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 25, 2004




OR


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



For the
transition period from to


Commission File No. 0-23204



BOSS
HOLDINGS, INC.(Exact Name of Registrant as Specified in Its Charter)




|Delaware                                                       |  |  |  | 58-1972066                          
|-------------------------------------------------------------- |  |  |  | ------------------------------------
|(State or Other
Jurisdiction of Incorporation or Organization) |  |  |  | (I.R.S.
Employer Identification No.)
|221 West First Street,
Kewanee, Illinois                       |  |  |  | 61443                               
|(Address of Principal
Executive Offices)                       |  |  |  | (Zip
Code)                          



Registrants telephone number, including area code: (309) 852-2131




SECURITIES REGISTERED PURSUANT TO SECTION 12(b) of the Act: None




SECURITIES REGISTERED PURSUANT TO SECTION 12(g) of the Act: Title of
Class                        Common
Stock, $0.25 Par Value




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




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.  [  ]




Indicate by check mark whether the registrant is an
accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes [  ] No [X]




The aggregate market value of the voting stock held
by non-affiliates as of June 26, 2004 was approximately $3,878,000.




There were 1,936,957 shares of the Registrants
common stock outstanding as of March 15, 2005.


INCORPORATION BY REFERENCE



Specified portions of the registrants
definitive proxy statement for its 2005 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: availability and
pricing of goods purchased from international suppliers, increased port and inbound transportation congestion which could delay receipt of goods and
increase the cost of imported goods, unusual weather patterns which could affect domestic demand for the registrants products and curtail
imprinting operations, pricing policies of competitors, 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 completed the acquisition
of Galaxy Balloons, Inc. (Galaxy) during 2004, expanding the Companys operations into the promotional and specialty products
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 57% of BMC domestic 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, glove and protective wear sales tend to be higher in the Companys first and fourth quarters
and lower during the second and third quarters.


1

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BMC sells to a broad customer base approximating two
thousand active accounts. Accordingly, BMC has relatively little dependence on any one customer. At the end of 2004, BMC had an open order backlog of
approximately $1,250,000, down about $225,000 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. After declining in previous years, the cost of imported goods began to increase during 2004 for certain goods, particularly
split-leather products and goods produced from oil-based materials. The Company has occasionally experienced 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 shortages of purchased goods for resale in 2005.




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. Management developed a complete new line of CAT® products during 2003. Sales of CAT® products were in line with management
expectations for 2004 and totaled over 5% of 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 which are less sensitive to market
pricing pressures.




The Boss logo is an important trademark of the
Company which it vigorously defends in the market. In addition, BMC has various registered names and trademarks for specific products which 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.


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 purchased 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 2004 or 2003.




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 41% of sales in this segment during 2004 while Warrens largest customer accounted for 16%.


2

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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.


Promotional and Specialty Products



During the third quarter of 2004, the Company
acquired Galaxy, a Cleveland, Ohio based company operating in the promotional and specialty products segment. Galaxy provides custom imprinted
balloons, balls and other inflatable products that are sold primarily into the advertising specialties industry through approximately 4,000
distributors. In addition, Galaxy has broadened its product line to include various non-inflatable imprinted items including candles, yo-yos and
Christmas ornaments.




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. These items are imprinted with the
school or company name for maximum effect.




The advertising specialties industry includes over
20,000 distributors serving a $16 billion market which 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 as well as small minimums, and price. The products offered by Galaxy provide end-users with the opportunity to get their name in
front of many potential customers for a relatively small advertising cost.




Based on its review of 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 holiday season through January, then build to a peak in late summer. To reduce this seasonality, Galaxy has increased its product line to
include Christmas ornaments and candles.




Due to its broad customer base, Galaxy has little
dependence on any one customer. Galaxys open order backlog was not material at year-end due to the seasonal nature of sales in this segment.
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.


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 25, 2004, Boss employed approximately
213 full-time associates, up about 89 from the previous year due to the purchase of Galaxy. The Company employed no union employees at the end of 2004.
Approximately 206 associates were located in the United States with 7 located in Canada at year-end.




The Company believes its employee relations are
excellent with relatively low turnover rates in key positions. 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 at www.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


3

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about products available from subsidiary
operations is available at the following websites, www.galaxyballoon.com and www.roccorp.com.


|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
December 25, 2004. The principal executive offices are located in Kewanee, Illinois.


|Location             |  |  |  | City        |  | General Character                                  |  | Square Feet |         | Annual Rent |  | Lease Expiration
|-------------------- |  |  |  | ----------- |  | -------------------------------------------------- |  | ----------- | ------- | ----------- |  | ----------------
|Br. Columbia,
Canada |  |  |  | Vancouver   |  | Distribution                                       |  |             | 5,600   |             |  | $               
|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             |  |  |  | Springfield |  | Distribution                                       |  |             | 25,000  |             |  | $               
|Ontario,
Canada      |  |  |  | Concord     |  | Distribution
& Administration                      |  |             | 11,150  |             |  | $               
|Ohio                 |  |  |  | Lakewood    |  | Printing,
Distribution & Administration            |  |             | 65,000  |             |  | $               
|Ohio                 |  |  |  | Brunswick   |  | Manufacturing,
Distribution & Admin  Pet Supplies |  |             | 30,000  |             |  | $               



The Company sold its Springfield, Illinois building
in the fourth quarter of 2004 and leased back 25,000 square feet for one year to provide temporary storage. In connection with the Galaxy acquisition,
the Company assumed the lease of a portion of a building in Lakewood, Ohio. 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.




