement of operations as financial income or
expenses, as appropriate.





The
financial statements of a foreign subsidiary, whose functional currency is not
the US dollar, have been translated into US dollars. All balance sheet accounts
have been translated using the exchange rates in effect at the balance sheet
date. Statements of operations amounts have been translated using the average
exchange rate for the period. The resulting translation adjustments are not
included in determining net loss but are reported in a separate component of
accumulated other comprehensive income (loss) in shareholders’ equity.





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 group, have been eliminated in
consolidation.





d.
    Cash
      and cash equivalents:





The
Company considers all highly liquid investments purchased with maturities of
three months or less at the date acquired to be cash equivalents.





e.  Short-term
bank deposits:





The
Company classifies bank deposits with maturities of more than three months and
less than one year as short-term deposits. Short-term deposits are presented at
cost, including accrued interest.





f.
    Inventory:





Inventory
is stated at the lower of cost or market value. Inventory write-offs are
provided to cover risks arising from slow moving items. Cost is determined using
the "first-in, first-out" method. Inventory is composed of the food products and
drinks sold at the minibars in hotels.





g.
    Property
      and equipment:





Property
and equipment are stated at cost net of accumulated depreciation. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, at the following annual rates:





%Minibars
    10%
      or over the term of the hotel agreement (mainly 8-10 years), whichever is
      the shorterComputers
      and electronic equipment
    15
      - 33Office
      furniture and equipment
    7









**HOTEL
OUTSOURCE MANAGEMENT**
 INTERNATIONAL
INC. AND SUBSIDIARIES
 
 **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **US
Dollars in thousands**


h.
    Other
      assets:





Contract
rights for operating minibars in hotels in South Africa are amortized using the
straight-line method over the contracts periods with the hotels - 10
years.





i.  Impairment
of long-lived assets:





The
      Company's long-lived assets and certain identifiable intangibles are
      reviewed for impairment in accordance with Statement of Financial
      Accounting Standard No. 144 "Accounting for the Impairment or Disposal of
      Long-Lived Assets" ("SFAS No. 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 expect 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.





As of
December 2003 and December 2004, no impairment losses have been
identified.





j.
    Revenue
      recognition, and Accounts Receivable:





Revenues
are derived from operating minibars through exclusive long-term revenue sharing
agreements with hotels.





Revenues
      from product sales derived from outsource activity (minibars' content),
      under the exclusive long-term revenue sharing agreements with hotels, net
      of the hotel’s portion, and revenues from disposal of minibars are
      recognized in accordance with Staff Accounting Bulletin No. 101 "Revenue
      Recognition in Financial Statements" ("SAB No. 101") when delivery has
      occurred, persuasive evidence of an arrangement exists, the vendor’s fee
      is fixed or determinable and collectibles is probable. The Company
      determines such revenues by receiving confirmation of sales from hotels
      using its minibars (see Note 10a).





The
Company’s payment terms are normally net 15 days from invoicing. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral because (1) management believes it has certain collection
measures in-place to limit the potential for significant losses, and (2) because
of the nature of customers comprising the Company’s customer base.





k.
    Investments
      in affiliates:





The
      investment in companies over which the Company can exercise significant
      influence (generally, entities in which the Company holds 20% to 50% of
      ownership or voting rights) is presented using the equity method of
      accounting. The Company generally discontinues applying the equity method
      when its investment (including advances and loans) is reduced to zero and
      it has not guaranteed obligations of the affiliate or otherwise committed
      to provide












**HOTEL
OUTSOURCE MANAGEMENT**
 INTERNATIONAL
INC. AND SUBSIDIARIES
 
 **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS** ****
 **US
Dollars in thousands**






further
      financial support to the affiliate. Where the Company’s share of an
      affiliate’s losses is greater than the investment in such an affiliate and
      in which the Company has guaranteed obligations of the affiliate, the
      excess amount is presented as a liability.





m.
    Accounting
      for stock based compensation:





Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to account for stock-based compensation using
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and has adopted the disclosure only provisions of SFAS
123. Accordingly, compensation cost for stock options is measured at intrinsic
value, which is the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee is required to pay
for the stock. The Company accounts for stock-based compensation issued to
non-employees and consultants in accordance with the provisions of SFAS 123 and
the Emerging Issues Task Force consensus in Issue No. 96-18 ("EITF 96-18"),
"Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring or in Conjunction with Selling, Goods or Services".





