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

___________________FORM 10-K___________________

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


For the Fiscal Year Ended December 30, 2006 OR

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


For the Transition Period From ________ to ________Commission File Number 0-23204

BOSS HOLDINGS, INC.(Exact name of registrant as specified in its charter)

Delaware

58-1972066(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification No.)


221 West First Street, Kewanee, Illinois 61443(Address of principal executive offices) (Zip Code)Registrants telephone number, including area code: (309) 852-2131Securities registered pursuant to Section 12(b) of the Act: NoneSecurities registered pursuant to Section 12(g) of the Act:Common Stock $ 0.25 par value(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. o

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

Large accelerated filer oAccelerated filer oNon-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value of the voting and non-voting stock held by non-affiliates as of July 1, 2006 was approximately $5,066,000.

There were 2,001,535 shares of the Registrants common stock outstanding as of March 15, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

Specified portions of the registrants definitive proxy statement for its 2007 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.

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FORWARD LOOKING STATEMENTS OR INFORMATION

Certain statements, other than statements of historical fact, included in this Annual Report, including, without limitation, the statements under Current Developments, Business and Managements Discussion and Analysis of Financial Condition and Results of Operations are, or may be deemed to be, forward looking statements that involve significant risks and uncertainties, and accordingly, there is no assurance that these expectations will be correct. These expectations are based upon many assumptions that the registrant believes to be reasonable, but such assumptions ultimately may prove to be materially inaccurate or incomplete, in whole or in part and, therefore, undue reliance should not be placed on them. Several factors which could cause actual results to differ materially from those discussed in such forward-looking statements include, but are not limited to: pricing and availability of
goods purchased from international suppliers, unusual weather patterns which could affect domestic demand for the registrants products and curtail imprinting operations, pricing policies of competitors, increased port and inbound transportation congestion which could delay receipt of goods and increase the cost of imported goods, the ability to attract and retain employees in key positions, growth trends in the advertising specialties industry and uncertainties and changes in general economic conditions. The words believe, expect, anticipate, should, could and other expressions that indicate future events and trends identify forward-looking statements. All subsequent forward-looking statements attributable to the registrant or persons acting on its behalf are expressly qualified in their entirety.

PART I

ITEM 1.   BUSINESS

As used in this report, the terms Boss and Company refer to Boss Holdings, Inc. (the Registrant), a Delaware corporation, and its operating subsidiaries. The Companys primary operating subsidiary is Boss Manufacturing Company, a Delaware corporation (BMC), originally established in 1893.

The Company operates primarily in the work gloves and protective wear business segment. In addition, the Company conducts operations in the pet supplies business segment and promotional and specialty products segments. As described below, the Company acquired a pet supplies business in 2002, a promotional and specialty products company in 2004, and a specialty lighting products business in 2005. Specialty lighting products are part of the work gloves and protective wear business segment.

WORK GLOVES AND PROTECTIVE WEAR

Through BMC, the Company imports, markets and distributes gloves, boots and rainwear products serving two primary markets  consumer and industrial. The consumer market represents approximately 51% of BMC domestic gross product sales and consists of retailers ranging from convenience stores to mass merchandisers as well as hardware, and grocery stores. The industrial market, which accounts for the balance of sales in this segment, includes various commercial users of gloves and protective wear. These end-users include companies in the agricultural, automotive, energy, lumber and construction industries.

BMC primarily markets its products through distributors and manufacturer representatives. In addition, the Company sells directly through its own sales force to certain major retail customers. BMC products are sold predominantly to customers in the United States, with the Companys Boss Canada subsidiary generating approximately 5% of the sales in this segment.

The markets served by the work gloves and protective wear segment are intensely competitive with a high degree of price competition. In addition, many retailers have begun to import products directly in recent years. BMC competes on the basis of distribution service capabilities, selection, quality and price. Having participated in this segment for over 100 years, BMC and the Boss trade name are well known in the industry. The market for work gloves and protective wear is highly fragmented and served by a large number of domestic and foreign competitors ranging in size from small sole proprietorships to several companies substantially larger than BMC.

Sales in the work gloves and protective wear segment have historically exhibited seasonal fluctuations. Cold weather months generally provide increased sales while warm weather historically results in reduced sales activity. Because of this seasonality, work gloves and protective wear sales tend to be higher in the Companys first and fourth quarters while lower during the second and third quarters.

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BMC sells to a broad customer base approximating three thousand active accounts. Accordingly, BMC has relatively little dependence on any one customer. At the end of 2006, BMC had an open order backlog of approximately $1,244,000 up about $279,000 from the previous year.

The Company ceased domestic manufacturing operations during 2000 and is now primarily an importer and marketer. Finished goods in this segment are generally widely available from a number of suppliers in various countries. The cost to import many of the goods in this segment varied during 2006. Cost on gloves, boots and rainwear made from oil based fabrics, (such as PVC and nylon), fluctuated with oil prices. Latex prices increased during the year causing the cost of latex gloves and boots to increase. Revaluation of the Chinese currency and labor shortages resulted in cost pressure on all products imported from China. The Company has occasionally experienced short-term limitations in the supply of certain imported products, generally due to raw material shortages. Availability of imported goods is further subject to interruptions in shipping as well as import/export documentation and clearing. The Company does not anticipate any
significant shortages of purchased goods for resale in 2007.

During the fourth quarter of 2002, the Company entered into a trademark license agreement with Caterpillar Inc. under which the Company markets work gloves and rainwear under the CAT® trademark. Sales of CAT® products have steadily increased since their introduction in 2003, with total sales of $2,200,00 in 2006, representing 6% of domestic sales in the work gloves and protective wear segment for the year. The Company believes that the CAT® trademark will provide additional sales growth opportunities while allowing the Company to introduce new products that are less sensitive to market pricing pressures. New products being introduced in 2007 under the CAT® trademark include tool belts, tool bags and hats with hands-free illumination.

The Boss name and logo are important trademarks of the Company, which it vigorously defends in the market. In addition, BMC has various registered names and trademarks for specific products that the Company believes add substantial value in the sales and marketing efforts associated with this segment. Additional financial information on the work gloves and protective wear segment is included in the Notes to Consolidated Financial Statements and in Managements Discussion and Analysis of Financial Condition and Results of Operations.

PROMOTIONAL AND SPECIALTY PRODUCTS

During the third quarter of 2004, the Company acquired Galaxy Balloons, Incorporated (Galaxy), a Cleveland, Ohio based company operating in the promotional and specialty products segment. Galaxy provides custom imprinted balloons, mini-sport balls, signature balls, exercise balls, beach balls and other inflatable products. In addition, Galaxy has broadened its product line to include various non-inflatable imprinted items including yo-yos, juggle balls, sport horns, fan-ta-sticks, holiday candles and ornaments. These items are sold exclusively through authorized distributors in the promotional products industry. In the past two years, Galaxy has sold to approximately 10,000 different distributors.

A broad based group of end-users, from banks to hotels to schools, purchase Galaxys custom imprinted products for advertising and promotional purposes. Examples include miniature footballs and basketballs thrown into the crowds at sporting events and helium filled balloons given to children at restaurants. The products offered by Galaxy provide end-users with the opportunity to get their name in front of many potential customers for maximum exposure at a relatively small advertising cost.

The promotional products industry is comprised of over 20,000 registered distributors serving a $17.3 billion market that has experienced substantial growth over the past decade. This market is very competitive and Galaxy competes against companies offering similar products as well as companies offering other custom imprinted goods such as pens, t-shirts and caps. Galaxy competes on the basis of quality, both in terms of the products offered and the printing process; service, with Galaxy offering quick turn-around times (24 and 48 hour rush service) as well as small minimums at competitive prices.

Based on results from prior years, management expects seasonal sales fluctuations in the promotional and specialty products segment. Historically, sales in this segment reach a low point during the first and fourth quarter of the year then build to a peak in late summer and early fall due to the sales of football related products. To reduce the seasonality in the fourth quarter, Galaxy expanded its product line to include Christmas ornaments, candles and other products that sell well during the fourth quarter. During 2006 this strategy improved Galaxys fourth

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quarter results to its second most profitable quarter of the year. Galaxy continues to look for new products including those which could improve its seasonal variations. In 2007, Galaxy will be introducing a new line of beverage coolers and desk clocks with sport themes including baseball, soccer and basketball.

Due to its broad customer base, Galaxy has little dependence on any one customer. In 2006, Galaxys largest customer only accounted for 2.5% of total sales. Galaxys open order backlog was not material at year-end due to the seasonal nature of sales in this segment. Typically Galaxy doesnt have a large back order log because it ships most of its orders in five days or less. Galaxy purchases the finished goods on which it custom imprints products from a number of sources, both domestic and international. Though suppliers are limited in certain product areas, Galaxy has experienced no product shortages in recent years and anticipates an adequate supply of goods in the coming year.

Additional financial information on the promotional and specialty products segment is included in the Notes to Consolidated Financial Statements and in Managements Discussion and Analysis of Financial Condition and Results of Operations.

PET SUPPLIES

The Company operates in the pet supplies segment through two subsidiaries. The Warren Pet (Warren) division of the Companys Boss Manufacturing Holdings, Inc. subsidiary imports, markets and distributes a comprehensive line of non-food pet supplies to various retail outlets. Products in this line include dog and cat toys, collars and leads, chains and rawhide products. Warren markets its product line primarily to discount and hardware retailers utilizing a network of regional distributors.

Boss Pet Products, Inc. (Boss Pet), a wholly owned subsidiary of BMC, imports, markets and distributes pet cable restraints, shampoos and other pet chemical products. The Company acquired this business through the purchase of certain assets from RocCorp, Inc. during the fourth quarter of 2002. Boss Pet markets its products primarily to pet supply specialty retailers under the Prestige brand name. In addition, Boss Pet sells products to discount retailers under various privately labeled brand names. Essentially all sales in this segment are within the United States.

The pet supplies industry is extremely competitive. A small group of companies including Hartz Mountain Corporation and Sergeants Pet Care Products, Inc. dominate the industry. The Company competes primarily in selected market niches by focusing on customer service, specialized marketing, unique products and competitive pricing.

Sales in the pet supplies segment have historically exhibited seasonal fluctuations. Spring and summer months tend to generate higher sales at retail as consumers spend time outdoors with their pets during warm weather months. Cold weather months generally produce lower sales at retail. Because of this seasonality, pet supply sales tend to be higher in the Companys first and second quarters, with sales declining through the third and fourth quarters.

The Company generally has multiple sources of supply for substantially all of its product requirements in this segment. Finished goods in this segment have generally been readily available in sufficient quantities. However, the pet supplies segment is subject to the same potential for product interruptions noted in the work gloves and protective wear segment. Because of the seasonality in this segment, the open order backlog was not material at the end of 2006 or 2005.

Due to the market niches served by Boss Pet and Warren, these operations serve a smaller customer base with less diversification than the Companys operations in other segments. Boss Pets largest customer accounted for 29% of sales in this segment during 2006 while Warrens largest customer accounted for 17%.

Additional financial information on the pet supplies segment is included in the Notes to Consolidated Financial Statements and in Managements Discussion and Analysis of Financial Condition and Results of Operations.

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ENVIRONMENTAL MATTERS

The Company is subject to various federal, state and local regulations concerning the environment. Efforts to maintain compliance with such regulations have not required expenditures material to the Companys overall operating performance or financial condition.

EMPLOYEES

As of December 30, 2006, Boss employed approximately 210 full-time associates, down 25 from the previous year due to the lower employment levels at Galaxy and a slight reduction to the Boss Manufacturing Company distribution center staff. The Company employed no union employees at the end of 2006. Approximately 202 associates were located in the United States with 8 located in Canada at year-end.

The Company believes its employee relations are excellent. However, the Companys past success in attracting and retaining employees cannot assure attainment of future employment objectives.

AVAILABLE INFORMATION

Information concerning the Company and its products can be obtained from its primary internet website atwww.bossgloves.com. The Companys public financial reports and insider trading reports can be accessed under the Boss Holdings, Inc. subsection of the website area titled Company Information. In addition, information about products available from subsidiary operations is available at the following websites,www.galaxyballoon.comandwww.roccorp.com.

ITEM 1A.   RISK FACTORS

- The bulk of the Companys sales and profitability depend on its ability to import finished goods from foreign countries at competitive prices.
Currently, the Company imports most of its products from China, though suppliers are available in a number of other countries. There are a number of risks inherent to importing, including 1) potential price and currency fluctuations, 2) transportation difficulties and delays, 3) customs clearing delays, 4) potential political instability and 5) health and disease problems which can impact production capabilities as well as delay shipments due to inspection requirements. A disruption in supply could cause a temporary shortage of goods available to sell until such time as alternative sources were developed.In addition, due to long lead times the Company must make purchase decisions well in advance of expected product sales. When demand is lower than expected, purchases exceed demand and inventory builds. When demand is greater than expected, product shortages develop and the Companys shipping performance declines. Poor shipping performance can have a negative impact on customer relationships and result in price offsets from major retailers. As a result, management attempts to maintain adequate inventory levels on key styles to facilitate acceptable order fulfillment levels.
- Currently, the Company imports most of its products from China, though suppliers are available in a number of other countries. There are a number of risks inherent to importing, including 1) potential price and currency fluctuations, 2) transportation difficulties and delays, 3) customs clearing delays, 4) potential political instability and 5) health and disease problems which can impact production capabilities as well as delay shipments due to inspection requirements. A disruption in supply could cause a temporary shortage of goods available to sell until such time as alternative sources were developed.
- In addition, due to long lead times the Company must make purchase decisions well in advance of expected product sales. When demand is lower than expected, purchases exceed demand and inventory builds. When demand is greater than expected, product shortages develop and the Companys shipping performance declines. Poor shipping performance can have a negative impact on customer relationships and result in price offsets from major retailers. As a result, management attempts to maintain adequate inventory levels on key styles to facilitate acceptable order fulfillment levels.