Due to the addition of the CAT® product line,
various new industrial products, increased volume of industrial shipments and planned product expansion into certain outdoor products, the
Companys facilities in the work gloves and protective wear segment are currently at capacity. Management may obtain additional temporary storage
to meet anticipated space requirements during the coming year.


|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 2004.


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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 which 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 February 28, 2005 numbered
approximately 1,479. 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 Prices |     
|--------------- |  |  |  | ---------------------- | ----
|
|2004  High
bid |  |  |  | $                      | 7.00
|2004  Low
bid  |  |  |  | $                      | 5.06
|2003  High
bid |  |  |  | $                      | 3.90
|2003  Low
bid  |  |  |  | $                      | 3.20



There were no repurchases of common stock during the
three months ended December 25, 2004.


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|Item 6. |  | Selected Financial Data
|------- |  | -----------------------



The following table contains selected consolidated
financial data for the five year period ended December 25, 2004 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.


Consolidated Balance Sheet Data

|                                          |  |  |  | As of |       
|----------------------------------------- |  |  |  | ----- | ------
|
|
|Working
capital                           |  |  |  | $     | 20,039
|Total
assets                              |  |  |  |       | 32,179
|Long-term
debt, including current portion |  |  |  |       | 4,020 
|Stockholders equity                      |  |  |  |       | 24,605

Consolidated Statement of Operations Data

|                                      |  |  |  | Year Ended |       
|------------------------------------- |  |  |  | ---------- | ------
|
|Net
sales                             |  |  |  | $          | 43,474
|Cost of
sales                         |  |  |  |            | 29,624
|Gross
profit                          |  |  |  |            | 13,850
|Operating
expenses                    |  |  |  |            | 12,623
|Operating
income (loss)               |  |  |  |            | 1,227 
|Interest
income                       |  |  |  |            | 28    
|Interest
expense                      |  |  |  |            | (267  
|Other
income                          |  |  |  |            | 47    
|Net income (loss)
before income taxes |  |  |  |            | 1,035 
|Income tax
benefit (expense)          |  |  |  |            | 2,688 
|Net
income (loss)                     |  |  |  | $          | 3,723 
|Basic
earnings (loss) per share       |  |  |  | $          | 1.93  
|Diluted
earnings (loss) per share     |  |  |  | $          | 1.72  



In the third quarter of 2004, the Company reduced
its valuation allowance on the deferred tax asset related to net operating loss carryforwards, resulting in a $2,688,000 net tax non-cash benefit for
the year. This change materially affects the comparability of 2004 net earnings with prior periods. Please refer to Managements Discussion 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.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Inflation  Reviews the impact of inflation on the
Companys reported results.
|- |  | ------------------------------------------------------------------------------

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

Executive Summary



Boss expanded its family of companies with the
acquisition of Galaxy Balloons, Inc. during the third quarter of 2004. The Company generated sales of over $43 million, up about 20% from 2003, on the
strength of sales from this acquisition and revenue growth in the Companys traditional operating segments. Boss also improved its profitability
producing operating income for the year of $1,227,000, up $870,000 from 2003.




Due to the recent trend of improved earnings in the
Companys traditional operating segments and projected earnings from the Galaxy acquisition, management concluded during the third quarter of 2004
that the Company should recognize a portion of the tax benefit associated with its net operating loss (NOL) carryforwards. Accordingly, the
Company recorded a non-cash tax benefit of $3,127,000. With improved operating income and the recognition of a significant tax benefit, the Company
recorded net earnings of $3,723,000 for 2004. Excluding the tax benefit of $3,127,000, net income after tax at a normal rate of 39% would total
approximately $600,000, or basic earnings per share of $0.31.




While the Galaxy acquisition accounted for one half
of sales growth in 2004, the Company continued its favorable sales trend from 2003 in other segments. During 2004, Boss revenues in the work gloves and
protective wear segment increased on the strength of positive initial year sales of the recently developed CAT® product line of gloves and
rainwear as well as expansion of its domestic industrial customer base. In an effort to enhance sales growth for 2005, the Company developed an
expanded line of sports and outdoor products for the work gloves and protective wear segment during 2004. In the pet supplies segment, the Company
continued to expand its customer base, resulting in favorable revenue growth for this segment.




Due to product cost increases on certain items,
particularly in the work gloves and protective wear segment, the Company increased selling prices on a selected basis during 2004. These selling price
increases favorably impacted sales. However, margins trended slightly lower in 2004 because of higher product costs. Management believes import costs
on many items in this segment will increase further during the coming year.




Operating expenses increased 9% during 2004 compared
to the prior year due primarily to the Galaxy acquisition. In addition, operating expenses increased in the Companys other segments due in large
part to commissions and other expenses which fluctuate with sales.




Several factors significantly influenced the
Companys liquidity during 2004. First, the net cash price paid for Galaxy totaled $3,418,000, with the Company financing $1,750,000 from its
primary lender under a new term loan. A second significant factor occurred in the fourth quarter when the Company sold its Springfield, Illinois
building for $1,850,000. The selling price net of expenses essentially equaled the carrying cost of this facility. The Springfield sale enabled the
Company to retire a $1,120,000 mortgage and reduce its revolving line of credit by approximately $600,000. Third, the Company significantly increased
inventory during the year, particularly in its work gloves and protective wear segment, in large part to support CAT® product sales. Primarily as
a result of these factors, the Companys cash position declined by $3,423,000 and long-term debt, including the current portion, increased by
$837,000. Management believes the sales and profitability growth from its activities in 2004 will improve the Companys future liquidity and
financial position.