On
December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 123 (revised 2004), Share-Based Payment (“Statement 123R”), which
is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation
(“Statement 123”). Generally, the approach in Statement 123(R) is similar to the
approach described in Statement 123. However, Statements 123 permitted, but not
required, share-based payments to employees to be recognized based on their fair
values while Statement 123(R) requires all share-based payments to employees to
be recognized based on their fair values. Statement 123R also revises, clarifies
and expands guidance in several areas, including measuring fair value,
classifying an award as equity or as a liability and attributing compensation
cost to reporting periods. The new standard will be effective for the Company in
the first interim period beginning after June 15, 2005. The adoption of
Statement 123R may have in the future, a significant effect on the Company’s
results of operations.





n.
    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 provides a valuation allowance, if necessary to
reduce the amount of deferred tax assets to their estimated realizable
value.





o.
    Concentrations
      of credit risk:











**HOTEL
OUTSOURCE MANAGEMENT**
 INTERNATIONAL
INC. AND SUBSIDIARIES
 
 **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **US
Dollars in thousands**





Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents and trade receivables. The
majority of the





Company's
cash and cash equivalents are invested in interest bearing dollar and
dollar-linked instruments or in NIS deposits and South African Rand bearing
interest with major Israeli, US and South African banks. Such deposits in the
United States may be in excess of insured limits and are not insured in other
jurisdictions. Management believes that the financial institutions that hold the
Company's investments are financially sound, and accordingly, minimal credit
risk exists with respect to these investments.





The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. To date, the Company has not experienced any material
losses. An allowance for doubtful accounts is provided with respect to those
amounts that the Company has determined to be doubtful of collection. No
allowance was deemed necessary for the years ending December 31, 2003 and
2004.





The
Company has no off-balance sheet concentration of credit risk, such as foreign
exchange contracts or other foreign currency hedging arrangements.





p.
    Severance
      pay:





The
Company's liability for severance pay is calculated pursuant to Israeli
severance pay law based on the most recent salary of the employees multiplied by
the number of years of employment as of balance sheet date. Employees are
entitled to one month's salary for each year of employment, or a portion
thereof. The Company’s liability in Israel is fully provided by monthly deposits
with insurance policies and by an accrual. The value of these policies is
recorded as an asset in the Company’s balance sheet.





The
deposited funds include profits accumulated up to the balance sheet date. The
deposited funds may be withdrawn only upon the fulfillment of the obligation
pursuant to 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 immaterial profits.





Severance
pay expenses (income) for the years ended December 31, 2003 and 2004 amounted to
$11 and $(2), respectively.





q.
    Advertising
      Costs





Advertising
expenses were zero for both of the years ended December 31, 2004 and
2003.





r.
    Basic
      and diluted net loss per share:





Basic net
loss per share is computed based on the weighted average number of Common shares
outstanding during each year. Diluted loss per share is computed based on the
weighted average number of Common shares outstanding during each year, plus
dilutive potential Common shares considered outstanding during the year, in
accordance with Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS No. 128"). In periods in which they would be anti-dilutive,
common equivalent shares are ignored in the loss per share calculations. As a
result, basic and diluted net loss per share is identical for both of the years
in the accompanying consolidated financial statements.










**HOTEL
OUTSOURCE MANAGEMENT**
**INTERNATIONAL
INC. AND SUBSIDIARIES**
****
**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**US
Dollars in thousands**





Shares
issued at par value are recorded as outstanding shares for all reported periods
in the same manner as stock issued as a stock dividend or a stock split. All
share and per share amounts have been retroactively adjusted to reflect such
issuance.





s.
    Fair
      value of financial instruments:





The
financial instruments of the Company consist mainly of cash and cash
equivalents, short-term bank deposits, trade receivables, other accounts
receivable, short-term bank credit, trade payables, other accounts payable and
long-term loans from banks and others.





In view
of their short term nature, the fair value of the financial instruments included
in working capital of the Company is usually identical, or close, to their
carrying value. The fair value of non-related long-term loans also approximates
the carrying value, since they bear interest at rates approximating the
prevailing market rates. It was not practicable to estimate the fair value of
certain related party loans due to a lack of similar arrangements in the
marketplace and uncertainty as to the date and/or manner in which such loans
will be satisfied.





t.
    Reclassifications





Certain
amounts in the 2003 financial statement have been reclassified to conform to the


presentation
in the 2004 financial statements.