- Competition in the Companys operating segments is very intense and could negatively impact future operating results.
In the consumer market of the work gloves and protective wear segment, Boss competes with a number of larger, well-financed companies. Due to consolidation among retailers and the growth of direct import opportunities for major retailers, the consumer market has declined in recent years with heightened competition for market share. This competition for market share in a declining market could inhibit sales growth and negatively impact margins.Barriers to entry in the work gloves and protective wear market are very small, particularly in the industrial market. The Company competes against a substantial number of smaller, private companies with limited overhead that work on very low margins. Further, some competitors own offshore factories and seek to maintain factory efficiency and profitability, accepting minimal margins in the U.S.
- In the consumer market of the work gloves and protective wear segment, Boss competes with a number of larger, well-financed companies. Due to consolidation among retailers and the growth of direct import opportunities for major retailers, the consumer market has declined in recent years with heightened competition for market share. This competition for market share in a declining market could inhibit sales growth and negatively impact margins.
- Barriers to entry in the work gloves and protective wear market are very small, particularly in the industrial market. The Company competes against a substantial number of smaller, private companies with limited overhead that work on very low margins. Further, some competitors own offshore factories and seek to maintain factory efficiency and profitability, accepting minimal margins in the U.S.

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- Because of the seasonal nature of sales, the Company relies heavily on the effects of cold weather in our primary industry segment.
Substantially all of the Companys sales in the work gloves and protective wear market are in the U.S. and are affected by seasonal weather patterns. Sales of the majority of these products increase during cold weather and decrease during warmer months. Major portions of the U.S. have experienced warmer than normal winters during the past decade, a trend that adversely affects Company sales in this segment.
- Substantially all of the Companys sales in the work gloves and protective wear market are in the U.S. and are affected by seasonal weather patterns. Sales of the majority of these products increase during cold weather and decrease during warmer months. Major portions of the U.S. have experienced warmer than normal winters during the past decade, a trend that adversely affects Company sales in this segment.

- The Company relies heavily on a small customer base in the pet supplies segment.
Sales to the two largest customers in this segment represent 29% and 17% of total sales, respectively. Sales to these customers are not subject to any long-term purchase arrangements. If the Company failed to retain either of these customers, whether due to competitive forces, credit risks or other causes, the operating results in this segment would be significantly adversely affected.
- Sales to the two largest customers in this segment represent 29% and 17% of total sales, respectively. Sales to these customers are not subject to any long-term purchase arrangements. If the Company failed to retain either of these customers, whether due to competitive forces, credit risks or other causes, the operating results in this segment would be significantly adversely affected.

- Acts of war, natural disaster, terrorist act, or fire at a key facility present a substantial risk to the Company.
The Companys inventory is concentrated at a few facilities, which helps the Company operate efficiently but exposes it to a concentration of risk if one of the facilities were to be damaged or destroyed by an extraordinary event such as a fire, tornado, other natural disaster or terrorist act. The Company maintains appropriate commercial insurance against such risks, but if such an occurrence were to damage or destroy a substantial portion of the Companys inventory, the Companys results of operation would be significantly adversely affected and replacement inventory would be difficult to obtain quickly due to the factors discussed above in connection with the Companys importation of goods from foreign countries.
- The Companys inventory is concentrated at a few facilities, which helps the Company operate efficiently but exposes it to a concentration of risk if one of the facilities were to be damaged or destroyed by an extraordinary event such as a fire, tornado, other natural disaster or terrorist act. The Company maintains appropriate commercial insurance against such risks, but if such an occurrence were to damage or destroy a substantial portion of the Companys inventory, the Companys results of operation would be significantly adversely affected and replacement inventory would be difficult to obtain quickly due to the factors discussed above in connection with the Companys importation of goods from foreign countries.

- The Companys stock is very illiquid with minimal float due to insider holdings.
Based on reports filed with the SEC by insiders and holders of more than 5% of the Companys stock, the officers, directors and a handful of other large shareholders own approximately 70% of the Companys shares on a fully diluted basis. As a result of this concentration of ownership, the Companys common stock is very thinly traded and experiences extended periods with no transactions. This lack of public float adversely affects the liquidity of an investment in the Companys shares.
- Based on reports filed with the SEC by insiders and holders of more than 5% of the Companys stock, the officers, directors and a handful of other large shareholders own approximately 70% of the Companys shares on a fully diluted basis. As a result of this concentration of ownership, the Companys common stock is very thinly traded and experiences extended periods with no transactions. This lack of public float adversely affects the liquidity of an investment in the Companys shares.

- Higher interest rates could have a detrimental impact on the Companys results.
The Company relies heavily on its primary line of credit to finance operations. The Companys past acquisitions and working capital requirements for those businesses have resulted in increased borrowings on the Companys primary line of credit. The Board of Governors of the U.S. Federal Reserve significantly increased rates on short-term borrowings during past years and such interest rates could continue to climb. Because a substantial portion of the Companys borrowings bear interest at rates tied to prime or LIBOR interest rates, this results in increased operating costs for the Company. Although the Company believes it has managed its exposure to interest rates effectively in the past, future increases in both short term and long term
interest rates could negatively affect both results from operations and the Companys ability to successfully finance future business expansion.
- The Company relies heavily on its primary line of credit to finance operations. The Companys past acquisitions and working capital requirements for those businesses have resulted in increased borrowings on the Companys primary line of credit. The Board of Governors of the U.S. Federal Reserve significantly increased rates on short-term borrowings during past years and such interest rates could continue to climb. Because a substantial portion of the Companys borrowings bear interest at rates tied to prime or LIBOR interest rates, this results in increased operating costs for the Company. Although the Company believes it has managed its exposure to interest rates effectively in the past, future increases in both short term and long term
interest rates could negatively affect both results from operations and the Companys ability to successfully finance future business expansion.

- Energy cost increases negatively impact results, inbound & outbound freight, and warehousing cost.
Due to both global and domestic market forces, energy costs have risen significantly during the past few years. These increased energy costs negatively impact the Companys results for a number of reasons. Many trucking and transportation companies have levied energy cost surcharges on customers such as the Company. In many cases the Company is unable to pass outbound freight expenses on to its customers, decreasing profit margin. Similarly, increased energy costs for inbound freight and for heating and cooling at the Companys warehouse cannot be passed on to customers directly, but only through general price increases. Because of the significant price competition in the Companys primary markets described above, price increases have been difficult to implement, and generally involve significant time lag between incurring the increased operating expenses and implementation of price increases to cover those
expenses.
- Due to both global and domestic market forces, energy costs have risen significantly during the past few years. These increased energy costs negatively impact the Companys results for a number of reasons. Many trucking and transportation companies have levied energy cost surcharges on customers such as the Company. In many cases the Company is unable to pass outbound freight expenses on to its customers, decreasing profit margin. Similarly, increased energy costs for inbound freight and for heating and cooling at the Companys warehouse cannot be passed on to customers directly, but only through general price increases. Because of the significant price competition in the Companys primary markets described above, price increases have been difficult to implement, and generally involve significant time lag between incurring the increased operating expenses and implementation of price increases to cover those
expenses.

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- The Company is subject to evolving corporate governance and public disclosure regulations, particularly in regards to internal controls.
Because the Companys common stock is publicly traded, it is subject to rules and regulations issued by a number of governmental and other organizations, including the SEC, and the Public Company Accounting Oversight Board, which monitor the accounting practices of public companies. Many of these regulations continue to evolve, making compliance difficult and uncertain. In particular, Section 404 of the Sarbanes-Oxley Act of 2002 and related regulations will require the Company to include a management assessment of our internal controls over financial reporting beginning with the annual report for 2007 and to include an auditor attestation of that assessment beginning with the annual report for 2008. These efforts may require
the commitment of significant financial and managerial resources. A failure to complete a favorable assessment and obtain an auditors attestation could have a material adverse impact on the Company. In addition, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Failure of our control systems to prevent error or fraud could have a material adverse impact on the Company.
- Because the Companys common stock is publicly traded, it is subject to rules and regulations issued by a number of governmental and other organizations, including the SEC, and the Public Company Accounting Oversight Board, which monitor the accounting practices of public companies. Many of these regulations continue to evolve, making compliance difficult and uncertain. In particular, Section 404 of the Sarbanes-Oxley Act of 2002 and related regulations will require the Company to include a management assessment of our internal controls over financial reporting beginning with the annual report for 2007 and to include an auditor attestation of that assessment beginning with the annual report for 2008. These efforts may require
the commitment of significant financial and managerial resources. A failure to complete a favorable assessment and obtain an auditors attestation could have a material adverse impact on the Company. In addition, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Failure of our control systems to prevent error or fraud could have a material adverse impact on the Company.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.   PROPERTIES

The following table shows the location, general character, square footage, approximate annual rent and lease expiration date of the principal operating facilities owned or leased by the Company as of February 28, 2007. The principal executive offices are located in Kewanee, Illinois.

|                     |  |             |  |                               |  | Square  |  | Annual |         |                 
|-------------------- |  | ----------- |  | ----------------------------- |  | ------- |  | ------ | ------- | ----------------
|Location             |  | City        |  | General Character             |  | Feet    |  | Rent   |         | Lease Expiration
|Br. Columbia, Canada |  | Vancouver   |  | Distribution                  |  | 5,600   |  | $      | 9,000   |                 
|Illinois             |  | Kewanee     |  | Administrative Office         |  | 10,200  |  | $      |        |                 
|Illinois             |  | Kewanee     |  | Distribution & Administration |  | 147,000 |  | $      |        |                 
|Illinois             |  | Kewanee     |  | Distribution                  |  | 70,000  |  | $      |        |                 
|Illinois             |  | Kewanee     |  | Distribution  Pet Supplies   |  | 19,000  |  | $      |        |                 
|Illinois             |  | Taylorville |  | Distribution                  |  | 35,000  |  | $      | 70,000  |                 
|Ontario, Canada      |  | Concord     |  | Distribution & Administration |  | 11,150  |  | $      | 48,000  |                 
|Ohio                 |  | Lakewood    |  | Printing, Distribution &      |  | 65,000  |  | $      | 160,000 |                 
|                     |  |             |  | Administration                |  |         |  |        |         |                 
|Ohio                 |  | Maple Hts.  |  | Manufacturing, Distribution & |  | 50,000  |  | $      | 150,000 |                 
|                     |  |             |  | Admin  Pet Supplies          |  |         |  |        |         |                 

The above properties not designated as used in the pet supplies segment or printing (promotional and specialty products segment) are predominantly used in the work gloves and protective wear segment. Utilization of the various facilities fluctuates significantly during the year based on order and inventory levels. The Company believes its properties provide adequate distribution capacity for anticipated demand and adequate capacity to meet expected business requirements.

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ITEM 3.   LEGAL PROCEEDINGS

The Company is a party to various legal actions incident to the normal operations of its business. These lawsuits primarily involve claims for damages arising out of commercial disputes. The Company has been named as a defendant in several lawsuits alleging past exposure to asbestos contained in gloves sold by one of the Companys predecessors-in-interest, all of which actions are being defended by one or more of the Companys general liability or products liability insurers. Management believes the ultimate disposition of these matters should not materially impair the Companys consolidated financial position or liquidity.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company submitted no matters for security holder voting during the fourth quarter of 2006.

PART II

|ITEM 5. |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- |  | ---------------------------------------------------------------------

The Companys common stock (symbol: BSHI) currently is listed on the Over-the-Counter (OTC) Bulletin Board. The Companys common stock is not listed on any national stock exchange or on NASDAQ. The OTC Bulletin Board is a regulated quotation service that displays real-time quotes, last-sale prices and volume information for non-listed (over-the-counter) equity securities. The OTC Bulletin Board is a reporting system for participating market makers, not an issuer listing service, and should not be confused with the NASDAQ Stock Market. Participating market makers in the bulletin board system enter quotes and trade reports on a closed computer network and the information is made publicly available through numerous websites and other locations. The OTC Bulletin Board is distinct from the pink sheets published by the National Quotation Bureau that also report on transactions in non-listed equity securities. OTC
Bulletin Board quotations reflect interdealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

Stockholders of record at December 30, 2006 numbered approximately 1,438. The Company has not paid cash dividends on its Common Stock in the past and currently plans to retain earnings, if any, for business development and expansion.

Quarterly Stock PricesFirst

Second

Third

FourthQuarter

Quarter

Quarter

Quarter2006 - High bid

$
7.90

$
7.79

$
6.50

$
6.652006  Low bid

$
7.50

$
6.50

$
6.05

$
6.072005 - High bid

$
7.65

$
9.00

$
9.85

$
9.002005  Low bid

$
7.05

$
7.40

$
8.45

$
7.55


There were no repurchases of common stock during the three months ended December 30, 2006.

ITEM 6.   SELECTED FINANCIAL DATA

The following table contains selected consolidated financial data for the five-year period ended December 30, 2006 as derived from the consolidated financial statements of the Company. This table should be read in conjunction with Managements Discussion and Analysis of Results of Operations and Financial Condition and the Companys audited Consolidated Financial Statements and Notes thereto appearing elsewhere herein.