In the year ahead, several key factors are likely to
affect the Companys results. These factors include the impact of Galaxy operations on a full year basis, the cost of imported finished goods,
market acceptance of new CAT® products, customer retention and expansion efforts, particularly in the consumer market of the work gloves and
protective wear segment, and the upward trend in operating expenses. Each of these will be further discussed in the following sections. To summarize,
management anticipates sales growth for 2005 on full year sales from Galaxy, customer growth in the pet supplies segment and industrial market for work
gloves and protective wear and sales of outdoor and sporting gloves. However, margins are likely to be negatively impacted by higher import costs.
Further, management expects operating costs to increase due to the higher governance costs associated with public companies in the current environment
as well as sales related expenses such as commissions which should increase


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with higher sales. Increased costs and lower margins may offset
a significant portion of the benefit from higher sales during 2005.

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.




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 and passage of title. Management records estimated reductions to revenue for customer programs and incentive offerings including
special pricing agreements, promotions and other volume-based incentives. Management periodically reviews the balance in the associated accrued
promotional liability in relation to amounts charged and the current accrual rate. In addition, the Company maintains a schedule of allowances earned
for all major customers to ensure accrued allowances are materially accurate.


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.


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 25, 2004, the
inventory valuation allowance totaled approximately $799,000. Should forecasted product demand prove inaccurate, the Company may be unable to realize
the recorded value of certain products included in inventory.


8

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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 approximately
$31,325,000 as of December 25, 2004.




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 recent profitability
trend from traditional operating segments and projected profitability from the Galaxy acquisition, 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 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 purchase of Galaxy during
2004, the Company recorded goodwill of $2,453,000. 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 the Galaxy purchase 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 Galaxy, including goodwill, in relation to  its fair value based upon earnings
generated.


Results of Operations

Sales

|Sales by Segment $(000)          |  |  |  | 2004 |        | 2003 |  | 2002
|-------------------------------- |  |  |  | ---- | ------ | ---- |  | ----
|Work Gloves
& Protective Wear    |  |  |  |      | 33,118 |      |  |     
|Pet
Supplies                     |  |  |  |      | 6,087  |      |  |     
|Promotional
& Specialty Products |  |  |  |      | 4,269  |      |  |     
|Total
Sales                      |  |  |  |      | 43,474 |      |  |     

2004 Compared to 2003



The Company generated increased sales in each
operating segment during 2004, with total sales of $43,474,000 up $7,203,000, or 19.9%. The largest increase occurred in the promotional and specialty
products segment with the third quarter 2004 acquisition of Galaxy accounting for the sales growth in this segment. In addition, both the pet supplies
and work gloves and protective wear segments provided significant sales growth for the year.




The Company acquired Galaxy on July 30, 2004. The
Galaxy acquisition enabled the Company to expand into a new product line and new channel of distribution. Galaxy markets custom imprinted inflatable
products such as balloons and beach balls as well as certain other products including ornaments and candles sold primarily in the advertising
specialties industry. The Company believes this industry affords excellent revenue potential through expected industry growth as well as prospective
product line expansion opportunities.


9

---



Galaxy revenues totaled approximately $3,700,000 for
the five-month period subsequent to the acquisition. Sales in this segment typically reach a seasonal peak at the end of the third quarter, then
decline reaching a low during the holiday season through January. Due to this seasonality, sales and profitability for the five-month period in 2004
may not be indicative of full-year results to be expected for 2005. Management anticipates 2005 Galaxy sales to be in the range of $7,500,000 to
$8,000,000.




In the work gloves and protective wear segment sales
increased $2,736,000, or 9%, during 2004, the Companys largest growth in this segment in recent years. This sales growth was attributable to
increased revenue in the domestic industrial market and sales of CAT® branded products.




Sales in the domestic industrial market of the work
gloves and protective wear segment increased 13% in 2004 compared to the prior year on a 16% increase in unit volume. Despite selling price increases
on a number of items during 2004, a shift in sales mix to lower cost goods, particularly in rainwear products, more than offset the selling price
increases. After a long-term trend of decreasing import costs from 1998 through 2003, the cost of many imported goods constructed from split leather
and petroleum based products, such as polyester and PVC, began to rise in 2004. In response, the Company increased certain selling prices in an effort
to maintain margins. The Companys 2004 revenue growth in this market resulted from higher selling prices as well as expanded sales efforts in
recent years including increased utilization of manufacturers representative groups, greater participation in trade shows, utilization of a west
coast warehouse and product line extensions. While increasing sales, these efforts have also increased commission and warehousing
expenses.




During 2004, the Companys efforts in
developing CAT® branded gloves and rainwear yielded positive results. The process of obtaining the CAT® license and developing appropriate
products took longer than anticipated. However, initial customer reaction during 2004 was very favorable with sales totaling approximately $1,800,000.
The bulk of these sales occurred in the domestic market. Management believes there is a significant international demand for CAT® goods,
particularly in Europe, and plans to explore distribution network opportunities to capitalize on this demand in the future.




Sales in the domestic consumer market of the work gloves and
protective wear segment increased approximately 5.5% on the strength of CAT® product sales. The Companys sales to its traditional customer
base in the consumer market excluding CAT® goods declined approximately 4.4% due to customer attrition in prior years. However, unit volume was essentially unchanged
due to a higher mix of shipments to bulk oriented, net price customers on which the Company provides
minimal sales allowances. In addition, due to the growing number of retailers importing products direct from foreign suppliers, the Company has
developed strategic alliances with certain accounts to provide container quantities of goods direct from foreign sources.