u.
    Liquidity





The
Company’s consolidated financial statements were prepared using accounting
principles generally accepted in the United States of America applicable to a
going concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. At December 31, 2004, the Company
had a working capital deficit of approximately $728,000 (net of certain
shareholder loans that may be converted to equity by the Company).. However,
subsequent to December 31, 2004, the Company enhanced its working capital
position as a result of the sale of assets discussed at Note 1, sales of certain
shares of its common stock for approximately $200,000 and by securing the credit
facility discussed at Note 16 (which resulted in an approximate $650,000
improvement in working capital and is expected to provide the necessary funds
for the Company’s expansion). Management believes this debt facility and
improving operations (the Company continues to expand its operations and
estimates that it will generate positive results of operations in 2005) will
provide adequate capital to fund the Company’s operating needs and growth for
2005 and beyond. As such, the consolidated financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be
necessary should it be unable to continue as a going concern.











**HOTEL
OUTSOURCE MANAGEMENT**
 INTERNATIONAL
INC. AND SUBSIDIARIES
 
 **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **US
Dollars in thousands**








**NOTE
      3:-**
    **RELATED
      PARTY RECEIVABLES**


**December
      31,**
    
    **December
      31,****2003**
    
    **2004**Shareholders
      (see Note 15g) (1)
    5
    
    61Affiliate
      and other
    18
    
    2623
    
    87





(1)
    $55
      of the balance is a short-term loan in South African Rand, and bears
      annual interest of 10.75 %.





**NOTE
      4:-**
    **INVESTMENTS
      IN AN AFFILIATED COMPANY**


**December
      31,**
    
    **December
      31,****2003**
    
    **2004**Total
      investments in an affiliated company
    13
    
    21(a)
    Composition:Net
      equity as at purchase date
    1
    
    1Changes
      commencing with purchase date:Accumulated
      profits
    12
    
    2013
    
    21





**NOTE
      5:-**
    **PROPERTY
      AND EQUIPMENT**


**December
      31,**
    
    **December
      31,****2003**
    
    **2004**Cost:Minibars
    2,862
    
    4,753Vehicle
    27
    
    27Computers
      and electronic equipment
    25
    
    42Office
      furniture and equipment
    14
    
    542,928
    
    4,876Accumulated
      depreciation:Minibars
    411
    
    810Vehicle
    -
    
    4Computers
      and electronic equipment
    17
    
    28Office
      furniture and equipment
    11
    
    17439
    
    859Depreciated
      cost
    2,489
    
    4,017










**HOTEL
OUTSOURCE MANAGEMENT**
 INTERNATIONAL
INC. AND SUBSIDIARIES
 
 **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **US
Dollars in thousands**





Depreciation
expenses amounted to $217 and $362 for the years ended December 31, 2003 and
2004, respectively. As for liens, see Notes 7 and 10f.








**NOTE
      6:-**
    **CONTRACT
      RIGHTS**


**December
      31,**
    
    **December
      31,****2003**
    
    **2004**Cost
    53
    
    53Accumulated
      amortization
    (12)
    
    (20)Effect
      of exchange rate change
    15
    
    2456
    
    57





Amortization
expenses amounted to $7 and $8 for the years ended December 2003 and 2004,
respectively. The expected amortization expenses for the next 7 years are $8 per
year.





**NOTE
      7:-**
    **SHORT-TERM
      BANK CREDIT**





As of
December 31, 2004, the Company and its subsidiaries have authorized credit line
from a bank in the amount of $35, denominated in New Israeli Shekels (NIS) and
bearing interest at the rate of Prime + 3%. An amount of $48 is outstanding at
December 31, 2004. The Company pays quarterly fees for maintaining its credit
line at the rate of 0.375%. The credit line, which was personally guaranteed by
one of the Company’s stockholders, expired on March 31, 2005.





As of
December 31, 2004, the Company and its subsidiaries have authorized credit line
from a bank, denominated in South African Rand and bearing interest at the rate
of 11%. An amount of $311 is outstanding at December 31, 2004. Advances under
the line are collateralized by minibars having a net book value of approximately
$825 at December 31, 2004.