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|                                          |  | As of                                        
|----------------------------------------- |  | ---------------------------------------------
|                                          |  | 12/30/06                                     
|                                          |  | (Amounts in thousands, except per share data)
|Consolidated Balance Sheet Data           |  |                                              
|Working capital                           |  | $                                            
|Total assets                              |  |                                              
|Long-term debt, including current portion |  |                                              
|Stockholders equity                      |  |                                              
|                                         
|                                          |  | Year Ended                                   
|                                          |  | 12/30/06                                     
|Consolidated Statement of Operations Data |  |                                              
|Net sales                                 |  | $                                            
|Cost of sales                             |  |                                              
|Gross profit                              |  |                                              
|Operating expenses                        |  |                                              
|Operating income                          |  |                                              
|Interest income                           |  |                                              
|Interest expense                          |  |                                              
|Other income                              |  |                                              
|Net income before income taxes            |  |                                              
|Income tax (benefit) expense              |  |                                              
|Net income                                |  | $                                            
|Basic earnings per share                  |  | $                                            
|Diluted earnings per share                |  | $                                            

In the third quarter of 2004, and in the fourth quarter of 2006, the Company reduced its valuation allowance on the deferred tax asset related to net operating loss carryforwards, resulting in a $3,127,000 and $2,730,000 net tax non-cash benefit for 2004 and 2006, respectively. This change materially affects the comparability of 2004 and 2006 net earnings with other periods. Also, the Companys acquisition of Galaxy during the third quarter of 2004 affects the comparability of revenue and expense items with prior periods. Please refer to ManagementsDiscussion and Analysis of Results of Operations and Financial Condition  Income Tax Expense below.

|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------

CONTENTS

This item of the annual report on Form 10K is divided into the following sections:

- Executive Summary  Provides a brief overview of the years results and known uncertainties expected to have an effect on future results.
- Critical Accounting Policies  Discusses the accounting policies which management believes are the most essential to aid in understanding the Companys financial results.
- Results of Operations  Analyzes the Companys financial results comparing sales, operating margins and expenses to prior periods including managements expectation of trends and uncertainties on future results.
- Liquidity and Capital Resources  Analyzes the Companys cash flow from operating, investing and financing activities and further discusses the Companys current and projected liquidity.
- Inflation  Reviews the impact of inflation on the Companys reported results.

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- Market Risk  Discusses the Companys exposure to market risk sensitive instruments commonly referred to as derivatives.

Executive Summary

After three years of sales growth, 2006 total sales decreased slightly from 2005. Promotional & specialty products sales continue to improve, up 9% over 2005 which partially offset declines in the work gloves and protective wear and the pet supplies segments. The acquisition of Galaxy in the third quarter of 2004 has contributed significantly to the Companys overall sales growth in the past 3 years.

Overall gross profit was maintained from 2005 to 2006 despite lower sales. Margins in the Companys work gloves and protective wear segment increased 1% back to 2004 levels and helped to offset the margin losses in the pet supply segment. Promotional and specialty products gross margin as a percent of sales remained steady during 2006.

Operating earnings in the Companys work gloves and protective wear segment increased 56% due to improved margins mentioned above combined with operating expense savings. Operating earnings in the promotional and specialty products segment increased 25% with the additional sales volume. Overall the Company generated operating earnings of $2,203,000 which beat last years record number of $1,521,000.

Due to the recent trend of improved earnings in the Companys traditional operating segments and current projected earnings, management concluded during the fourth quarter of 2006, that the Company should recognize an additional portion of the tax benefit associated with its net operating loss (NOL) carryforwards. Accordingly, the Company recorded a non-cash tax benefit of $2,730,000. With improved operating income and the recognition of a significant tax benefit, the Company recorded net earnings of $3,894,000 for 2006. Excluding the tax benefit of $2,730,000, net income after tax would total approximately $1,164,000 or basic net earnings per share of $0.59

As management anticipated last year, liquidity improved during 2006. The Companys aggressive growth and acquisition activities over the past three years have generated significantly higher revenues. There were no acquisitions in 2006 and the Companys total long-term debt decreased $3,119,000 while cash on hand increased $1,002,000. These items are discussed in further detail in the Liquidity and Capital resources section that follows. In January of 2006, management negotiated an increase in its available line of credit on significantly improved terms with the Companys primary lender.

Management anticipates the following key factors will affect the Companys 2007 results: 1) higher costs on imported goods, particularly on items coming from China as a result of the strengthening of the Chinese currency to the US dollar; 2) whether the Company will be able to counter margin erosion by implementing higher selling prices; 3) the Companys ability to continue to control selling and administrative expenses; 4) managements ability to improve working capital asset utilization to reduce debt requirements; 5) continued acceptance of CAT® products in the domestic market and expansion into international markets; 6) the trend of major retailers importing products on a direct basis; 7) sales and marketing initiatives to promote Head-Lite sales and 8) managements efforts to continue to grow Company revenues through strategic acquisitions and the introduction of new products.

Overall, management anticipates modest sales growth in the coming year with operating expenses remaining relatively stable. Margins are likely to remain under pressure in 2007, with cost increases continuing for a number of products. By focusing on improved customer profitability, supply chain efficiency, inventory utilization and sales growth in higher margin areas, management intends to offset cost increases.

Critical Accounting Policies

The discussion and analysis of financial condition and results of operations are based upon the Companys consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.

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Significant accounting policies which management believes are the most critical to aid in fully understanding and evaluating the Companys reported financial results include the following:

Revenue Recognition

The Company recognizes revenue from product sales at the time of shipment based on standard terms of FOB shipping point, with title passing to the customer at time of shipment. Management records estimated reductions to revenue for various customer programs and incentive offerings primarily in the consumer market of the work gloves and protective wear segment. These programs include the following:

- Rebates and other volume-based incentives  The Company records a revenue reduction and associated accrued liability each period based on the estimated rebate total. Rebates paid are then charged to the accrued liability. Each quarter, management compares the accrued liability balance to the estimated rebates payable compiled for all customers and makes adjustments as appropriate to revenues and the accrued rebate liability.
- Terms discounts  the Company offers cash discounts to certain customers, recorded as revenue reductions in each period with an associated accounts receivable allowance. Management periodically analyzes this allowance account to ensure its adequacy, adjusting sales and the accounts receivable allowance when appropriate.
- Cooperative advertising and marketing allowances  the Company supports certain customer advertising and marketing initiatives to promote product sales at retail. In many cases, customers advertise Company products using mutually agreed specifications such as the Boss logo and trade names, with the Company then reimbursing a portion of the advertising cost incurred by the customer.The Company also supports various other advertising and marketing initiatives to promote sales. All such costs are treated as a reduction of revenues for accounting purposes.
- To a lesser extent, the Company occasionally utilizes additional incentives to increase market share such as buying back a competitors inventory from a new customer, offering conversion allowances and providing other new customer incentives. Such methods are common in certain retail industry channels. All such costs are treated as a reduction of revenues for accounting purposes.

As of December 30, 2006, the Companys accrual for customer advertising and promotional activities totaled $627,000. The Company has received no material allowances or credits from any vendors in connection with the purchase or promotion of such vendors products.

Accounts Receivable

Management performs ongoing customer credit evaluations and adjusts credit limits based upon payment history and the customers current credit worthiness, as determined by review of available credit information. The Companys estimate for its allowance for doubtful accounts related to trade receivables is based on two methods. The amounts calculated from each of these methods are evaluated to determine the total amount reserved. First, the Company evaluates specific accounts on which available information indicates that the customer may have an inability to meet its financial obligations. In these cases, based on the best available facts and circumstances, the Company records a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. Second, a general reserve is established for all customers based on a range of percentages applied to aging categories. The
Company has consistently applied these percentages for a number of years and management believes the results adequately provide for expected unrecoverable accounts. However, should circumstances change, for example an unexpected material adverse change in a major customers ability to meet its financial obligation to the Company, managements estimate of the recoverability of amounts due the Company could be reduced by a material amount. As of December 30, 2006, the Companys bad debt allowance totaled $221,000.

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Inventories

Inventories are stated at the lower of cost or market value. Cost is principally determined by the first-in, first-out method using a standard cost system. To facilitate up-to-date costing in the current rapidly changing environment, standards are updated upon receipt of goods when the cost of the goods received represents a material change from the current standard. Inventory gains and losses associated with these standard cost changes are amortized in an effort to match the impact of such gains and losses with the associated impact on margin recorded in the statement of income. Management periodically reviews inventory quantities on hand and records a provision for excess, slow-moving and obsolete inventory based primarily on forecasted product demand. As of December 30, 2006, the inventory valuation allowance totaled approximately $842,000. Should forecasted product demand prove inaccurate, the Company may be unable to realize the
recorded value of certain products included in inventory.

Deferred Taxes

The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Because of substantial losses in prior years, primarily during the years 1995 through 1997, the Company has available NOL carryforwards of $28,123,000 as of December 30, 2006.

Accounting principles generally accepted in the United States require the recording of a valuation allowance against the net deferred tax asset associated with this NOL and other timing differences if it is more likely than not that the Company will not be able to utilize the NOL to offset future taxes. Due to the size of the NOL carryforward in relation to the Companys taxable income and to potential uncertainties surrounding expected future earnings, management did not recognize any of its net deferred tax asset prior to the third quarter of 2004.

Because of the Companys profitability trend from traditional operating segments and projected profitability, management concluded during the third quarter of 2004 that the Company would likely utilize approximately 25% of its available NOL carryforwards. Accordingly, the Company reduced its valuation allowance by $3,127,000 and recognized a commensurate tax benefit in 2004. During the fourth quarter of 2006, the Company reevaluated its estimates and, based upon its current and projected profitability and the higher sales volumes now being realized in the work gloves and protective wear segment, determined that it was more likely than not that it would be able to utilize an additional $2,730,000 of its remaining NOL carryforwards. Accordingly, at the end of 2006 theCompany reduced its valuation allowance and recognized a $2,730,000 tax benefit. In all subsequent periods, for book purposes the
Company will record income tax expense on earnings at normal rates, approximately 39% currently, and reduce the related deferred tax asset. The tax benefit and tax expenses recorded for book purposes have no effect on the Companys actual tax liability.

Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause the provision for income taxes to vary significantly from period to period, although the Companys cash tax payments would remain unaffected until complete utilization of the NOL benefit.

Goodwill

In connection with its purchases of Galaxy during 2004 and Head-Lite, LLC., during 2005, the Company has recorded goodwill of $3,380,000. Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of the business acquired. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company does not amortize the goodwill associated with these acquisitions since it has an indefinite life. Instead, management will test goodwill for impairment in the fourth quarter of each year, or if certain circumstances indicate the existence of a possible impairment.Managements impairment test will consider the carrying value of each acquisition, including goodwill, in relation to its fair value based upon earnings generated.

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Pending Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is more likely than not that the position is sustainable based on its technical merits. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006 and the Company will adopt the new requirements in its fiscal first quarter of 2007. The cumulative effects, if any, of adopting FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. The Company does not expect that FIN 48 will have a material effect on its consolidated financial condition or results of operations.

Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The Company will adopt the provisions of SFAS 157 effective January 1, 2008. The Company does not expect SFAS 157 to have a material impact on its results of operations, financial position, or cash flows.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 will be effective for the Company on January 1, 2008. The provisions of SFAS 159 are elective, and the Company has not determined whether and to what extent to implement its provisions or how if implemented, it might affect the financial statements.

Results of Operations

SalesSales by Segment $(000)

2006

2005

2004Work Gloves & Protective Wear

$ 37,257


$ 38,045


$ 32,535Pet Supplies

6,414


6,940


6,028Promotional & Specialty Products

9,992


9,165


4,269Total Sales

$53,663


$54,150


$42,832


2006 Compared to 2005

Consolidated sales decreased 0.9% in 2006 compared to the prior year. Revenue growth in the promotional and specialty products segment continued, increasing 9% over 2005. Work gloves and protective wear decreased 2.1%. Sales of pet products were down 7.6%.

Sales in the work gloves and protective wear segment decreased $788,000, or 2.1%, during the year. Sales in this area increased in both of the last 2 years, but leveled off this year based on the competitiveness of the market. During 2006 prices were increased several times to maintain the margin as costs of these products, particularly products constructed from split leather, latex and petroleum based products such as PVC and polyester continued to increase. Many competitors did not increase their prices during 2006, so it was a challenge to maintain sales without unduly sacrificing margin. No major customers were lost, but some orders went to other distributors because of price.

Over the last three years, the Company has broadened its industrial distributor customer base by offering more specialized products, expanding its trade show presence, participating in industry specific buying groups and supporting distributor efforts to educate end-users about application-specific products. In addition, the Company has significantly expanded its presence in the hardware distributor channel serving the industrial and safety market. These efforts grew the industrial portion of this segment during the past few years, but industrial sales this year decreased by approximately $111,000 on a 0.7% decrease in unit volume.

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The Company actually increased sales slightly during 2006 in the domestic consumer market, but additional discounts and advertising allowances were granted to remain competitive in the market that more than offset the sales increase. As in the industrial sales area, the Company was successful in raising the level of sales during 2004 and 2005 through aggressive sales and promotional efforts. This level of sales was maintained in 2006 in a competitive market with increasing product costs while maintaining the same  percentage of margin.

Sales of CAT® branded products totaled $2,200,000 in 2006. The CAT® name is globally recognized and provides a number of new market opportunities to the Company, both domestically and internationally. Additional CAT® branded products are scheduled to be added to the product offerings in 2007.

Sales in the promotional and specialty products segments increased 9.0% or $827,000 over 2005. Introduction of new products was the primary factor in the sales growth. The addition of the Christmas candles and ornaments have improved sales in this segment during the fourth quarter.The Company plans to add several additional items to the promotional and specialty products line in 2007. Management anticipates continued growth in this segment based on sales potential from new products and projected growth in the advertising specialty industry.

Sales in the pet supplies segment decreased 7.6% or $526,000 due to a direct import program by a major customer. Although the Company continues to service this customer, the direct import program resulted in price and margin reductions. Management intends to offset such impacts by aggressive sales activity to build its customer base.

2005 Compared to 2004

Consolidated sales increased 26.4% in 2005 compared to the prior year. Revenue growth in the work gloves and protective wear segment was the largest contributing factor to the Companys overall sales growth. The third quarter 2004 acquisition of Galaxy in the promotional and specialty products segment also played a significant role in the consolidated sales growth. In addition, the Company generated a 15.1% sales increase in the pet supplies segment.

Sales in the work gloves and protective wear segment increased $5,510,000, or 16.9%, with revenues up in both the industrial and consumer markets served by Boss. The largest sales growth in this segment occurred in the domestic industrial market, with sales up 21% on a 17% increase in unit volume. The positive sales trend in this market from prior years accelerated in 2005, with pricing and volume both up during the year.