Management believes costs in the work gloves and
protective wear segment will continue to increase in the year ahead due to the weakening dollar, raw material cost increases and the elimination of
certain Asian export subsidies. The Companys efforts to pass on these cost increases through higher selling prices should have a favorable impact
on revenue growth, though margins would be negatively impacted if the full cost increases can not be passed on in the form of increased selling prices.
In addition, management anticipates the favorable sales trend in the domestic industrial market to continue with further expansion of the
Companys customer base in this market. CAT® product sales should continue to provide future growth opportunities, though sales growth in
2005 will likely be well below that experienced in 2004 due in part to the end of a trial by a major retailer who chose not to continue with this line
of goods. Opportunities in the traditional consumer market are more limited and may minimize the overall sales growth potential in this segment during
2005. The Company made an investment in 2004 to develop a new line of sports and outdoor products in an effort to bolster future sales growth
potential, but this line was not completed until late in the year and generated no sales in 2004.




Sales in the pet supplies segment increased
$919,000, or 17.8%, in 2004 compared to 2003 on sales growth from the Companys Boss Pet operation. Boss Pet sales increased approximately
$1,150,000 from 2003 on increased volume attributable primarily to the addition of new customers. In addition, sales to the largest customer in this
segment increased approximately 10%. Boss Pet sales during 2004 consisted primarily of pet restraints, though the Company has developed certain shampoo
and chemical products to broaden its product offering. The sales trend at Boss Pet has been positive since the Companys fourth quarter 2002
acquisition of this operation. However, the largest customer in this segment has indicated it will begin a direct import strategy on certain items
beginning in


10

---

2005. While Boss Pet expects to retain this
customer and provide these products direct from the foreign source, this change may negatively impact future revenues and margins when
implemented.



Warren Pet sales declined about $230,000 during 2004
due to lower volumes from existing customers as several of the retailers served by Warren experienced sales declines attributable in part to extreme
weather conditions in the southeast. Warren Pet experienced no significant customer attrition during the year, and has customer commitments for 2005
which should result in increased sales for the upcoming year.


2003 Compared to 2002



Consolidated sales for the year ended December 27,
2003 totaled $36,271,000, up $2,463,000, or 7.3%, from 2002 following two years of declining sales. This sales growth was attributable to the pet
supplies segment, while sales in the Companys other segments declined slightly.




Sales in the pet supplies segment increased
$2,526,000 in 2003 compared to the prior year and represented 14.2% of consolidated sales. This sales growth was attributable to the Boss Pet
acquisition completed in the fourth quarter of 2002. Boss Pet sales totaled approximately $2,825,000 in its first complete year of operation for the
Company, in line with managements objective. The Company completed the assimilation of this operation with minimal customer loss in 2003. Warren
sales were essentially unchanged during 2003 as better than expected fourth quarter sales offset reduced volume earlier in the year.




Sales in the Companys primary work gloves and
protective wear segment declined 0.1% in 2003 compared to the prior year. Though down in total for this segment, sales in the domestic industrial
market increased 6.7% despite further reductions in selling prices during the year. Unit volume increased in line with the revenue increase as higher
sales of more expensive goods, particularly rainwear, offset the impact of lower selling prices.




Boss engaged additional manufacturers
representative groups to increase coverage in certain geographical areas and also utilized a west-coast warehouse facility available from one such
group to increase its presence in the western region. These actions helped to facilitate industrial sales growth, but also increased commission and
warehousing expense. Boss increased industrial market penetration during the year adding a number of new customers with minimal attrition of its
existing customer base.




Domestic consumer market sales in the work gloves
and protective wear segment declined 5.9% in 2003 compared to 2002. The Company experienced certain customer losses during the year which negatively
impacted sales in various channels of distribution including private label, automotive parts, drug and discount retailers. In total, these customers
represented approximately 11% and 13% of 2003 and 2002 sales, respectively.




A number of larger retailers have begun to import
products direct from foreign suppliers in recent years. The Company is pursuing strategic alliances with certain customers to provide container
quantities of goods directly to accounts which buy in bulk quantities and can provide their own warehousing. In addition, the Company has focused its
sales efforts on channels most likely to benefit from the distribution services it provides such as convenience stores and hardware
distributors.


Gross Margin

|                                 |  |  |  | 2004 |        | 2003 |  | 2002 |     
|-------------------------------- |  |  |  | ---- | ------ | ---- |  | ---- | ----
|
|Work Gloves
& Protective Wear    |  |  |  |      | 10,179 |      |  |      | 30.7
|Pet
Supplies                     |  |  |  |      | 2,046  |      |  |      | 33.6
|Promotional
& Specialty Products |  |  |  |      | 1,625  |      |  |      | 38.1
|Total Gross
Margin               |  |  |  |      | 13,850 |      |  |      | 31.9

2004 Compared to 2003



On a consolidated basis, the Companys sales
growth in all operating segments resulted in a gross margin increase of $1,863,000 in 2004 compared to the prior year. However, overall gross margin
declined as a percentage of sales by 1.1% due to lower margins in the work gloves and protective wear segment.


11

---



Margin erosion in the work gloves and protective
wear segment was predominantly attributable to the consumer market. The Company increased sales to several bulk oriented, lower margin customers in
this market during the year which reduced gross margins. In addition, costs increased on many imported goods in the work gloves and protective wear
segment. Management anticipates further margin erosion in this segment as more large customers import products on a direct basis and import costs
continue to rise.




In the Pet Supplies segment, 2004 margins improved
slightly due to the Companys transition to imported goods at Boss Pet during the year. Product cost was more stable in this segment than in the
work gloves and protective wear segment. However, the Company anticipates somewhat lower margins in the pet supplies segment during 2005 due to the
addition of certain lower margin, bulk oriented customers and the expected transition of the Companys largest customer in this segment to a
direct import program.