**NOTE
      8:-**
    **OTHER
      ACCOUNTS PAYABLE AND ACCRUED
EXPENSES**





**December
      31,**
    
    **December
      31,****2003**
    
    **2004**Payables
      in respect of "revenue sharing" agreement
    38
    
    91Accrued
      expenses
    43
    
    37Employees
      and payroll accruals
    16
    
    38Government
      authorities and others
    18
    
    55115
    
    221





**NOTE
      9:-**
    **LONG-TERM
      LOANS**





**Annual**
    
    **December
      31,**
    
    **December
      31,****interest
      rates**
    
    **2003**
    
    **2004**From
      Banks:In
      NIS
    8%
    
    151
    
    78In
      US dollar
    10%
    
    440
    
    330In
      US dollar or linked thereto
    Libor
      +2.25%
    
    147
    
    40In
      Euro
    9.7%
    
    126
    
    85864
    
    533From
      Shareholders
    
    
    530
    
    611Total
    
    
    1,394
    
    1,144Less
      - current maturities
    
    
    (365)
    
    (307)1,029
    
    837













**HOTEL
OUTSOURCE MANAGEMENT**
 INTERNATIONAL
INC. AND SUBSIDIARIES
 
 **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **US
Dollars in thousands**





Shareholders
balance as of December 31, 2004 composed as follows:





See
      note 15d
    
    300
    
    312See
      note 15f
    
    230
    
    299530
    
    611





Aggregate maturities of long-term loans to banks for years subsequent to
December 31, 2004 are as follows:





Year
    
    **Amount**2005
    
    3072006
    
    1162007
    
    110533





**NOTE
      10:-**
    **COMMITMENTS
      AND CONTINGENT LIABILITIES**





a.
    The Company and its affiliate have contractual obligations to hotels in
      regard to operating


minibars
in hotel rooms. The Company and its affiliate own most of these minibars.
Several  hotels
have a contractual purchase option granted which allows them to purchase and
operate the
minibars during the agreement period and receive a reduction in the purchase
price relative to the term of the operating agreement that has already
elapsed.





b.
    In
      1998, the Company entered into a "revenue sharing" agreement to operate
      minibars in one hotel. As consideration for the minibars, the other
      company is entitled to receive a percentage of the Company’s proceeds
      received from that hotel during six years commencing in 1999. The other
      company’s share in revenue in regard with this agreement was completely
      paid during the reporting periods.The
      agreement was terminated on December 31, 2004. The hotel transferred a
      purchase option it had for the minibars to the company, which exercised it
      and bought 560 minibars for $50.




c.
    In October 2001, the Company established a wholly owned
      subsidiary in the United States. The wholly owned subsidiary established
      another US company (HOS) to provide outsource services to hotels using
      minibars manufactured by Bartech Int. The Company currently owns 70% of
      HOS and Bartech Int. hold 30%. Both sides contributed their equity
      participation in cash. Total equity participation as of December 31, 2004
      was in the amount of $ 2,229.









**HOTEL
OUTSOURCE MANAGEMENT**
 **INTERNATIONAL
INC. AND SUBSIDIARIES**
 
 **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 US
Dollars in thousands





Bartech
Int. will not refer outsource leads in the United States to any person other
than HOS and will not, without the Company’s consent, knowingly sell, rent or
license its minibars in





the
United States to any person who intends to use them in outsource for hotels;
provided, that Bartech Int. may refer outsource leads or sell, rent or license
minibars to hotels (i) which have pre-existing relationships with outsource
vendors other than HOS, or (ii) to which HOS is not able or not willing to
provide outsource.





As
      part of the shareholders agreement, the minority shareholders (Bartech
      Int.) were awarded several consent rights in regard with certain
      transactions such as disposition of assets and capital raising issues. The
      shareholders' agreement does not provide Bartech Int. with any consent
      rights regarding operational issues such as approval of annual budget and
      executive compensation or employment of management
    personnel.





HOS
purchases minibars from Bartech Systems International at a 15% discount from its
then current US price list. First installation was completed in July 2002. At
December 31, 2004 and 2003 approximately $735 and $288, respectively was owed to
this entity.





On
October 1, 2001 an option was granted that, subsequent to installation of at
least 5,000 minibars in hotels in the United States by HOS and for a period of
60 months thereafter, Bartech Int. shall have the option to purchase all shares
issued by HOS for a price that shall reflect the value of the United States
subsidiary according to the higher of (a) $2.25 multiplied by the number of
minibars operated by HOS (minimum of $ 11,250) or (b) HOS net after tax income,
determined in accordance with US GAAP, for the 12 full months completed prior to
the month the option is exercised, multiplied by 15.





d.
    In
      April 2003, the Company signed a 10 year agreement with Bartech Int.
      according to which the Company will provide outsource services to hotels
      on an exclusive basis, in all European and other territories in which
      Bartech Int. is active using Bartech Int. minibars which the Company will
      purchase from Bartech Int.





e.
    Shareholders
      of the Company gave unlimited personal guarantees to a bank in respect of
      the Company liabilities. Total liabilities of the Company to the bank as
      of December 31, 2004 were in the amount of approximately $251. A
      shareholder of the Company participated in HOS long-term bank loan
      received in September 2002, in that he deposited $550 with the bank and
      that such funds represent the source of the loan. The subsidiary pays the
      bank and the shareholder receives from the bank a portion of the interest.
      In the event of the subsidiary default in its payments he may require the
      bank to assign him its rights in the loan, including all the security and
      collateral consisting of the equipment, all accounts and contract rights
      arising from the agreement with the hotel and the corporate guarantees
      given to the lending bank. The balance of the loan as of December 31, 2004
      amounted to $330.