The Company increased sales in the domestic consumer market by 14% during 2005 compared to the prior year, with sales up 11% in the Companys traditional customer base and 17% in CAT® branded goods. Through aggressive sales and promotional efforts, the Company increased its penetration in the hardware wholesale channel in 2005, adding several new customers and expanding its relationship to be the primary supplier with certain existing accounts. Harsh weather conditions in the fourth quarter, both from increased hurricane activity in markets served by the Companys customers as well as colder than normal winter weather in the northeastern and midwest regions favorably impacted sales.

Sales of CAT® branded products totaled $2,200,000 in 2005, despite the loss of the Companys largest customer for CAT® goods from 2004. The Company significantly expanded its CAT® customer base, increasing penetration in a number of channels of distribution including hardware distributors, convenience stores and truck stops.

During 2004 and 2005, the Company developed an expanded line of sports and outdoor products in an effort to promote sales growth. After evaluating initial sales efforts, the Company concluded that the profit potential from this new line did not meet management objectives and eliminated the sales team assembled to launch these products.

Sales in the promotional and specialty products segments increased $4,896,000 because 2005 included a full year of sales from Galaxy, while 2004 only included the five month period subsequent to the acquisition. Galaxy sales totaled $8,885,000 in 2005, up 11.5% from 2004 including sales prior to the acquisition with sales of balloons and sports balls providing the bulk of sales growth.

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Though smaller in dollar impact, the pet supplies segment increased revenues by $912,000, or 15.1%, compared to 2004. This increase was primarily attributable to Warren Pet, where sales were up 35% with new customer sales in the dollar store retail channel accounting for the majority of this increase. Boss Pet sales grew 4.3% during 2005 due primarily to higher volume at this operations largest customer.

Gross Margin

|                                 |  | 2006   |  | 2005 |   | 2004
|-------------------------------- |  | ------ |  | ---- | - | ----
|Gross Margin by Segment $(000)   |  | $      |  | %    |   | $   
|Work Gloves & Protective Wear    |  | 9,018  |  | 24.2 | % |     
|Pet Supplies                     |  | 1,140  |  | 17.8 | % |     
|Promotional & Specialty Products |  | 3,393  |  | 34.0 | % |     
|Total Gross Margin               |  | 13,551 |  | 25.3 | % |     

2006 Compared to 2005

In total, margins were up slightly as a percentage of sales during 2006 due to margin increases in the work gloves and protective wear segment which was able to offset the decreased margin in pet supplies. Gross margin on promotional and specialty products remained essentially the same as in 2005.

As expected, product costs increased during 2006 in the work gloves and protective wear segment. To offset this, the Company increased selling prices. Margins remained the same in the consumer market, but increased approximately 1% in the industrial market. In addition, freight and warehousing expenses both decreased during the year which also contributed to improvement in this segment. Management was able to implement changes during the year on freight terms on industrial sales, passing on more of the increased shipping and fuel costs to the customer and less third party warehousing space was required in 2006 reducing warehouse rental expense.

Margins in the promotional and specialty products segment remained largely unchanged from 2005 while margins in the pet supplies segment declined as a result of increased product costs and shipping direct to one major customer at a lower margin.

2005 Compared to 2004

In total, margins were unchanged as a percentage of sales during 2005 due to increased sales in the higher margin promotional and specialty products segment. However, margins declined in the Companys two largest operating segments during the year.

Product costs increased during 2005 in the work gloves and protective wear segment. Although the Company increased selling prices during the year, these increases generally lagged product cost increases due to competitive pressure, resulting in lower margins. Margins declined in both the consumer and industrial markets of the work gloves and protective wear segment. In addition, freight and warehousing expenses both increased during the year, negatively impacting margins. Freight expenses increased due primarily to higher fuel surcharges levied by freight lines because of increased diesel prices during the year. Warehousing expenses increased because of higher inventory levels requiring increased utilization of third party warehousing as well as higher handling costs on the increased volume of shipments in this segment.

In the promotional and specialty products segment, margins declined in 2005 compared to 2004 due primarily to the seasonality of the Galaxy business. The Company acquired Galaxy at the beginning of its peak season in 2004, resulting in higher reported margins. During the first half of 2005 when sales activity was lower, margins were somewhat lower due to fixed expenses such as rent, utilities and depreciation, which represent a higher proportion of total expenses in those periods of lower business activity.

Margins in the pet supplies segment improved slightly during 2005 due in large part to increased sales at Warren Pet, with fixed expenses such as warehousing down as a percentage of sales.

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|Operating Expenses                 
|-----------------------------------
|                                   
|Operating Expense by Segment $(000)
|Work Gloves & Protective Wear      
|Pet Supplies                       
|Promotional & Specialty Products   
|Corporate & Other                  
|Total Operating Expense            

2006 Compared to 2005

On a consolidated basis, operating expenses decreased by $681,000 in 2006 compared to the prior year. These savings came primarily from the work gloves and protective wear segment:

- Commissions  commission expense decreased $284,000 during the year due primarily to a change in the salesmens commission program;
- Selling payroll  payroll expense decreased $72,000 during 2006 as a result of field sales personnel reductions; and
- Sport and Outdoor Product Line  discontinuance of the sports and outdoor product line reduced spending $250,000 compared to 2005 expenditures to promote this line.

Operating expenses decreased by $199,000 in the pet supplies segment for 2006. During 2005 the Company incurred approximately $100,000 of non-recurring expense for redesigned product labels. The remaining cost savings were primarily from reduced commission and show expenses.

In the promotional and safety products segment, operating expenses were in line with 2005 while absorbing additional payroll costs.

In the corporate and other segment, 2006 operating expenses decreased by $53,000 due mostly to lower stock compensation expense.

2005 Compared to 2004

On a consolidated basis, operating expenses increased by $2,532,000 in 2005 compared to the prior year. Higher operating expenses in the work gloves and protective wear segment represented the majority of this increase. Operating expenses in this segment increased due primarily to higher sales related expenses such as increased commissions, expanded marketing expenses, trade shows and the introduction of a line of sporting gloves. In addition to sales related expenses, administrative payroll increased during 2005 due in part to an additional week of compensation during the fiscal year and higher payroll taxes as well as routine salary increases.

In the promotional and safety products segment, operating expenses increased by $1,004,000 during 2005 compared to the prior year because 2005 includes a full year of Galaxy operating expenses. Galaxys operating expenses were in line with management projections and were slightly lower as a percentage of sales than recorded in 2004.

Operating expenses increased by $100,000 in the pet supplies segment for 2005 due primarily to costs incurred in connection with Warren Pets redesigned product labeling. Though gross operating expenses increased in this segment, operating expenses declined as a percentage of sales during 2005.

In the corporate and other segment, 2005 operating expenses increased by $109,000 due to higher stock compensation expense recorded during the year, primarily relating to the calculated fair value of stock options granted in 2005.

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|Operating Income                        
|----------------------------------------
|                                        
|Operating Income (Loss) by Segment$(000)
|Work Gloves & Protective Wear           
|Pet Supplies                            
|Promotional & Specialty Products        
|Corporate & Other                       
|Total Operating Income                  

2006 Compared to 2005

Operating income improved to $2,203,000, increasing last years earnings by $682,000. Earnings increased in the work gloves and protective wear segment as a result of improved margins and savings in operating expenses. Earnings also increased above last year in the promotional and specialty products segment from the additional sales volume. These increases more than offset the decline in earnings in the pet supplies segment caused by increased costs and lower selling prices.

2005 Compared to 2004

The Company generated an overall increase of $294,000 in operating earnings during 2005 compared to 2004. Earnings increased in the promotional and specialty products segment due to the full year earnings from Galaxy and in the pet supplies segment because of increased sales volume. These increases more than offset the decline in earnings in the work gloves and protective wear segment attributable to lower margin and increased selling expenses, and in the corporate and other segment resulting from higher stock compensation expense.

Other Income (Expense)

During 2006, interest expense decreased by $12,000 in comparison to the prior year due to a lower level of borrowing. Due to its operating profits and better management of its inventory, the Companys borrowings on its primary operating line of credit decreased significantly during 2006 which offset most of the effect of interest rate increases.

Interest expense in 2005 increased by $161,000 over 2004. This was caused by higher interest rates and also by the higher borrowings as a result of the Galaxy and Head-Lite acquisitions and increased working capital requirements.

Income Tax Expense

Because of losses in prior years, the Company has available, for U.S. income tax purposes, NOL carryforwards of approximately $28,123,000. Prior to 2004, management recorded a 100% valuation allowance offsetting this tax benefit due to uncertainty regarding the Companys likelihood of realizing a material portion of the NOL available. Management concluded during the third quarter of 2004 that the Company was more likely than not to utilize approximately 25% of its available NOL. Based on this conclusion, the Company reduced the valuation allowance offsetting its deferred tax asset and recognized a tax benefit of $3,127,000. During the fourth quarter of 2006, the Company reevaluated its profitability trend from the traditional operating segments and the projected profitability increase due to higher sales volumes being realized in the work gloves and protective wear segment. As a result of this reevaluation, management determined
that it was more likely than not that it would be able to utilize an additional $2,730,000 of the remaining NOL carryforwards. Accordingly, the Company reduced its valuation allowance and recognized a $2,730,000 tax benefit. In all subsequent periods, for book purposes, the Company will record income tax expense on earnings at normal rates, approximately 39% currently, and reduce the related deferred tax asset. The tax benefit and tax expenses recorded for book purposes have no effect on the Companys actual tax liability.

Shareholders and other users of the Companys financial statements should carefully consider the effect of non-cash tax entries (such as the tax benefits recognized in 2004 and 2006) when comparing current results with past or future financial statements of the Company.

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Liquidity and Capital Resources

2006 Compared to 2005

Cash generated from operating activities during 2006 was $4,606,000 which was a result of lower working capital and record earnings for the year. Reduction in working capital came from the following: 1) inventory reduction in the work gloves and protective wear segment, and the promotional and specialty products segment;2) lower receivables in the work gloves and protective wear segment and 3) higher accounts payable in the work gloves and protective wear segment.

Cash flows used in investing activities totaled $481,000 in 2006 consisting of $281,000 for purchases of property and equipment and a $200,000 contingency payment to the prior owner of Galaxy under the terms of the acquisition agreement, based on that segments profitability. Major expenditures included a new warehouse roof in Kewanee along with hardware and software upgrades, production equipment at Galaxy and racking at the pet supply warehouse in Cleveland. An additional $200,000 will be paid in the first quarter of 2007 as the final Galaxy earn-out payment.

Financing activities used cash of $3,119,000 in 2006 as the Company paid off the revolving line of credit and a portion of the long-term debt. During the prior two years, the Company utilized cash on hand and increased borrowings for acquisitions and working capital increases, which were instrumental in the Companys revenue growth. During 2006, a major portion of the working capital borrowings were paid down and Boss ended the year with $1,002,000 on hand.

At the end of 2006, the Company was in compliance with the revolving credit facilitys covenant requirements, which management renegotiated at the beginning of 2006, increasing the total line to $7,000,000 and extending the term until 2009 on improved terms. At the end of the year the total $7,000,000 was available. Management believes the revolving credit facility should provide sufficient liquidity for anticipated obligations going forward. The Company does not have material commitments for future capital expenditures.

As of December 30, 2006, the Company held in trust approximately $349,000 in marketable securities representing deferred compensation benefits for certain Company executives, directors and consultants. Such benefits are payable upon termination of employment or services.

On a longer-term basis, the Company expects to generate sufficient cash from operations to meet the needs of its existing business operations. However, certain potential growth and expansion plans, if implemented, could require the Company to obtain additional funding sources such as increased bank lines of credit, the issuance of additional capital stock, or the issuance of public or private debt. There can be no assurance that any of these funding sources will be available to the Company when and if required.

2005 Compared to 2004

Cash flows from operating activities used cash of $1,840,000 during 2005 due to funds expended to support working capital requirements. Higher inventory levels in the work gloves and protective wear segment represented the bulk of the increase in working capital during the year, resulting primarily from additional product styles to broaden the Companys product lines, increased inventory carrying levels to support higher sales volume, higher carrying cost due to purchase price increases, and certain strategic inventory purchases. Working capital also increased because of higher accounts receivable at the end of 2005 due to higher fourth quarter sales.

Cash flows from investing activities used cash of $1,080,000 in 2005 with acquisitions representing the bulk of this total. The Company acquired Head-Lite in the second quarter of the year for a cash purchase price of $700,000 plus various legal and other acquisition costs. In addition, the Company recorded a $200,000 earn-out, payable in the fourth quarter of 2005, to the former owner of Galaxy based on 2005 earnings performance. Purchases of property and equipment totaled $371,000 during 2005 with major expenditures including a new roof and lighting at the Companys 70,000 square foot Kewanee distribution building, production equipment at Galaxy and computer software to improve remote communications as well as electronic data interchange capabilities at the Companys headquarters.

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Financing activities provided cash of $1,773,000 in 2005 as the Company borrowed funds to support its acquisition activities and working capital requirements. These funds were borrowed primarily from the Companys revolving line of credit.

Contractual Obligations

Following is a table summarizing the Companys contractual obligations and commercial commitments. The long-term debt and capital lease obligation payments include projected interest at the contractual rate, or for floating rate obligations include interest at the year-end rate. Interest on the revolving line of credit is based on the Companys borrowings as of year-end.

|                                   |  |           |  | Payments Due by Period
|---------------------------------- |  | --------- |  | ----------------------
|                                   |  |           |  | Less                  
|Contractual Obligations            |  |           |  | Than 1                
|$(000)                             |  | Total     |  | Year                  
|Long-Term Debt Obligations         |  | 2,922     |  |                       
|Capital Lease Obligations          |  | 59        |  |                       
|Operating Lease Obligations        |  | 1,054     |  |                       
|Total Contractual Cash Obligations |  | 4,035     |  |                       
|                                  
|                                   |  |           |  | Amount of Commitment  
|                                   |  |           |  | Expiration Per Period 
|                                   |  | Total     |  | Less                  
|Other Commercial Commitments       |  | Amount    |  | Than 1                
|$(000)                             |  | Committed |  | Year                  
|Licensing Commitments              |  | 550       |  |                       
|Purchase Obligations               |  | 5,607     |  |                       
|Total Commercial Commitments       |  | 6,157     |  |                       

Inflation

The Company does not believe that the moderate rates of inflation experienced in the United States over the last three years have had a material effect on its net sales or profitability. The Company obtains finished goods from various foreign countries to minimize the impact of inflation in any region, though costs of certain goods have increased over the past two years and are expected to rise further in the coming year. Such cost increases may have a negative impact on future profitability.