Margins declined in the promotional and specialty
products segment in 2004 because of the Galaxy acquisition. Though margins at this operation are lower than the Companys Boss Balloon operation,
margins in this segment are the most favorable in the Company and provide excellent overall returns. Cost increases in this segment are not expected to
have a material impact on margins during 2004.


2003 Compared to 2002



Gross margin increased both in total dollars and as
a percentage of sales in each of the Companys operating segments during 2003, with the total gross margin percentage of 33.0% the highest
achieved during the years presented. Despite lower sales in the work gloves and protective wear segment, the Company increased gross margin by $139,000
on a 0.5% increase in margin as a percentage of sales. The improved margin was attributable to the consumer market where the Company benefited from
lower cost on certain imported goods. Margins in the industrial market were essentially unchanged from 2002 as a percentage of sales.




In the pet supplies segment, gross margin increased
by $917,000 due to increased sales from Boss Pet as discussed above. As a percentage of sales, gross margin increased 3.2% in this segment because the
Company negotiated lower prices from existing suppliers and began importing certain products.




Gross margin increased 5.1% of sales in the
promotional and specialty products segment due primarily to the elimination of certain promotional allowances at Boss Balloon.


Operating Expenses

|                                         |  | 2004 |        | 2003 |  | 2002
|---------------------------------------- |  | ---- | ------ | ---- |  | ----
|
|Work
        Gloves & Protective Wear    |  |      | 8,870  |      |  |     
|Pet
        Supplies                     |  |      | 1,835  |      |  |     
|Promotional
        & Specialty Products |  |      | 998    |      |  |     
|Corporate
        & Other                |  |      | 920    |      |  |     
|Total
        Operating Expense          |  |      | 12,623 |      |  |     

2004 Compared to 2003



Consolidated operating expenses increased $993,000
in 2004 compared to 2003 due primarily to the Galaxy acquisition, with operating expenses also up in the pet supplies segment. In the promotional and
specialty products segment, operating expenses increased $671,000 because of Galaxy expenses, which were in line with management projections prior to
the acquisition. This operation has a lower overhead structure than the Companys other segments due in part to the customer base served and sales
channel structure.




In the pet supplies segment, operating expenses
increased due to higher warehousing costs and increased selling expenses. Warehousing costs increased as a result of the reclassification of certain
Boss Pet occupancy costs during 2003. Such expenses were previously treated as manufacturing costs and included in cost of goods sold before the
transition from manufacturing to importing. Margins and overall profitability at this operation have improved as a result of this transition. In
addition to warehouse cost increases, various selling costs including commissions and sales payroll increased in connection with higher
sales.


12

---



Operating expenses in the work gloves and protective
wear segment increased $55,000 during 2004 as higher sales related expenses more than offset lower warehousing costs resulting from warehouse
consolidation in 2003. Selling expenses increased due to higher sales as well as the Companys development of new sports and outdoor related
products. In the corporate and other segment, operating expenses declined by $48,000 due in part to lower legal expenditures during the year. Overall
operating expenses declined as a percentage of sales to 29%.


2003 Compared to 2002



During 2003, consolidated operating expenses
increased $1,566,000 compared to 2002 due primarily to higher expenses in the work gloves and protective wear segment. Operating expenses in this
segment increased due to the following items:


| |  | Selling expense  sales related expenses increased
approximately $475,000 with a number of factors contributing to this increase. The Company incurred various product development and start-up expenses
associated with the new line of CAT® products. Such costs included guaranteed royalty expense, travel, consulting, and sales brochure development
and printing costs. Commission expense increased on sales in the industrial market of the work gloves and protective wear segment due in part to
increased utilization of certain manufacturers representatives. Use of these groups helped to increase sales in this market during the year.
The Company increased its presence at various trade and customer shows during 2003 to bolster sales growth. While successful in promoting sales growth,
participation in these shows increased selling expenses both for show fees as well as associated travel to attend and display products. In
addition to the above items, Boss incurred certain additional advertising and catalogue development costs in its continuing efforts to promote sales
growth in the work glove and protective wear segment.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | General & Administrative expense  expenses in this
area increased approximately $300,000 due primarily to the consolidation of warehouses in 2003. During the year, Boss acquired certain facilities in
Kewanee, IL, renovated these facilities, closed its Springfield, IL distribution center and consolidated its Boss Manufacturing regional warehouse
operations in Kewanee. Management expects this consolidation to promote efficiency, improve the Companys level of customer service and provide
future cost savings. However, the cost to close Springfield and relocate goods to Kewanee totaled approximately $110,000 in 2003. Also, the Company
incurred duplicate payroll expense as well as other start-up expenses to complete the consolidation in Kewanee. In addition to the warehouse
consolidation costs experienced in 2003, Boss incurred additional warehouse expense from the public facility used at the port of entry due to higher
inventory levels for most of the year. General and administrative expense also included higher payroll cost associated with strengthening the
Companys purchasing function and other administrative support.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, operating expenses increased by
$649,000 in the pet supplies segment due primarily to expenses associated with the new Boss Pet subsidiary. These expenses included selling expenses as
well as administrative and warehousing expenses associated with this subsidiarys Brunswick, Ohio office. As a percentage of sales, operating
expenses have declined by 10.7% in the pet supplies segment over the past two years due to increased sales and decreases in certain administrative
costs.