**HOTEL
OUTSOURCE MANAGEMENT**
 **INTERNATIONAL
INC. AND SUBSIDIARIES**
 
 **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **US
Dollars in thousands**




f.
    Liens
      have been placed on all Company assets, including rights to receive
      amounts due from customers, in favor of banks as security for amounts due.
      Total liabilities that are secured by these liens as of December 31, 2004
      amount to approximately $892.




g.
    In
      February 2004 the Company signed consulting contracts with shareholders.
      The annual cost of these agreements amounts to $108 in 2004. Some of the
      agreements were later amended.





h.
    Options
      granted to shareholder - see note 11.





i.
    Liens
      placed by shareholders - see note 15e.





j.
    Through
      September 2004, the Company leased certain office space from a related
      entity for approximately $2,800 per month under a month to month
      arrangement. Since such time, leases are on a month to month basis. Total
      amounts incurred for rent and office services to this related entity
      approximated $37,200 and $79,300, respectively. No amounts are due to this
      entity at December 31, 2004.




Shareholders’
Rights:





The
common shares confer upon the holders the right to receive a notice to
participate and vote in the general meetings of the Company and to receive
dividends, if and when declared.





Preferred
shares rights are yet to be determined.





In June
2003, an investor was issued 1,000,000 ordinary shares in return for an
investment of $500, the Company agreed to nominate him as a director at its
first meeting after the Company's common stock was listed on the OTCBB Stock
Exchange. The investor was appointed as a director of the Company in February
2004. Further, in 2003, the Company agreed that as a Director, he would receive
options to purchase 1,000,000 shares of the Company common stock at $0.50 per
share. These options are being allocated to him at a rate of 40,000 per month
for 25 months starting March 2004. The director will have discretion as to when
to exercise such options, but they shall expire 30 days from the last allocation
of 40,000 options.





In
February 2004 the board of directors approved a series of agreements with
shareholders by which in return for services rendered to the Company in the past
and in the future they were issued


1,000,000
shares at no consideration. $213 was recorded as an expense in the previous year
in regard for services rendered in the past and $87 was recorded as an expense
in the current year.





In March
2004, 2 shareholders extended to the Company additional loans amounting to $600
for the purpose of purchase of additional minibars. These loans were converted
into share capital as part of the rights offering the Company held in July 2004
(see below).





In May
2004 the Company approved the conversion of loans extended to the Company by
shareholders and others amounting to $414 into 828,000 shares of restricted
Company common stock. In addition, 2 individuals invested $110 in return for
220,000 common shares.




**HOTEL
OUTSOURCE MANAGEMENT**
 **INTERNATIONAL
INC. AND SUBSIDIARIES**
 
 **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **US
Dollars in thousands**




On July
10, 2004, the Company commenced an offering to its existing shareholders,
pursuant to which each shareholder was offered the right to purchase one share
of the Company common stock for every 5.566 shares of common stock held as of
July 10, 2004. A total of 4,500,180 shares were offered. The purchase price was
$0.33 per share. The shares of common stock offered in this rights offering are
restricted from transfer. This offering expired on August 12, 2004 and the
Company raised $936 including the conversion of the loans mentioned above, and
issued 2,834,358 shares of common stock.




In
September 2004 a shareholder lent the Company $150. In October 2004 the Company
converted this loan, plus a previous loan of $250 into 952,522 shares of common
stock.