Off Balance-Sheet Arrangements

The Company has no material off-balance sheet arrangements.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Companys primary market risk exposure consists of changes in short-term prime and LIBOR interest rates on certain borrowings that bear interest at floating rates. During 2004, the Company borrowed $1,750,000 under a term loan from its primary lender in connection with the Galaxy acquisition. The Company entered into an interest rate swap agreement that effectively fixed the interest rate on approximately $1 million of the initial term loan at 6.32%. The face value of the swap agreement declines ratably with the term loan principal. An increase of one percent per annum in the effective interest rate would increase the Companys annual interest approximately $5,000 on the floating portion of the term loan. The Companys revolving credit facility also bears interest at a floating rate of interest.

During 2003, the Company entered into an interest rate swap agreement related to its mortgage note in the original amount of $1,040,000 on Kewanee warehouse facilities. The swap is utilized to effectively fix the interest rate on this debt at 5.83%.

19

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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements and schedules of the Company and its Accountants Opinion are set forth in Part IV, Item 15, of this Report:

| | (i)   |  | Report of Independent Registered Public Accounting Firm.                                                                                              
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |      
| | (ii)  |  | Consolidated Balance Sheets  as of December 30, 2006 and December 31, 2005.                                                                          
| |      
| | (iii) |  | Consolidated Statements of Income, Cash Flows and Stockholders Equity for the years ended December 30, 2006, December 31, 2005 and December 25, 2004.
| |      
| | (iv)  |  | Notes to the Consolidated Financial Statements.                                                                                                       
| |      
| | (v)   |  | Schedule II  Valuation and Qualifying Accounts.                                                                                                      

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURES

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Companys Chief Executive Officer and Chief Financial Officer of the effectiveness of the Companys disclosure controls and procedures (as defined in Exchange Act Rule 240.13a-15(e)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Companys current disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms.

There were no changes in the Companys internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

PART III

ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information appearing in the Companys Definitive Proxy Statement prepared in connection with its 2007 Annual Meeting of Stockholders (the Proxy Statement) under the captions Election of Directors, Executive Officers, Compliance with Section 16(a) of the Exchange Act, Code of Ethics and Corporate Governance is incorporated herein by reference. The Proxy Statement is to be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

ITEM 11.   EXECUTIVE COMPENSATION

The information appearing in the Proxy Statement under the caption Executive Compensation is incorporated herein by reference.

|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

The information appearing in the Proxy Statement under the captions Security Ownership of Certain Beneficial Owners and Management and Securities Authorized for Issuance under Equity Compensation Plans is incorporated herein by reference.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information appearing in the Proxy Statement under the captions Certain Relationships and Related Transactions and Director Independence is incorporated herein by reference.

20

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ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information appearing in the Proxy Statement under the caption Principal Accountant Fees and Services is incorporated herein by reference.

PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

| | (a) |  | List the following documents filed as a part of the report:
| | --- |  | -----------------------------------------------------------
| |    

| | (1) |  | All financial statements, as follows:Report of Independent Registered Public Accounting Firm attached as page F-2 to this report.                                                                                                                                                                                                                              
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    
| |     |  | Financial Statements attached as pages F-3 through F-21 to this report: Consolidated Balance Sheets  as of December 30, 2006 and December 31, 2005; Consolidated Statements of Income, Cash Flows and Stockholders Equity for the years ended December 30, 2006, December 31, 2005 and December 25, 2004; and Notes to the Consolidated Financial Statements.
| |    
| | (2) |  | Schedule II  Valuation and Qualifying Accounts attached as page F-23 to this report.                                                                                                                                                                                                                                                                          
| |    

| | (b) |  | Exhibits:                                                                                                  
| | --- |  | -----------------------------------------------------------------------------------------------------------
| |     |  |                                                                                                            
| |     |  | The exhibits filed with or incorporated into this report are listed in the Index to Exhibits which follows.

21

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|(Registrant)             | Boss Holdings, Inc.                                     
|------------------------ | --------------------------------------------------------
|                         |                                                         
|By (Signature and Title) | /s/                                                     
|                         |                                                         
|                         | STEVENG. PONT,Vice President of Finance                 
|                         | Principal Financial Officer and Chief Accounting Officer
|                         | Date: March 30, 2007                                    

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

|By (Signature and Title) | /s/ G. LOUIS GRAZIADIO III           | 
|------------------------ | ------------------------------------ | 
|                         | G. LOUISGRAZIADIOIII                
|                         | Chairman of the Board and President,
|                         | Principal Executive Officer         
|                         | Date: March 30, 2007                
|                        
|By (Signature and Title) | /s/ PERRY A. LERNER                  | 
|                         | PERRYA. LERNER,Director             
|                         | Date: March 30, 2007                
|                        
|By (Signature and Title) | /s/ LEE E. MIKLES                    | 
|                         | LEEE. MIKLES,Director               
|                         | Date: March 30, 2007                
|                        
|By (Signature and Title) | /s/ PAUL A. NOVELLY                  | 
|                         | PAULA. NOVELLY,Director             
|                         | Date: March 30, 2007                
|                        
|By (Signature and Title) | /s/ WILLIAM R. LANG                  | 
|                         | WILLIAMR. LANG,Director             
|                         | Date: March 30, 2007                

22

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INDEX TO EXHIBITS

(3)(i) Articles of Incorporation

|3.1   |  | Certificate of Incorporation (incorporated by reference from the Companys Registration Statement on Form SB-2 - Registration No. 33-73118-A)                  
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|3.1.1 |  | Amendment to Certificate of Incorporation, dated December 7, 1998 (incorporated by reference from the Companys Form 10-K for the year ended December 26, 1998)
|     
|3.1.2 |  | Amendment to Certificate of Incorporation, dated June 30, 2000 (incorporated by reference from the Companys Form 10-Q for the quarter ended July 1, 2000)     

(3)(ii) By-Laws

|3.2 |  | By-Laws (incorporated by reference from the Companys Registration Statement on Form SB-2 - Registration No. 33-73118-A)
|--- |  | ------------------------------------------------------------------------------------------------------------------------

(10) Material Contracts

|10.1   |  | 1998 Incentive Stock Option Plan, as amended (incorporated by reference from the Companys Registration Statement on Form S-8 dated February 1, 2001)                                                                                                                        
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|10.2   |  | 1998 Non-Employee Director Stock Option Plan, as amended (incorporated by reference from the Companys Registration Statement on Form S-8 dated February 1, 2001)                                                                                                            
|      
|10.3   |  | Loan and Security Agreement among Boss Holdings, Inc., Boss Manufacturing Company and American National Bank and Trust Company of Chicago, dated June 16, 2000 (incorporated by reference from the Companys Form 10-Q for the quarter ended July 1, 2000)                   
|      
|10.3.1 |  | First Amendment to Loan and Security Agreement among Boss Holdings, Inc., Boss Manufacturing Company and American National Bank and Trust Company of Chicago, dated May 28, 2002 (incorporated by reference from the Companys Form 10-Q for the quarter ended June 29, 2002)
|      
|10.3.2 |  | Second Amendment to Loan and Security Agreement among Boss Holdings, Inc., Boss Manufacturing Company and Bank One, N.A., dated April 15, 2003 (incorporated by reference from the Companys Form 10-Q for the quarter ended June 28, 2003)                                  
|      
|10.3.3 |  | Third Amendment to Loan Agreement among Boss Holdings, Inc., Boss Manufacturing Company and Bank One, N.A., dated October 13, 2003 (incorporated by reference from the Companys Form 10-K for the year ended December 27, 2003)                                             
|      
|10.3.4 |  | Fourth Amendment to Loan Agreement among Boss Holdings, Inc., Boss Manufacturing Company and Bank One, N.A., dated March 17, 2004 (incorporated by reference from the Companys Form 10-Q for the quarter ended March 27, 2004)                                              
|      
|10.3.5 |  | Fifth Amendment to Loan Agreement among Boss Holdings, Inc., Boss Manufacturing Company and Bank One, N.A., dated July 30, 2004 (incorporated by reference from the Companys Form 10-K for the year ended December 25, 2004)                                                
|      
|10.3.6 |  | Sixth Amendment to Loan Agreement among Boss Holdings, Inc., Boss Manufacturing Company and JP Morgan Chase Bank, N.A., dated January 30, 2006 (incorporated by reference from the Companys Form 10-Q for the quarter ended April 1, 2006)                                  
|      
|10.4   |  | Boss Holdings, Inc. 2004 Stock Incentive Plan (incorporated by reference from the Companys definitive Proxy Statement filed April 30, 2004)                                                                                                                                 
|      
|10.5   |  | Stock Purchase Agreement dated July 30, 2004 between Boss Holdings, Inc. and Terrence J. Brizz regarding Galaxy Balloons, Incorporated (incorporated by reference from the Companys Form 8-K dated July 30, 2004)                                                           

23

---

|14.1 |  | Code of Ethics for Senior Executive and Financial Officers (incorporated by reference from the Companys Form 10-K for the year ended December 25, 2004)
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|21.1 |  | Subsidiaries of the Registrant                                                                                                                          
|    
|23.1 |  | Consent of McGladrey & Pullen, LLP                                                                                                                      
|    
|31.1 |  | Certification of Principal Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.                                                 
|    
|31.2 |  | Certification of Principal Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.                                                 
|    

|32 |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

24

---



















Boss Holdings, Inc.

and Subsidiaries

Consolidated Financial Statements

December 30, 2006



















F1

---

Report of Independent Registered Public Accounting Firm

To the Board of DirectorsBoss Holdings, Inc.Kewanee, Illinois

We have audited the accompanying consolidated balance sheets of Boss Holdings, Inc. and subsidiaries as of December 30, 2006 and December 31, 2005, and the related consolidated statements of income, stockholders equity, and cash flows for each of the three years in the period ended December 30, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 provided a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Boss Holdings, Inc. and subsidiaries as of December 30, 2006 and December 31, 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2006 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.



Davenport, IowaMarch 30, 2007

McGladrey & Pullen, LLP is a member firm of RSM International an affiliation of separate and independent legal entities.

F2

---

BOSS HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets(Dollars in Thousands, Except Per Share Data)

|                                                                    |  | December 30, |         | December 31,
|------------------------------------------------------------------- |  | ------------ | ------- | ------------
|                                                                    |  | 2006         |         | 2005        
|Assets                                                              |  |              |         |             
|Current Assets:                                                     |  |              |         |             
|Cash and cash equivalents                                           |  | $            | 1,002   |             
|Accounts receivable, net of allowance for doubtful accounts and     |  |              |         |             
|returns 2006 $221; 2005 $291                                        |  |              | 8,155   |             
|Inventories                                                         |  |              | 14,838  |             
|Deferred tax asset                                                  |  |              | 1,187   |             
|Prepaid expenses and other                                          |  |              | 619     |             
|Total current assets                                                |  |              | 25,801  |             
|Property and Equipment, net                                         |  |              | 3,656   |             
|Other Assets                                                        |  |              | 426     |             
|Intangibles, net of amortization 2006 $110; 2005 $67                |  |              | 160     |             
|Goodwill                                                            |  |              | 3,380   |             
|Deferred Tax Asset                                                  |  |              | 3,156   |             
|                                                                    |  | $            | 36,579  |             
|Liabilities and Stockholders Equity                                |  |              |         |             
|Current Liabilities:                                                |  |              |         |             
|Current portion of long-term debt                                   |  | $            | 481     |             
|Accounts payable                                                    |  |              | 1,540   |             
|Accrued payroll and related expenses                                |  |              | 766     |             
|Accrued liabilities                                                 |  |              | 1,641   |             
|Total current liabilities                                           |  |              | 4,428   |             
|Long-Term Debt                                                      |  |              | 2,106   |             
|Deferred Compensation                                               |  |              | 349     |             
|Commitments and Contingencies (Note 4)                              |  |              |         |             
|Stockholders Equity:                                               |  |              |         |             
|Common stock, $.25 par value; authorized 10,000,000 shares; issued  |  |              |         |             
|1,980,767 and 1,985,611 shares; outstanding 1,980,767 and 1,980,767 |  |              |         |             
|shares in 2006 and 2005, respectively                               |  |              | 495     |             
|Additional paid-in capital                                          |  |              | 66,324  |             
|Accumulated (deficit)                                               |  |              | (37,175 | )           
|Accumulated other comprehensive income                              |  |              | 52      |             
|                                                                    |  |              | 29,696  |             
|Less: 4,844 treasury shares, at cost                                |  |              |        |             
|Total stockholders equity                                          |  |              | 29,696  |             
|                                                                    |  | $            | 36,579  |             

See Notes to Consolidated Financial Statements.