Operating Income

|                                 |  |  |  | 2004 |       | 2003 |  | 2002 |     
|-------------------------------- |  |  |  | ---- | ----- | ---- |  | ---- | ----
|
|Work Gloves
& Protective Wear    |  |  |  |      | 1,309 |      |  |      | 4.0 
|Pet
Supplies                     |  |  |  |      | 211   |      |  |      | 3.5 
|Promotional
& Specialty Products |  |  |  |      | 627   |      |  |      | 14.7
|Corporate
& Other                |  |  |  |      | (920  | )    |  |      |    
|Total
Operating Income           |  |  |  |      | 1,227 |      |  |      | 2.8 

13

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2004 Compared to 2003



The Company generated an increase in consolidated
operating income of $870,000 because of earnings growth in the promotional and safety products segment and the work gloves and protective wear
segment. The Galaxy acquisition provided the bulk of the earnings growth in the promotional and safety products segment, while sales growth in the
CAT® line and the domestic industrial market generated improved earnings in the work gloves and protective wear segment. Earnings were also
favorably impacted by increased earnings in the pet supplies segment attributable to higher sales from the Companys Boss Pet operation as well as
reduced corporate expenses.


2003 Compared to 2002



Lower sales and increased operating expenses during
2003 led to lower profitability in the Companys work gloves and protective wear segment with operating income down $802,000 compared to 2002.
In the pet supplies segment, earnings from the Companys Boss Pet subsidiary along with improved profitability at Warren led to a significant
improvement for this segment with operating income up $267,000. Consolidated operating income totaled $357,000 in 2003, down $488,000 from 2002
because of lower earnings in the Companys primary work gloves and protective wear segment.


Other Income (Expense)



Interest expense increased by $118,000 during 2004
because of higher borrowings and increased interest rates. Borrowings increased due to funds borrowed in connection with the Galaxy acquisition as well
as revolving fund borrowings to support working capital requirements. Interest income declined by $34,000 as the Company used a substantial portion of
its cash holdings to complete the Galaxy acquisition during the third quarter.




Interest income during 2003 totaled $62,000, down
from $97,000 in 2002 due to lower interest rates. Interest expense increased to $149,000 in 2003, an increase of $36,000 from 2002, because of interest
on new mortgages associated with the purchase of warehouse facilities in Kewanee.




Other income in 2003 of $209,000 consisted primarily
of foreign exchange gains on certain obligations of the Companys Canadian subsidiary. In addition, Boss recorded a gain of $96,000 on the sale of
certain marketable securities sold in 2003.


Income Tax Expense



Because of losses in prior years, the Company has
available for U.S. income tax purposes NOL carryforwards of approximately $31,325,000. 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. In view of
the Companys profitability during the past several years and projected earnings from the recently acquired Galaxy operation, management concluded
during the third quarter of 2004 that the Company is 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. On subsequent earnings, the
Company recorded income tax expense at normal rates and reduced the deferred tax asset accordingly, resulting in a net tax benefit of $2,688,000 for
2004.




Shareholders and other users of the Companys
financial statements should carefully consider the effect of non-cash tax entries when comparing current results with past or future financial
statements of the Company.


Liquidity and Capital Resources

2004 Compared to 2003



During 2004, cash flows from operating activities
used cash of $1,401,000, compared to using cash of $388,000 in the prior year. The Companys increased inventories were the primary factor in the
use of cash for 2004. The increase in inventory resulted from the following factors: 1) Purchases of CAT® products to support sales in this new
product line, CAT® inventory totaled approximately $1,500,000 at the end of 2004; 2) New styles and higher minimum carrying levels to support
increased industrial market sales; 3) Higher carrying cost due to purchase price increases; and 4) Higher pet supplies inventory to support the
substantial increase in sales and transition to imported product at Boss Pet.


14

---



Cash flows from investing activities used cash of
$1,853,000 in 2004, due in large part to the $3,418,000 purchase of Galaxy. The Company sold its Springfield, Illinois building with net proceeds
totaling $1,712,000 during the fourth quarter of 2004. Purchases of property and equipment were below prior year levels and consisted primarily of a
new warehouse management system.




Cash used in financing activities totaled $223,000 in
2004. In connection with the Galaxy acquisition, the Company borrowed $1,750,000 under a new term loan with its primary lender. The Company used
proceeds from the Springfield building sale to retire the mortgage on this facility and reduce borrowings on its revolving line of credit. During the
first quarter of 2004, the Company used $135,000 to purchase and retire a portion of its common stock under a restricted tender offer pursuant to SEC
Rule 13e-4(h)(5) for shares held by persons or entities with total holdings of less than 100 shares.




The Company ended 2004 with $1,056,000 in cash and
cash equivalents and borrowings of $98,000 under its $6,000,000 revolving credit facility. Management believes these sources should provide sufficient
liquidity for anticipated obligations during 2005. The Company does not have material commitments for future capital expenditures. As of December 25,
2004, the Company held in trust approximately $222,000 in marketable securities representing deferred compensation benefits for certain Company
executives, directors and counsel. 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.


2003 Compared to 2002



Cash flows from operating activities used cash of
$388,000 in 2003, compared to providing cash flows of $3,689,000 in 2002. Increased inventories during 2003 accounted for the bulk of this reduction in
cash flow. Several factors led to the increased inventory level including the following: 1) Increased purchases to secure current lower prices in
anticipation of cost increases; 2) Increased Boss Pet inventory to support projected 2004 sales (by converting to an importer, this operation carries
higher inventory levels than it did as a domestic manufacturer); and 3) New CAT® products that the Company began receiving in the fourth quarter
in preparation for 2004 sales.




Lower earnings also negatively impacted cash flows
from operations in 2003. These unfavorable items were partially offset by lower accounts receivable. Accounts receivable declined due to improved
collection efforts with past due items down substantially from 2002, as well as lower December sales.