**NOTE
      12:-**
    **CUSTOMERS
      AND GEOGRAPHIC INFORMATION**





The
Company manages its business on a basis of one reportable segment (see Note 1
for a brief description of the Company’s business) and follows the requirements
of Statement of Financial Accounting Standard No. 131 "Disclosures About
Segments of an Enterprise and Relation Information" ("SFAS No. 131"). Major
customers’ data as a percentage of total sales to unaffiliated
customers:





**Year
      ended December 31,****2003**
    
    **2004**Customer
      A
    
    12.7%
    
    12.8%Customer
      B
    
    11.1%
    
    9.2%Customer
      C
    
    4.4%
    
    4.3%Customer
      D
    
    4.0%
    
    4.5%Customer
      E
    
    31.3%
    
    21.2%Customer
      F
    
    7.4%
    
    5.4%





Breakdown
of Consolidated Sales to unaffiliated Customers according to Geographic
Regions:





**Year
      ended December 31,****2003**
    
    **2004**Israel
    
    44%
    
    26%South
      Africa
    
    23%
    
    22%USA
    
    33%
    
    42%Europe
    
    -
    
    10%Total
    
    100%
    
    100%





As of
December 31, 2004, $825 of the consolidated long-lived assets were located in
South Africa, $321 were located in Israel, $2,327 in the USA and $544 in Europe.









**HOTEL
OUTSOURCE MANAGEMENT**
 **INTERNATIONAL
INC. AND SUBSIDIARIES**
 
 **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **US
Dollars in thousands**


**NOTE
      13:-**
    **FINANCIAL
      EXPENSES**


****


**Year
      ended December 31,****2003**
    
    **2004**Interest
      on long-term bank loans, net
    
    94
    
    71Other,
      net
    
    93
    
    4))187
    
    67




**NOTE
      14:-**
    **INCOME
      TAXES**





a.
    The
      subsidiaries in Israel were subject to a 36% corporate tax rate. On June
      29, 2004 the Knesset passed an amendment to the Income Tax Law (Temporary
      Ordinance No. 140), 2004 (hereinafter - “the Amendment”). This Amendment
      legislates, inter alia, that the tax rate of 36% levied on corporations
      will gradually be reduced commencing with the 2004 tax year, with an
      effective tax rate of 35%, until the year 2007, with an effective tax rate
      of 30%. This Amendment does not have any significant effect on the results
      of operations, financial status and cash flows of the
    Company.





The South
African subsidiary is subject to a 30% corporate tax rate. The US subsidiary is
subject to a 15% -35% corporate tax rate.





b.
    Pursuant
      to the Income Tax (Inflationary Adjustments) Law - 1985, results for tax
      purposes in Israel are measured in real terms, in accordance with changes
      in the Israeli Consumer Price Index. However, Paragraph 9(f) of Statement
      of Financial Accounting Standard No. 109, "Accounting for Income Taxes",
      prohibits the recognition of deferred tax liabilities or assets that arise
      from differences between the financial reporting and tax bases of assets
      and liabilities that are remeasured from the local currency into US
      dollars using historical exchange rates and that result from changes in
      exchange rates or indexing for tax
purposes.





c.
    The
      subsidiary in the US is subject to both federal and state tax. The federal
      tax is determined according to taxable income, for the first $50 taxable
      income the rate is 15%. In addition, a 9.3% California state tax is
      applicable.





d.
    As
      of December 31, 2004 Bartech Med and a subsidiary in Israel had
      approximately $750 Israeli net operating loss carry forwards. The loss
      carry forwards in Israel have no expiration date.





As of
December 31, 2004, HOMI and HOS had approximately $1,585 net operating loss
carryforwards. Utilization of US net operating losses, which expires in various
years through December 31, 2024, may be subject to substantial annual limitation
due to the “change in ownership” provisions of the Internal Revenue Code of 1986
and similar state provisions. The annual limitations may result in the
expiration of net operating losses before utilization. The foreign net operating
loss carryforwards do not expire.





As of
December 31, 2004 the South African subsidiary had net operating losses carry
forwards of $11.









**HOTEL
OUTSOURCE MANAGEMENT**
 **INTERNATIONAL
INC. AND SUBSIDIARIES**
 
 **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **US
Dollars in thousands**


As of
December 31, 2004 the Companies in Europe had net operating losses carry
forwards of $63.








e.
    Deferred
      income taxes:





Deferred
      income taxes reflect the net tax effects of temporary differences between
      the carrying amounts of assets and liabilities for financial reporting
      purposes and the amounts used for income tax puposes.  Significant
      components of the Company and its subsidiary's deferred tax assets and
      liabilities are as follows:




**December
      31,**
    
    **December
      31,****2003**
    
    **2004**Operating
      loss carry forwards
    444
    
    512Temporary
      differences in regard to expenses and property
    (119)
    
    (230)Net
      deferred tax asset before valuation allowance
    325
    
    282Valuation
      allowance
    (344)
    