F3

---

BOSS HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of IncomeYears Ended December 30, 2006, December 31, 2005 and December 25, 2004(Dollars in Thousands, Except Per Share Data)

|                                           |  | 2006 |        | 2005 |  | 2004
|------------------------------------------ |  | ---- | ------ | ---- |  | ----
|Net sales                                  |  | $    | 53,663 |      |  | $   
|Cost of sales                              |  |      | 40,112 |      |  |     
|Gross profit                               |  |      | 13,551 |      |  |     
|Operating expenses                         |  |      | 11,348 |      |  |     
|Operating income                           |  |      | 2,203  |      |  |     
|Other income and (expenses):               |  |      |        |      |  |     
|Interest income                            |  |      | 4      |      |  |     
|Interest expense                           |  |      | (416   | )    |  |     
|Other                                      |  |      | 41     |      |  |     
|                                           |  |      | (371   | )    |  |     
|Income before income tax expense (benefit) |  |      | 1,832  |      |  |     
|Income tax expense (benefit)               |  |      | (2,062 | )    |  |     
|Net income                                 |  | $    | 3,894  |      |  | $   
|Basic earnings per common share            |  | $    | 1.97   |      |  | $   
|Diluted earnings per common share          |  | $    | 1.72   |      |  | $   

See Notes to Consolidated Financial Statements.

F4

---

BOSS HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders EquityYears Ended December 30, 2006, December 31, 2005 and December 25, 2004(In Thousands)

|                               |  |              |   |         |   |             |   |               | Additional |                |   |               |   |         | Accumulated Other |        |  |   |      |   |  |    |   | Total
|------------------------------ |  | ------------ | - | ------- | - | ----------- | - | ------------- | ---------- | -------------- | - | ------------- | - | ------- | ----------------- | ------ |  | - | ---- | - |  | -- | - | -----
|                               |  | Common Stock |   | Paid-In |   | Accumulated |   | Comprehensive |            | Treasury Stock |   | Stockholders
|                               |  | Shares       |   | Dollars |   | Capital     |   | (Deficit)     |            | Income (Loss)  |   | Shares        |   | Dollars |                   | Equity
|Balance, December 27, 2003     |  | 1,953        |   |         | $ | 488         |   |               | $          | 66,783         |   |               | $ | (45,482 | )                 |        |  | $ | (116 | ) |  | (5 | ) |      
|Exercise of stock options      |  | 19           |   |         |   | 4           |   |               |            | 29             |   |               |   |        |                   |        |  |   |     |   |  |   |   |      
|Comprehensive income:          |  |              |   |         |   |             |   |               |            |                |   |               |   |         |                   |        |  |   |      |   |  |    |   |      
|Net income                     |  |             |   |         |   |            |   |               |            |               |   |               |   | 3,723   |                   |        |  |   |     |   |  |   |   |      
|Other comprehensive income     |  |              |   |         |   |             |   |               |            |                |   |               |   |         |                   |        |  |   |      |   |  |    |   |      
|(Note 10)                      |  |             |   |         |   |            |   |               |            |               |   |               |   |        |                   |        |  |   | 54   |   |  |   |   |      
|Comprehensive income           |  |              |   |         |   |             |   |               |            |                |   |               |   |         |                   |        |  |   |      |   |  |    |   |      
|Share buyback (odd lots)       |  | (21          | ) |         |   | (5          | ) |               |            | (130           | ) |               |   |        |                   |        |  |   |     |   |  |   |   |      
|Stock based compensation       |  |             |   |         |   |            |   |               |            | 74             |   |               |   |        |                   |        |  |   |     |   |  |   |   |      
|Balance, December 25, 2004     |  | 1,951        |   |         |   | 487         |   |               |            | 66,756         |   |               |   | (41,759 | )                 |        |  |   | (62  | ) |  | (5 | ) |      
|Exercise of stock options      |  | 35           |   |         |   | 9           |   |               |            | 78             |   |               |   |        |                   |        |  |   |     |   |  |   |   |      
|Comprehensive income:          |  |              |   |         |   |             |   |               |            |                |   |               |   |         |                   |        |  |   |      |   |  |    |   |      
|Net income                     |  |             |   |         |   |            |   |               |            |               |   |               |   | 690     |                   |        |  |   |     |   |  |   |   |      
|Other comprehensive income     |  |              |   |         |   |             |   |               |            |                |   |               |   |         |                   |        |  |   |      |   |  |    |   |      
|(Note 10)                      |  |             |   |         |   |            |   |               |            |               |   |               |   |        |                   |        |  |   | 118  |   |  |   |   |      
|Comprehensive income           |  |              |   |         |   |             |   |               |            |                |   |               |   |         |                   |        |  |   |      |   |  |    |   |      
|Stock based compensation       |  |             |   |         |   |             |   |               |            | 178            |   |               |   |        |                   |        |  |   |     |   |  |   |   |      
|Balance, December 31, 2005     |  | 1,986        |   |         |   | 496         |   |               |            | 67,012         |   |               |   | (41,069 | )                 |        |  |   | 56   |   |  | (5 | ) |      
|Cancellation of treasury stock |  | (5           | ) |         |   | (1          | ) |               |            | (816           | ) |               |   |        |                   |        |  |   |     |   |  | 5  |   |      
|Comprehensive income:          |  |              |   |         |   |             |   |               |            |                |   |               |   |         |                   |        |  |   |      |   |  |    |   |      
|Net income                     |  |             |   |         |   |            |   |               |            |               |   |               |   | 3,894   |                   |        |  |   |     |   |  |   |   |      
|Other comprehensive (loss)     |  |              |   |         |   |             |   |               |            |                |   |               |   |         |                   |        |  |   |      |   |  |    |   |      
|(Note 10)                      |  |             |   |         |   |            |   |               |            |               |   |               |   |        |                   |        |  |   | (4   | ) |  |   |   |      
|Comprehensive income           |  |              |   |         |   |             |   |               |            |                |   |               |   |         |                   |        |  |   |      |   |  |    |   |      
|Stock based compensation       |  |             |   |         |   |            |   |               |            | 128            |   |               |   |        |                   |        |  |   |     |   |  |   |   |      
|Balance, December 30, 2006     |  | 1,981        |   |         | $ | 495         |   |               | $          | 66,324         |   |               | $ | (37,175 | )                 |        |  | $ | 52   |   |  |   |   |      

See Notes to Consolidated Financial Statements.

F5

---

BOSS HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash FlowsYears Ended December 30, 2006, December 31, 2005 and December 25, 2004(Dollars in Thousands)

|                                                            |  | 2006 |        | 2005 |  | 2004
|----------------------------------------------------------- |  | ---- | ------ | ---- |  | ----
|Cash Flows from Operating Activities:                       |  |      |        |      |  |     
|Net income                                                  |  | $    | 3,894  |      |  | $   
|Adjustments to reconcile net income to net cash provided by |  |      |        |      |  |     
|(used in) operating activities:                             |  |      |        |      |  |     
|Depreciation and amortization                               |  |      | 467    |      |  |     
|Stock based compensation                                    |  |      | 128    |      |  |     
|Gain on disposal of property and equipment                  |  |      |       |      |  |     
|Deferred tax expense (benefit)                              |  |      | (2,132 | )    |  |     
|Changes in assets and liabilities:                          |  |      |        |      |  |     
|(Increase) decrease in:                                     |  |      |        |      |  |     
|Accounts receivable                                         |  |      | 218    |      |  |     
|Inventories                                                 |  |      | 1,890  |      |  |     
|Prepaid expenses and other current assets                   |  |      | (65    | )    |  |     
|Other assets                                                |  |      | (5     | )    |  |     
|Increase (decrease) in:                                     |  |      |        |      |  |     
|Accounts payable                                            |  |      | 271    |      |  |     
|Accrued liabilities                                         |  |      | (60    | )    |  |     
|Net cash provided by (used in) operating activities         |  |      | 4,606  |      |  |     
|                                                           
|Cash Flows from Investing Activities:                       |  |      |        |      |  |     
|Proceeds from disposition of property and equipment         |  |      |       |      |  |     
|Purchases of property and equipment                         |  |      | (281   | )    |  |     
|Acquisitions                                                |  |      | (200   | )    |  |     
|Net cash used in investing activities                       |  |      | (481   | )    |  |     
|                                                           
|Cash Flows from Financing Activities:                       |  |      |        |      |  |     
|Net borrowings on revolving line of credit                  |  |      | (2,302 | )    |  |     
|Borrowing on long-term obligations                          |  |      |       |      |  |     
|Repayment of long-term obligations                          |  |      | (817   | )    |  |     
|Purchase and retirement of stock                            |  |      |       |      |  |     
|Proceeds from exercise of stock options                     |  |      |       |      |  |     
|Net cash provided by (used in) financing activities         |  |      | (3,119 | )    |  |     
|Effect of exchange rate changes on cash                     |  | $    | (4     | )    |  | $   

(Continued)

F6

---

BOSS HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)Years Ended December 30, 2006, December 31, 2005 and December 25, 2004(Dollars in Thousands)

2006

2005

2004Increase (decrease) in cash and cash equivalents

$
1,002

$
(1,056
)

$
(3,423
)Cash and cash equivalents:Beginning





1,056



4,479Ending

$
1,002

$



$
1,056Supplemental Disclosures of Cash Flows Information,cash payments for:Interest paid

$
412

$
413


$
243Income taxes paid, net


91


139



101Supplemental Disclosures of Noncash Investing andFinancing Activities:Assets purchased under capital lease obligation









318Acquired acquisition contingency


200


200






See Notes to Consolidated Financial Statements.

F7

---

BOSS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in Thousands, Except Per Share Data)

NOTE 1.     NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of business:

Boss Holdings, Inc. and its subsidiaries are engaged in the import, marketing, and distribution of gloves, boots, rainwear, pet supplies and specialty lighting products, as well as custom imprinting of inflatable and other products for the advertising specialties industry. Customers, located throughout North America, include retailers ranging from convenience stores to mass merchandisers and various commercial users. The Company sells its products primarily through distributors and manufacturers representatives.

Significant accounting policies:

Principles of consolidation: The accompanying consolidated financial statements include the accounts of Boss Holdings, Inc. (BHI), and its wholly-owned subsidiary, Boss Manufacturing Holdings, Inc. and subsidiaries (BMHI) (collectively, the Company). All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.

Fiscal year: The Company maintains a 52/53-week year ending on the last Saturday of the calendar year. Fiscal years 2006, 2005 and 2004 contained 52, 53 and 52 weeks, respectively.

Use of estimates in the preparation of financial statements: The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Cash and cash equivalents: Cash and cash equivalents consist of cash on hand, time deposits, and liquid debt instruments such as commercial paper with maturities of three months or less from the date of purchase.

Accounts receivable: Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Accounts receivable are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.

An account is considered to be past due if any portion of the receivable balance is past due more than 60 days. The provision for bad debts charged to expense was $3, $117 and $(31) for the years ended 2006, 2005 and 2004, respectively.

Marketable securities: The Company classifies marketable equity securities as trading or available for sale securities, as defined by the Statement of Financial Accounting Standards No. 115,Accounting for Certain Investments in Debt and Equity Securities(SFAS 115). In accordance with the provisions of SFAS 115, marketable securities are stated at fair value with net unrealized gains and losses included in operations for trading securities and in accumulated other comprehensive loss for available for sale securities.

The Companys marketable equity securities, classified as trading, are held in trust under a deferred compensation arrangement, and are included in other assets on the consolidated balance sheets for all periods presented.

Revenue recognition: The Company recognizes revenue and provides for the estimated cost of returns and allowances in the period goods are shipped to the customer based on its standard selling terms of FOB shipping point, with title passing to the customer at time of shipment. Shipping and handling charges billed to customers are included in revenues. Sales in any single foreign geographic area or to any single customer did not exceed 10% of net sales for 2006, 2005 or 2004.

F8

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BOSS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in Thousands, Except Per Share Data)

NOTE 1.     NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cost of sales: The Companys cost of sales expense includes all costs incident to purchasing goods for sale, transporting them from the supplier to Company facilities, warehousing and shipping goods to the customer. Such costs include product cost, inbound freight, duty, brokerage fees and storage costs as well as shipping and handling costs associated with outbound shipments to customers.

Warranty costs and returns: The Company provides for estimated warranty costs and returns at the time of sale. Accrued costs of warranty obligations and returns are classified as accrued liabilities and are immaterial to the financial statements as a whole.

Inventories: Inventories are valued at the lower of cost or market using primarily the first-in, first-out (FIFO) method. The Company provides estimated inventory allowances for excess, slow moving and obsolete inventory whose carrying value is in excess of net realizable value. Inventories consist of finished goods for the periods presented.

Property and equipment and depreciation: Property and equipment is recorded at historical cost. The Company provides for depreciation generally using the straight-line method over the following estimated useful lives:

YearsMachinery and equipment
3

10Office furniture and equipment
3

8Buildings and improvements
20

39


Depreciation expense was $424, $401 and $384 for 2006, 2005 and 2004, respectively.

Goodwill and other intangibles: Goodwill represents the excess of purchase price over the fair value of the identifiable net assets acquired. In accordance with SFAS No. 142,Goodwill and Other Intangible Assets, goodwill is not amortized and, instead, is evaluated for impairment at least annually. Based upon the impairment tests there was no impairment at December 30, 2006. Other intangible assets are recorded at cost and amortized over their estimated useful life.

Fair value of financial instruments: The Companys financial instruments consist of cash equivalents, marketable securities, accounts receivable, accounts payable, interest rate swap agreements, and long-term debt. The carrying values of cash equivalents, accounts receivable, and accounts payable approximate fair value due to their relatively short-term nature. The carrying value of marketable securities equals fair value based on the quoted market prices of shares held by the Company. The carrying value of the long-term obligations approximates fair value based upon borrowing rates currently available to the Company for borrowings with comparable maturities. The interest rate swap agreements are recorded at fair value.

Concentrations of credit risk: The Companys financial instruments that are exposed to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable.

The Company places its cash and temporary cash investments with high credit quality financial institutions. The Federal Deposit Insurance Corporation (F.D.I.C.) insures total cash balances up to $100 per bank. The combined account balances at each institution periodically exceed the F.D.I.C. coverage resulting in a concentration of credit risk for the amounts on deposit in excess of $100. The Companys management does not believe this credit risk is significant, as they do not anticipate non-performance of the financial institutions.