Cash flows from investing activities used cash of
$1,398,000 in 2003, compared to providing cash of $22,000 in the previous year. Purchases of property and equipment represented the Companys only
investing activity in 2003 and consisted primarily of warehouse acquisition and renovation in conjunction with the Companys warehouse
consolidation initiative completed during the year.




Financing activities provided cash of $1,391,000 in
2003 as the Company borrowed $1,640,000 in connection with the purchase and renovation of warehouse facilities during 2003. Payments on existing debt
of $249,000 partially offset the new loan activity during the year.




During the first half of 2003, the Company from time
to time invested a portion of its available cash in marketable securities in an effort to improve its return on funds. Such investments varied between
zero and $100,000, with none held by the Company as of December 27, 2003. In the future, the Company may invest in marketable securities, including
stocks, bonds and other securities traded on a major U.S. exchange or NASDAQ. Such investments involve risk and may result in losses which could be
significant to the Company in the event of unfavorable market conditions or unanticipated results.


15

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Contractual Obligations



Following is a table summarizing the Companys
contractual obligations and commercial commitments:


|                                   |  |  |  |  |       | Payments Due by Period | 
|---------------------------------- |  |  |  |  | ----- | ---------------------- | 
|
|Long-Term
Debt Obligations         |  |  |  |  | 3,703 |                        | 
|Capital Lease
Obligations          |  |  |  |  | 317   |                        | 
|Operating
Lease Obligations        |  |  |  |  | 951   |                        | 
|Total
Contractual Cash Obligations |  |  |  |  | 4,971 |                        | 

|                             |  |  |  |  |     | Amount of Commitment Expiration Per Period | 
|---------------------------- |  |  |  |  | --- | ------------------------------------------ | 
|
|Licensing
Commitments        |  |  |  |  | 150 |                                            | 
|Total
Commercial Commitments |  |  |  |  | 150 |                                            | 

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 which have experienced deflationary conditions during recent years, though costs of certain goods
began to increase during 2004 and are expected to rise further in the coming year. Such cost increases may have a negative impact on future
profitability.


|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 $10,000 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%.


|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) |  | Reports of Independent Registered Public Accounting
Firms.
|--- |  | ----------------------------------------------------------

|(ii) |  | Consolidated Balance Sheets  as of December 25, 2004 and
December 27, 2003.
|---- |  | ----------------------------------------------------------------------------

|(iii) |  | Consolidated Statements of Income, Cash Flows and
Stockholders Equity for the years ended December 25, 2004, December 27, 2003 and December 28, 2002.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|(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.


16

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|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 and Executive Officers of the
Registrant
|-------- |  | --------------------------------------------------



The information appearing in the Companys
Definitive Proxy Statement prepared in connection with its 2005 Annual Meeting of Stockholders (the Proxy Statement) under the captions
Election of Directors, Executive Officers, Compliance with Section 16(a) of the Exchange Act and Code of
Ethics 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
|-------- |  | ----------------------------------------------



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


|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.


17

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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: Reports of Independent  Registered Public Accounting
Firms attached as page F-2 and F-3 to this report. Financial Statements attached as pages
F-4 through F-21 to this  report: Consolidated Balance Sheets  as of December 25,
2004 and December 27, 2003; Consolidated Statements of Income, Cash Flows and
Stockholders Equity for the years ended December 25, 2004, December 27, 2003 and
December 28, 2002; Notes to the Consolidated Financial  Statements.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Schedule
II  Valuation and Qualifying Accounts attached as  page F-22 to this report.
|--- |  | --------------------------------------------------------------------------------------

|(b) |  | Exhibits:
|--- |  | ---------

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

18

---

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/
J. Bruce LancasterJ. Bruce Lancaster Chief Financial Officer, Director Date: March 25,
2005



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 IIIG. Louis Graziadio III Chairman of the Board and President, Principal
Executive Officer Date: March 25, 2005
|------------------------ |  |  |  | --------------------------------------------------------------------------------------------------------------------------------------
|By (Signature and
Title) |  |  |  | /s/
Perry A. LernerPerry A. Lerner, Director Date: March 25, 2005                                                                     
|By (Signature and
Title) |  |  |  | /s/
Lee E. MiklesLee E. Mikles, Director Date: March 25, 2005                                                                         
|By (Signature and
Title) |  |  |  | /s/
Paul A. NovellyPaul A. Novelly, Director Date: March 25, 2005                                                                     
|By (Signature and
Title) |  |  |  | /s/
Richard D. SquiresRichard D. Squires, Director Date: March 25, 2005                                                               

19

---





BOSS
HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED FINANCIAL STATEMENTSDecember 25, 2004


F-1

---

McGladrey & PullenCertified Public Accountants

Report of Independent Registered Public Accounting Firm



To the Board of
Directors Boss Holdings, Inc. Kewanee, Illinois




We have audited the accompanying consolidated
balance sheets of Boss Holdings, Inc. and subsidiaries as of December 25, 2004 and December 27, 2003, and the related consolidated statements of income,
stockholders equity, and cash flows for the years then ended. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated financial statements 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
25, 2004 and December 27, 2003, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally
accepted accounting principles.




We have also audited Schedule II of Boss Holdings,
Inc. and subsidiaries for the years ended December 25, 2004 and December 27, 2003. In our opinion, this schedule presents fairly, in all material
respects, the information required to be set forth therein.




/s/ McGladrey & Pullen, LLPDavenport,
Iowa February 18, 2005


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

F-2

---

Report of Independent Registered Public Accounting Firm



Board of
Directors Boss Holdings, Inc.




We have audited the accompanying consolidated
statements of income, stockholders equity, and cash flows of Boss Holdings, Inc. and subsidiaries for the year ended December 28, 2002. These
financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements
based on our audit.