    (330)Net
      deferred tax (foreign)
    (19)
    
    (48)





As of
December 31, 2004, the Company and its subsidiaries have provided valuation
allowances of $330 in respect of deferred tax assets resulting from tax loss and
temporary differences. Management currently believes that it is more likely than
not that the deferred tax regarding the loss carryforward and other temporary
differences will not be realized in the foreseeable future. Deferred tax
liability is presented in long-term liabilities.





f.
    Composition
      of income taxes:





**Year
      ended December 31,****2003**
    
    **2004**Current
      taxes
    
    -
    
    -Deferred
      taxes
    
    24
    
    (11)24
    
    (11)





g.
    Breakdown
      of losses (income) before taxes:





Israel
    
    250
    
    13South
      Africa
    
    82
    
    (9)USA
    
    577
    
    717Europe
    
    -
    
    63Total
    
    909
    
    784







**HOTEL
OUTSOURCE MANAGEMENT**
 **INTERNATIONAL
INC. AND SUBSIDIARIES**
 
 **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **US
Dollars in thousands**


h.
    The
      main reconciling items between the statutory tax rate of the Company and
      the effective tax rate are the non-recognition of tax benefits from
      accumulated net operating losses carry forward among the various
      subsidiaries worldwide due to the uncertainty of the realization of such
      tax benefits.







**NOTE
      15:-**
    **OTHER
      RELATED PARTY TRANSACTIONS**





a.
    The
      following transactions with shareholders are included in the financial
      statements as follows:


**Year
      ended December 31,****2003**
    
    **2004**General
      and administrative (1)
    
    372
    
    508(1)
      Including officer salaries and
      management
      fees
    
    298
    
    471





b.
    Guarantees
      and participation of shareholders - see Notes 7 and
10e.





c.
    During
      the years 2003 and 2004, affiliated company paid the Company,
      reimbursement of expense and management fees in the amount of $15 and $10,
      respectively.





As
      for balances as of December 31, 2004 - see Note
3.





d.
    In
      December 2003 the Company entered into agreements with 2 shareholders
      pursuant to which each agreed to lend the Company $150. The agreements
      indicate that the $300 has no set repayment terms other than interest will
      be paid or accrued at 4% per annum. The agreements further state that
      should the loans remain outstanding as at December 31, 2008 and it is not
      possible to repay the loans, the loans will be prolonged on the same terms
      for an additional 5-year period.





e.
    In
      November 2004 the Company entered into agreement with 2 shareholders
      pursuant to which each agreed to lend the Company $350. These loans are
      for a maximum of 6 months, to be repaid no later than May 2005, and shall
      bear interest at 10% per annum. The Company has the right to repay all or
      part of these loans, plus accrued interest, through the issuance of
      Company common stock at a price of $0.25 per share. The loans are secured
      by a general lien and security interest over all of the Company’s assets,
      which will be subordinate to all pre-existing liens on the assets. In
      addition certain other shareholders pledged a collective total of
      2,000,000 of their shares in the Company as collateral for these loans. At
      December 31, 2004, the balance of these loans, which includes accrued
      interest, was $712.









**HOTEL
OUTSOURCE MANAGEMENT**
 **INTERNATIONAL
INC. AND SUBSIDIARIES**
 
 **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **US
Dollars in thousands**


f.
    The
      minority shareholder of the Company’s South African subsidiary granted a
      loan to the subsidiary which had a balance of $230 at December 31, 2003
      and $299 as of December 31, 2004 (see Note 9a). The loan term is
      indefinite with no fixed terms of repayment. Despite this, these loans
      have been classified as long term as this shareholder has confirmed that
      repayment will not be required in 2005.





g.
    The
      subsidiary granted a loan to a company controlled by the minority
      shareholder amounting to $55 as of December 31, 2004 (see Note
      3).






**NOTE
      16:-**
    **SUBSEQUENT
      EVENTS**





Financing
Agreement





On
February 28, 2005, HOMI entered into a financing agreement with Solog Mifalei
Srigah Ltd. (“Solog”), which is a public limited company whose stock is traded
on the Tel-Aviv Stock Exchange (the “Financing Agreement”).





Pursuant
to the Financing Agreement, HOMI has been granted a loan facility by Solog,
which will allow HOMI to draw down up to $10,000,000 (ten million US Dollars),
in such amounts and at such times as required in accordance with its operations,
during the two year term of the Financing Agreement (the “Financing”). For the
term of the Financing Agreement, Solog has delivered a contingent undertaking
not to provide other entities in HOMI’s industry field with financing, and HOMI
has delivered a contingent undertaking not to obtain external, third party,
non-convertible debt financing from any party other than Solog.