Concentrations of credit risk with respect to accounts receivable are limited due to the diversity of the Companys customer base. The Companys management has established certain credit requirements that its customers must meet before sales credit is extended. The Company generally does not require collateral, but monitors the financial condition of its customers to help ensure collections and to minimize losses. Historically, the Company has not experienced significant losses related to accounts receivable from individual customers or from groups of customers in any geographic area.

F9

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BOSS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in Thousands, Except Per Share Data)

NOTE 1.     NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Foreign currency translation: Financial statements of the Companys Canadian subsidiary are translated into U.S. dollars using fiscal year-end exchange rates for assets and liabilities, and average exchange rates during the year for the results of operations. Translation adjustments of the Canadian accounts are reported as a separate component of other comprehensive earnings within stockholders equity. Exchange rate adjustments related to foreign currency transactions are recognized in comprehensive income.

Income taxes: The Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates applied to taxable income. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred income tax assets when it is more likely than not that the asset will not be realized.

Advertising costs: The Company generally expenses the cost of advertising the first time advertising takes place. Costs of trade shows and developing advertising materials are expensed at the time of the trade shows or as the advertising materials are produced and distributed to customers. Advertising expense for 2006, 2005 and 2004 was $923, $858 and $599, respectively.

Stock based compensation: In 2004, the Company adopted the fair value recognition provisions of SFAS No. 123(R),Share-Based Payment, using the modified retrospective application method. Under this transition method all prior years were restated to reflect the compensation cost that would have been recognized had the recognition provisions of SFAS 123 been applied to all awards granted to employees after January 1, 1995.

The Company calculates stockbased compensation by estimating the fair value of each option using the Black-Scholes option pricing model. The Companys determination of fair value of share-based payment awards is made as of their respective dates of grant using that option pricing model and is affected by the Companys stock price as well as a number of subjective assumptions. These variables include, but are not limited to, the Companys expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behavior. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate selected to value any particular grant is based on the U.S. Treasury rate that corresponds to the pricing term of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of the
Companys stock price. These factors could change in the future, affecting the determination of stock-based compensation expense in future periods.

Earnings per share: Basic net earnings per common share is based upon the weighted average number of common shares outstanding during the period. Diluted net earnings per common share is based upon the weighted average number of common shares outstanding plus dilutive potential common shares, including options outstanding during the period.

F10

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BOSS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in Thousands, Except Per Share Data)

NOTE 1.     NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Pending accounting pronouncements:

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is more likely than not that the position is sustainable based on its technical merits. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006 and we will adopt the new requirements in its fiscal first quarter of 2007. The cumulative effects, if any, of adopting FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. The Company does not expect that FIN 48 will have a material effect on the consolidated financial condition or results of operations.

Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The Company will adopt the provisions of SFAS 157 effective January 1, 2008 and it is not expected to have a material impact on the results of operations, financial position, or cash flows.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and FinancialLiabilities which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 will be effective for the Company on January 1, 2008. The provisions of SFAS 159 are elective, and the Company has not determined whether and to what extent it may be implemented or how if implemented, it might affect the financial statements.

Reclassifications: Certain items in the footnotes have been reclassified to be consistent with the classifications adopted for the year ended December 30, 2006. The reclassifications had no effect on total stockholders equity or net income.

NOTE 2.     PROPERTY AND EQUIPMENT

Property and equipment as of December 30, 2006 and December 31, 2005 is as follows:

2006

2005Land

$
440

$
440Machinery and equipment


1,662


1,597Buildings and improvements


2,652


2,610Office furniture and equipment


2,240


2,0676,994


6,714Less accumulated depreciation


3,338


2,915$
3,656

$
3,799


F11

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BOSS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in Thousands, Except Per Share Data)

NOTE 3.     LONG-TERM OBLIGATIONS

Long-term debt as of December 30, 2006 and December 31, 2005 is as follows:

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 2006 |       | 2005
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ----
|Boss
      Holdings, Inc. revolving line of credit (A)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | $    |      |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Boss Holdings, Inc. term note payable to a lender. Requires monthly
      principal payments through July 2011 of $21 plus interest at LIBOR plus
      2.1%, adjusted monthly (effective rate of 7.42% as of December 30, 2006).
      The Company has entered into an interest rate swap agreement related to
      this note. The swap effectively fixes the interest rate on approximately
      57% of the note at 6.32%. Collateralized by all assets of Galaxy Balloons,
      Inc., in addition to accounts receivable and inventory of Boss
      Manufacturing Company and subsidiaries. |  |      | 1,167 |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Boss Manufacturing Company mortgage note payable to a lender.
      Requires monthly principal payments of $4. Interest is at LIBOR plus 2.1%,
      adjusted monthly. The Company has entered into an interest rate swap
      agreement related to this mortgage note. The swap effectively fixes the
      interest rate on the debt at 5.83%. All remaining principal is due in July
      2010. Collateralized by certain real property of Boss Manufacturing
      Company located in Kewanee, Illinois.                                                                                     |  |      | 849   |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |      |       |     
|Boss Manufacturing Company loan agreement with a private company,
      unsecured. Requires monthly payments with variable principal payments
      ranging from $3 to $7. Interest at 3%.                                                                                                                                                                                                                                                                                                                                                                                                         |  |      |      |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Boss Manufacturing Company loan agreement with a local governmental
      agency. Requires monthly payments of $8, including interest at 3%, through
      April 2010. Collateralized by certain real property of Boss Manufacturing
      Companys Kewanee, Illinois facilities.                                                                                                                                                                                                                                                                                                                 |  |      | 301   |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Boss Manufacturing Company loan agreement with a local governmental
      agency. Requires monthly payments of $3, including interest at 3%, through
      October 2012. Collateralized by certain real property of Boss
      Manufacturing Companys Kewanee, Illinois facilities.                                                                                                                                                                                                                                                                                                               |  |      | 212   |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Non-interest bearing obligations to former owner of Galaxy
      Balloons, Inc. payable in two equal annual installments through
      2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |      |      |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Capital
      lease obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |      | 58    |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |      | 2,587 |     
|Less
      current maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |      | 481   |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | $    | 2,106 |     

F12

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BOSS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data)

NOTE 3.LONG-TERM OBLIGATIONS (Continued)

Scheduled principal payments of long-term debt are as follows:

Year ending:December 29, 2007


$
481December 27, 2008



427December 26, 2009



431December 25, 2010



1,012December 31, 2011



205Thereafter



31$
2,587


|(A) |  | On January 30, 2006, the Company modified its loan and security agreement (the Credit Agreement) with a commercial bank. The revised Credit Agreement expires in January 2009 and provides a revolving credit facility up to $7,000 based on a formula that includes eligible accounts receivable and inventories. Interest is payable monthly at the banks prime rate less 1.25% or, at the Companys option, LIBOR plus 2.1% (effective rate of 7.42% as of December 30, 2006). The Company incurs an unused line fee of 1/8% per annum on the unused portion of the credit facility. As of December 30, 2006, the Company had no borrowings on the revolving credit facility. Availability under this credit agreement was $7,000 as of December 30, 2006.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Credit Agreement includes certain restrictive covenants and requires maintenance of certain financial ratios including current ratio, minimum tangible net worth, debt service coverage, and debt to tangible net worth. The Companys accounts receivable and inventories secure the credit facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Deferred compensation plan:

Effective September 1, 2002, the Company adopted a nonqualified deferred compensation plan that allows executives to defer between 5% and 100% of their compensation, and non-employee directors, consultants and counsel to defer between 5% and 100% of their fees. The Company provides no matching contributions to the plan. Each plan participant is fully vested in all deferred compensation and earnings credited to his or her account, which the plan holds in an investment trust. The liability under the plan totaled $349 and $321 as of December 30, 2006 and December 31, 2005, respectively.

F13

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BOSS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data)

NOTE 4.COMMITMENTS AND CONTINGENCIES

Leases:

The Company leases certain office and operating facilities and certain equipment under operating lease agreements that expire on various dates through 2009 and require the Company to pay all maintenance costs. Rent expense under these leases was $422, $402 and $249 for 2006, 2005 and 2004, respectively.

The following is a schedule by year of future minimum payments under the operating lease agreements:

Year ending:December 29, 2007

$
404December 27, 2008


330December 26, 2009


320Total minimum lease payments

$
1,054


Licensing:

During 2002, the Company entered into a license agreement for the use of certain trademarks in its products. The agreement contained provisions for the payment of guaranteed or minimum royalties through 2005. The Company incurred royalties of $249, $221 and $182 in 2006, 2005 and 2004, respectively. The Company has extended the agreement with provisions for the payment of guaranteed or minimum royalties through 2008.

The following is a schedule by year of future minimum payments under the license agreement:

Year ending:December 29, 2007


$
250December 27, 2008



300$
550


Litigation:

The Company is a party to various legal actions incident to the normal operation of its business. These lawsuits primarily involve claims for damages arising out of commercial disputes. The Company has been named as a defendant in several lawsuits alleging past exposure to asbestos contained in gloves manufactured or sold by one of the Companys predecessors-in-interest, all of which actions are being defended by one or more of the Companys products liability insurers. Management believes the ultimate disposition of these matters should not materially impact the Companys consolidated financial position or liquidity.

F14

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BOSS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data)

NOTE 5.STOCK OPTIONS

The Company adopted two stock option plans in 1998 providing for the issuance of options covering up to 425,000 shares of common stock to be issued to officers, directors, or consultants to the Company. In 2004, an equity-based incentive program was adopted allowing the issuance of up to 150,000 shares of common stock in the form of any of the following: stock options, stock appreciation rights, performance based stock awards and restricted stock units. Various vesting conditions apply to these options, based on either tenure or certain performance criteria. Stock option transactions are summarized as follows:

|                       | Year Ended       
|---------------------- | -----------------
|                       | December 30, 2006
|                       |                  
|                       |                  
|                       |                  
|                       | Shares           
|Outstanding, beginning | 393,834          
|Granted                |                 
|Exercised              |                 
|Expired                | (12,834          
|Outstanding, ending    | 381,000          
|                      
|Options exercisable,   |                  
|end of year            | 351,251          
|                      
|Weighted average fair  |                  
|value per option of    |                  
|options granted        |                  

The following table summarizes the status of the Companys non-vested shares as of December 31, 2005 and changes during the year ended December 30, 2006.

WeightedAverageValue onNon-vested shares

Shares

Grant DateNonvested, December 31, 2005

70,016


3.55Vested

(38,434
)

3.42Forfeited

(1,833
)

3.84Nonvested, December 30, 2006

29,749


3.69


The Companys management estimated fair values of the stock options using the Black-Scholes options-pricing model using the following weighted-average assumptions for 2005 and 2004, respectively; expected volatility of 48% and 51%; expected dividend yield of 0.0%; weighted average risk-free rate of return of 4.2% and 2.7%; and expected lives of 5 years. Compensation expense related to stock options was $128, $178 and $74, for 2006, 2005 and 2004, respectively.

As of December 30, 2006, the total compensation cost of nonvested awards is approximately $20 of which $20 will vest in 2007. The intrinsic value of outstanding and vested options was $1,170 and $1,042, respectively, as of December 30, 2006.

F15

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BOSS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data)

NOTE 6.EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

|                                                 | Year Ended  
|------------------------------------------------ | ------------
|                                                 | December 30,
|                                                 | 2006        
|Numerator, earnings attributable to              |             
|common stockholders                              | $           
|                                                
|Denominator:                                     |             
|Basic-weighted average common shares outstanding |             
|Dilutive effect of employee stock options        |             
|Diluted outstanding shares                       |             
|                                                
|Basic earnings, per common share                 | $           
|Diluted earnings, per common share               |             

NOTE 7.RELATED PARTY TRANSACTIONS

During 2006, 2005 and 2004, compensation, fees, and expense reimbursements paid to directors or their affiliates totaled $343, $327 and $358, respectively.

NOTE 8.ACQUISITIONS

Head-Lite:

On June 15, 2005, the Company purchased substantially all assets of privately held Head-Lite, LLC (Head-Lite). Head-Lite is a Scottsdale, Arizona based importer and distributor of specialty lighting products consisting primarily of baseball style caps with a light source integrally installed above the bill of the cap providing for hands-free illumination. Consideration for this acquisition consisted of a cash purchase price of $700 and assumption of certain current liabilities primarily related to inventory. The Company utilized a combination of cash reserves and additional borrowings under its primary line of credit to consummate the purchase of Head-Lite.

F16

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BOSS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data)

NOTE 8.ACQUISITIONS (Continued)

This transaction was accounted for using purchase accounting and has been included in the Companys operations since the date of acquisition. The allocation of the Head-Lite purchase price is as follows:

Acquisition cost:Base purchase price
$
700Acquisition expenses

49Less working capital purchase price adjustment

(15
)Net purchase price
$
734Allocation of purchase cost:Cash
$
25Accounts receivable

75Inventory

241Identified intangibles and other assets

50Goodwill

527Accounts payable assumed

(177
)Accrued liabilities assumed

(7
)Net purchase price

734Less cash acquired

25Net cash paid
$
709


Had this acquisition taken place on December 28, 2003, consolidated sales and income would not have been significantly different from the amounts reported for 2004 and 2005.

Galaxy Balloons, Inc.

On July 30, 2004, the Company purchased all outstanding shares of common stock of privately held Galaxy Balloons, Incorporated, an Ohio corporation (Galaxy). Galaxy is a Cleveland, Ohio based manufacturer, importer, and distributor of imprinted and personalized balloons, balls, toys, inflatable goods and other products sold primarily in the advertising specialties industry. The base purchase price for the Galaxy shares was $3,300, with earn-out payments of up to an additional $400 if Galaxys future financial performance exceeds specified benchmarks. During 2005 and 2006 the Company recorded an additional earnout payment obligation of $200 per year with a corresponding increase in goodwill. The Company utilized a combination of cash reserves, additional borrowings under its primary line of credit and a term loan of approximately $1,750 provided by the Companys primary lender to fund the acquisition of Galaxy.

F17

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BOSS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data)

NOTE 8.ACQUISITIONS (Continued)

This transaction was accounted for using purchase accounting and has been included in the Companys operations since the date of acquisition. The allocation of purchase price prior to additional-earnout payments is as follows:

Acquisition cost:Base purchase price
$
3,300Tangible net worth adjustment and closing costs

318Covenant not to compete

50Total

3,668Less term note

(200
)Less covenant not-to-compete

(50
)Net cash price
$
3,418Allocation of purchase cost:Current assets
$
1,517Property and equipment

691Identified intangibles and other assets

241Goodwill

2,453Accounts payable assumed

(370
)Accrued liabilities assumed

(236
)Bank debt assumed

(390
)Deferred tax liability

(238
)$
3,668


The following unaudited pro forma financial information reflects the consolidated results of the Company as if the acquisition of Galaxy had occurred at the beginning of the fiscal year ended December 25, 2004:

Net sales
$ 48,727Income before income tax
1,690Income tax benefit
2,635Net income
4,325Basic earnings per common share
2.24Diluted earnings per common share
2.00


NOTE 9.INCOME TAXES

The Company records income taxes based on its consolidated tax return. Current and deferred federal and state tax expense (benefit) is as follows:

YearEndedDecember 30,

December 31,

December 25,2006

2005

2004Current income tax expense (benefit):Federal
$
19


$
44


$
State and local

51



101



2470



145



24Deferred income tax expense (benefit):Federal

(2,127
)


336



(2,765
)State and local

(5
)


(32
)


53(2,132
)


304



(2,712
)Total income tax expense (benefit)
$
(2,062
)

$
449


$
(2,688
)


F18

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BOSS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data)

NOTE 9.INCOME TAXES (Continued)

Income taxes recorded by the Company differ from the amounts computed by applying the statutory U.S. federal income tax rate to net earnings before income taxes. The following schedule reconciles income tax expense (benefit) at the statutory rate and the actual income tax expense as reflected in the consolidated statements of income for the respective periods:

Year EndedDecember 30,

December 31,

December 25,2006

2005

2004Income tax expense computed at theU.S. corporate tax rate of 34%
$
623


$
387


$
352Adjustments attributable to:State income taxes

46



69



77Deferred tax asset valuation allowance

(2,730
)






(3,127
)Other

(1
)


(7
)


10Total income tax expense (benefit)
$
(2,062
)

$
449


$
(2,688
)


The temporary differences result in a net deferred income tax asset that is reduced by a related valuation allowance, summarized as follows:

December 30,

December 31,2006

2005Deferred income tax assets:Operating loss carryforwards
$
9,562

$
10,235Accounts receivable

106


133Accruals

62


69Compensation related

491


446Inventories

577


558Tax credit carryforwards

407


373Gross deferred tax assets

11,205


11,814Deferred tax asset valuation allowance

6,500


9,230Net deferred tax assets

4,705


2,584Deferred income tax liabilities:Intangibles

60


56Property and equipment

302


317362


373Net deferred income tax assets
$
4,343

$
2,211


Included in the tax credit carryforward is approximately $407 of alternative minimum tax credits and general business credits available to reduce future income taxes payable.

Prior to the third quarter of 2004 the Company had provided a valuation allowance against its net deferred tax assets. Historically the profitability of the Company was somewhat volatile and there was not consistent profitability from the core operating segments. During the third quarter of 2004, management determined that based on the stabilizing of the profitability of the core operating segments and anticipated sales growth, it was more likely than not that a portion of the NOL would be utilized. Accordingly the Company reduced the valuation allowance by $3,127 and recognized a commensurate tax benefit in 2004. In the fourth quarter of 2006 the Company reevaluated its estimates and based on its current and projected profitability and the higher sales volumes now being realized in the work glove and protective wear segment, determined that it was more likely than not that it would be able to utilize an additional $2,730 of its remaining NOL carryforwards.
Accordingly, at the end of 2006 the Company reduced its valuation allowance to $6,500 and recognized a $2,730 tax benefit.

F19

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BOSS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data)

NOTE 9.INCOME TAXES (Continued)

As of December 30, 2006, the Company had operating loss carryforwards for U.S. income tax purposes of $28,123 available to reduce future taxable income through the following years:

Year of expiration:2010


$
9112011



16,5492012



9,1972019



5362021



930$
28,123


NOTE 10.COMPREHENSIVE INCOME (LOSS)

SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and display of comprehensive income (loss) and its components in a full set of general-purpose financial statements. The Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be disclosed in the financial statements.

Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events from non-owner sources. Comprehensive income (loss) is the total of net income and other comprehensive income (loss), which for the Company is comprised of foreign currency items and the unrealized gains and losses on the interest rate swap agreements, net of income taxes. Accumulated other comprehensive income (loss) consists of the following:

Year EndedDecember 30,

December 31,

December 25,2006

2005

2004Foreign currency items:Beginning balance
$
29


$
(62
)

$
(116
)Current period change

(4
)


91



54Ending balance

25



29



(62
)Interest swap agreements, net of income taxes:Beginning balance

27







Current period change





27



Ending balance

27



27



Accumulated other comprehensive income (loss)
$
52


$
56


$
(62
)


F20

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BOSS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data)

NOTE 11.OPERATING SEGMENTS AND RELATED INFORMATION

The Company operates in three business segments. In the work gloves and protective wear segment, through its Boss Manufacturing Company subsidiary, the Company imports, markets and distributes gloves, boots, rainwear and specialty lighting products. The Company conducts operations in the pet supplies segment through Boss Pet and the Warren Pet Products division of BMHI. In this segment, the Company imports and markets a line of pet supplies including dog and cat toys, collars, leads, chains and rawhide products. Through its Galaxy Balloons subsidiary, the Company provides specialty imprinted balloons, inflatable products and other goods included in the promotional items and specialty products segment.

The following table provides summarized information concerning the Companys reportable segments. In this table, the Companys corporate operations are grouped into a miscellaneous column entitled, Corporate and Other.

|                        | Work       |        |          |   |               |             |           |       |       |   |        |   |  |  
|----------------------- | ---------- | ------ | -------- | - | ------------- | ----------- | --------- | ----- | ----- | - | ------ | - |  | -
|                        | Gloves and |        |          |   |               | Promotional |           |       |       |   |        |   | 
|                        | Protective |        | Pet      |   | and Specialty |             | Corporate |       |       |  
|                        | Wear       |        | Supplies |   | Products      |             | and Other |       | Total
|2006:                   |            |        |          |   |               |             |           |       |       |   |        |   |  |  
|Revenue                 | $          | 37,257 |          | $ | 6,414         |             | $         | 9,992 |       | $ |       |   |  | $
|Operating income (loss) |            | 1,568  |          |   | 126           |             |           | 1,485 |       |   | (976   | ) |  |  
|Goodwill                |            | 527    |          |   |              |             |           | 2,853 |       |   |       |   |  |  
|Total assets            |            | 23,601 |          |   | 2,919         |             |           | 5,471 |       |   | 4,588  |   |  |  
|Capital expenditures    |            | 137    |          |   | 41            |             |           | 103   |       |   |       |   |  |  
|Depreciation            |            | 282    |          |   | 19            |             |           | 123   |       |   |       |   |  |  
|2005:                   |            |        |          |   |               |             |           |       |       |   |        |   |  |  
|Revenue                 | $          | 38,045 |          | $ | 6,940         |             | $         | 9,165 |       | $ |       |   |  | $
|Operating income (loss) |            | 1,002  |          |   | 356           |             |           | 1,192 |       |   | (1,029 | ) |  |  
|Goodwill                |            | 527    |          |   |              |             |           | 2,653 |       |   |       |   |  |  
|Total assets            |            | 25,500 |          |   | 2,905         |             |           | 4,646 |       |   | 2,390  |   |  |  
|Capital expenditures    |            | 311    |          |   | 1             |             |           | 59    |       |   |       |   |  |  
|Depreciation            |            | 284    |          |   | 19            |             |           | 98    |       |   |       |   |  |  
|2004:                   |            |        |          |   |               |             |           |       |       |   |        |   |  |  
|Revenue                 | $          | 32,535 |          | $ | 6,028         |             | $         | 4,269 |       | $ |       |   |  | $
|Operating income (loss) |            | 1,309  |          |   | 211           |             |           | 627   |       |   | (920   | ) |  |  
|Goodwill                |            |       |          |   |              |             |           | 2,453 |       |   |       |   |  |  
|Total assets            |            | 21,265 |          |   | 3,237         |             |           | 4,393 |       |   | 3,284  |   |  |  
|Capital expenditures    |            | 133    |          |   | 14            |             |           |      |       |   |       |   |  |  
|Depreciation            |            | 298    |          |   | 19            |             |           | 67    |       |   |       |   |  |  

F21

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BOSS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data)

NOTE 12.QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (Unaudited)

The following is a summary of the unaudited quarterly results for fiscal 2006 and 2005:

|                         | First   |           | Second  |  | Third   |           | Fourth  |  |      
|------------------------ | ------- | --------- | ------- |  | ------- | --------- | ------- |  | -----
|                         | Quarter |           | Quarter |  | Quarter |           | Quarter |  | Total
|2006:                    |         |           |         |  |         |           |         |  |      
|Net sales                | $       | 13,676    |         |  | $       | 12,074    |         |  | $    
|Gross profit             |         | 3,067     |         |  |         | 2,763     |         |  |      
|Net income (loss)        |         | (51       | )       |  |         | (44       | )       |  |      
|Net earnings (loss), per |         |           |         |  |         |           |         |  |      
|common share:            |         |           |         |  |         |           |         |  |      
|Basic                    | $       | (0.03     | )       |  | $       | (0.02     | )       |  | $    
|Diluted                  | $       | (0.03     | )       |  | $       | (0.02     | )       |  | $    
|Denominator for net      |         |           |         |  |         |           |         |  |      
|earnings (loss), per     |         |           |         |  |         |           |         |  |      
|common share:            |         |           |         |  |         |           |         |  |      
|Basic                    |         | 1,981,000 |         |  |         | 1,981,000 |         |  |      
|Diluted                  |         | 2,204,000 |         |  |         | 2,198,000 |         |  |      
|2005:                    |         |           |         |  |         |           |         |  |      
|Net sales                | $       | 13,473    |         |  | $       | 11,373    |         |  | $    
|Gross profit             |         | 3,355     |         |  |         | 2,678     |         |  |      
|Net income (loss)        |         | 94        |         |  |         | (93       | )       |  |      
|Net earnings (loss), per |         |           |         |  |         |           |         |  |      
|common share:            |         |           |         |  |         |           |         |  |      
|Basic                    | $       | 0.05      |         |  | $       | (0.05     | )       |  | $    
|Diluted                  | $       | 0.04      |         |  | $       | (0.05     | )       |  | $    
|Denominator for net      |         |           |         |  |         |           |         |  |      
|earnings (loss), per     |         |           |         |  |         |           |         |  |      
|common share:            |         |           |         |  |         |           |         |  |      
|Basic                    |         | 1,937,000 |         |  |         | 1,949,000 |         |  |      
|Diluted                  |         | 2,177,000 |         |  |         | 2,178,000 |         |  |      

As more fully described in Note 9, the Company recorded a tax benefit of $2,730 in the fourth quarter of 2006 as a result of a reduction in the tax valuation allowance.

F22

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BOSS HOLDINGS, INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (Dollars in Thousands)

|                              |           |        |          | Additions  |          |          |            |   |        |     | 
|----------------------------- | --------- | ------ | -------- | ---------- | -------- | -------- | ---------- | - | ------ | --- | 
|                              |           |        |          | Charged to |          | Charged  |            |   |        |     | 
|                              |           |        |          | Costs and  |          | to Other |            |   |        |     | 
|                              | Beginning |        | Expenses |            | Accounts |          | Deductions |   | Ending
|Year ended December 30, 2006: |           |        |          |            |          |          |            |   |        |     | 
|Accounts receivable           | $         | 361    |          | $          | 3        |          |            | $ |       |     | 
|Inventories                   |           | 821    |          |            | 72       |          |            |   | 28     | (d) | 
|Deferred income tax asset     |           | 9,230  |          |            | (2,730   | )        |            |   |       |     | 
|Sales allowance               |           | 669    |          |            | 2,024    |          |            |   |       |     | 
|Total allowances deducted     |           |        |          |            |          |          |            |   |        |     | 
|from assets                   | $         | 11,081 |          | $          | (631     | )        |            | $ | 28     |     | 
|Year ended December 31, 2005: |           |        |          |            |          |          |            |   |        |     | 
|Accounts receivable           | $         | 276    |          | $          | 117      |          |            | $ | 17     | (c) | 
|Inventories                   |           | 799    |          |            | 19       |          |            |   | 3      | (c) | 
|Deferred income tax asset     |           | 9,230  |          |            |         |          |            |   |       |     | 
|Sales allowance               |           | 518    |          |            | 1,648    |          |            |   |       |     | 
|Total allowances deducted     |           |        |          |            |          |          |            |   |        |     | 
|from assets                   | $         | 10,823 |          | $          | 1,784    |          |            | $ | 20     |     | 
|Year ended December 25, 2004: |           |        |          |            |          |          |            |   |        |     | 
|Accounts receivable           | $         | 294    |          | $          | (31      | )        |            | $ | 20     | (b) | 
|Inventories                   |           | 630    |          |            | 113      |          |            |   | 56     | (b) | 
|Deferred income tax asset     |           | 12,357 |          |            | (3,127   | )        |            |   |       |     | 
|Sales allowance               |           | 545    |          |            | 1,346    |          |            |   |       |     | 
|Total allowances deducted     |           |        |          |            |          |          |            |   |        |     | 
|from assets                   | $         | 13,826 |          | $          | (1,699   | )        |            | $ | 76     |     | 

Notes:

(a) Write off of uncollectible accounts. (b) Balance related to Galaxy acquisition. (c) Balance related to Head-Lite acquisition. (d) Payments/credit write-offs, etc.

F23

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