The
Financing will be in the form of loans to HOMI and/or its subsidiaries (the
“Loans”), which will be repaid at a monthly rate, principal plus interest, of
$15 (fifteen US Dollars) per $1,000 (one thousand US Dollars) of principal,
assuming a 9-year loan period. If the loan period is less than 9 years, the
interest rate will be reduced accordingly. The Loans will correspond in length
to the terms of the outsource operation agreements which HOMI and/or its
subsidiaries have entered, or will enter, into with hotels, and the specific
purpose of the Financing is to enable HOMI and/or its subsidiaries to purchase,
and/or refund and/or operate the minibars at such hotels.





The Loans
will be secured by a lien on all minibars in respect of which the Loan was
received, and a security interest and assignment of a portion of HOMI’s and/or
its subsidiaries’ monthly revenues from those minibars, in the amount required
to pay each month’s repayments on all outstanding Loans, principal plus
interest.





For each
$1,000,000 (one million US Dollars) of Financing that has been completed by
Solog, Solog will be entitled to receive non-assignable, non-transferable
options to purchase 300,000 shares of HOMI’s common stock, at a price of $0.65
(sixty-five cents) per share, exercisable by cash payment upon 45 days’ advance
written notice, at any time within a period ending on the third anniversary of
the date of the Financing Agreement.










**HOTEL
OUTSOURCE MANAGEMENT**
 **INTERNATIONAL
INC. AND SUBSIDIARIES**
 
 **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **US
Dollars in thousands**


Consulting
Agreements





Effective
January 1,2005, the Company entered consulting agreements with two of its
directors that require the Company to pay aggregate, annual consulting fees of
$150,000.





**NOTE
      17****:******
    **OTHER****RECENT
      PRONOUNCEMENTS**





FIN 46
- Consolidation of Variable Interest Entities





In
January 2003, the FASB issued FIN 46, (revised in December 2003 as FIN46R)
"Consolidation of Variable Interest Entities," which clarifies the application
of Accounting Research Bulletin ("ARB") 51, Consolidated Financial Statements,
to certain entities (called variable interest entities)





in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The disclosure requirements of this Interpretation are effective for all
financial statements issued after January 31, 2003. The consolidation
requirements apply to all variable interest entities created after January 31,
2003. In addition, public companies must apply the consolidation requirements to
variable interest entities that existed prior to February 1, 2003 and remain in
existence as of the beginning of annual or interim periods beginning after June
15, 2003. The adoption of FIN 46R ha s
had no
impact on the Company’s financial
statements . as the
Company does not have any variable interest entities that require consolidation.





SFAS
150 - Accounting for Certain ‘Financial Instruments with Characteristics of Both
Liabilities and Equity





In May
2003, SFAS No. 150 “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” was issued to establish new
standards for how an entity classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an entity classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of these instruments were
previously classified as equity. This statement was effective when issued for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective for calendar year public companies for the third quarter of 2003.
The adoption of SFAS 150 had no impact on the financial statements of the
Company.





SFAS
132 - Employers’ Disclosures about Pensions and Other Postretirement
Benefits





In
December 2003, FASB Statement No. 132 (revised) was issued which prescribes the
required employers’ disclosures about pension plans and other postretirement
benefit plans; but it does not change the measurement or recognition of those
plans. The Statement retains and revises the disclosure requirements contained
in the original Statement 132. It also requires additional disclosures about the
assets, obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other postretirement benefit plans. The Statement
generally is effective for fiscal years ending after December 15, 2003. Since
the Company does not have any types of pension plans or other postretirement
benefits, the adoption of this Statement did not have an effect on the Company’s consolidated financial
statements.




**HOTEL
OUTSOURCE MANAGEMENT**
 **INTERNATIONAL
INC. AND SUBSIDIARIES**
 
 **NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 US
Dollars in thousands







SFAS
153 - Exchanges of Nonmonetary Assets an Amendment of APB Opinion No.
29





In
December 2004, FASB Statement No. 153 was issued amending APB Opinion No. 29 to
eliminate the exception allowing nonmonetary exchanges of similar productive
assets to be measured based on the carrying value of the assets exchanged as
opposed to at their fair values. This exception was replaced with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. The provisions of this statement are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after the June 15, 2005. The
adoption of this statement did not have a material impact on the Company’s consolidated financial
statements.