We conducted our audit in accordance with auditing
standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our
opinion.




As described in Note 1 to the consolidated financial statements,
the Company retroactively adopted Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment.




In our opinion, the financial statements referred to
above present fairly, in all material respects, the consolidated results of operations and consolidated cash flows of Boss Holdings, Inc. and
subsidiaries for the year ended December 28, 2002 in conformity with accounting principles generally accepted in the United States of
America.




We have also audited Schedule II of Boss Holdings,
Inc. and subsidiaries for the year ended December 28, 2002. In our opinion, this schedule presents fairly, in all material respects, the information
required to be set forth therein.




/s/ GRANT
THORNTON LLP




Atlanta,
Georgia February 14, 2003 (except for the last table of Note 1, as to which the date is March 22,
2005)


F-3

---



Boss Holdings, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (Dollars in Thousands, Except Per Share
Data)

|                                                                                                                                                                             |  |  |  | December 25, 2004 |         | December 27, 2003
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ----------------- | ------- | -----------------
|ASSETS                                                                                                                                                                      
|Current
Assets                                                                                                                                                               |  |  |  |                   |         |                  
|Cash and cash
equivalents                                                                                                                                                    |  |  |  | $                 | 1,056   |                  
|Accounts
receivable, net of allowance for doubtful accounts and returns 2004 $221; 2003 $250                                                                                 |  |  |  |                   | 7,251   |                  
|Inventories                                                                                                                                                                  |  |  |  |                   | 14,124  |                  
|Deferred
tax asset                                                                                                                                                           |  |  |  |                   | 1,218   |                  
|Prepaid
expenses and other                                                                                                                                                   |  |  |  |                   | 484     |                  
|Total
current assets                                                                                                                                                         |  |  |  |                   | 24,133  |                  
|Property and
Equipment, net                                                                                                                                                  |  |  |  |                   | 3,829   |                  
|Assets Held for
Sale                                                                                                                                                         |  |  |  |                   |        |                  
|Other
Assets                                                                                                                                                                 |  |  |  |                   | 249     |                  
|Intangibles, net
of amortization $20                                                                                                                                         |  |  |  |                   | 200     |                  
|Goodwill                                                                                                                                                                     |  |  |  |                   | 2,453   |                  
|Deferred tax
asset                                                                                                                                                           |  |  |  |                   | 1,315   |                  
|                                                                                                                                                                             |  |  |  | $                 | 32,179  |                  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                        
|Current
Liabilities:                                                                                                                                                         |  |  |  |                   |         |                  
|Current
portion of long-term debt                                                                                                                                            |  |  |  | $                 | 762     |                  
|Accounts
payable                                                                                                                                                             |  |  |  |                   | 1,173   |                  
|Accrued
payroll and related expenses                                                                                                                                         |  |  |  |                   | 853     |                  
|Accrued
liabilities                                                                                                                                                          |  |  |  |                   | 1,306   |                  
|Total
current liabilities                                                                                                                                                    |  |  |  |                   | 4,094   |                  
|Long-Term
Debt                                                                                                                                                               |  |  |  |                   | 3,258   |                  
|Deferred
Compensation                                                                                                                                                        |  |  |  |                   | 222     |                  
|Commitments and Contingencies (Note 4)                                                                                                                                       |  |  |  |                   |         |                  
|Stockholders Equity:                                                                                                                                                        |  |  |  |                   |         |                  
|Common stock,
$.25 par value; authorized 10,000,000 shares; issued 1,950,611 and 1,952,404 shares; outstanding 1,936,957 and 1,938,750 shares in 2004 and 2003,
respectively |  |  |  |                   | 487     |                  
|Additional
paid-in capital                                                                                                                                                   |  |  |  |                   | 67,776  |                  
|Accumulated
(deficit)                                                                                                                                                        |  |  |  |                   | (41,759 | )                
|Unearned
compensation                                                                                                                                                        |  |  |  |                   | (87     | )                
|Accumulated
other comprehensive (loss)                                                                                                                                       |  |  |  |                   | (62     | )                
|                                                                                                                                                                             |  |  |  |                   | 26,355  |                  
|Less: 13,654
treasury shares, at cost                                                                                                                                        |  |  |  |                   | 1,750   |                  
|                                                                                                                                                                             |  |  |  |                   | 24,605  |                  
|                                                                                                                                                                             |  |  |  | $                 | 32,179  |                  

See Notes to Consolidated Financial Statements.

F-4

---

Boss Holdings, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME Years Ended December 25, 2004, December
27, 2003, and December 28, 2002 (Dollars in Thousands, Except Per Share Data)

|                                                       |  |  |  | 2004 |        | 2003 |  | 2002
|------------------------------------------------------ |  |  |  | ---- | ------ | ---- |  | ----
|Net
sales                                              |  |  |  | $    | 43,474 |      |  | $   
|Cost of
sales                                          |  |  |  |      | 29,624 |      |  |     
|Gross
profit                                           |  |  |  |      | 13,850 |      |  |     
|Operating
expenses                                     |  |  |  |      | 12,623 |      |  |     
|Operating
income                                       |  |  |  |      | 1,227  |      |  |     
|Other income
and (expenses):                           |  |  |  |      |        |      |  |     
|Interest
income                                        |  |  |  |      | 28     |      |  |     
|Interest
expense                                       |  |  |  |      | (267   | )    |  |     
|Gain on
lawsuit settlement, net of settlement expenses |  |  |  |      |       |      |  |     
|Gain on
marketable securities                          |  |  |  |      |       |      |  |     
|Other                                                  |  |  |  |      | 47     |      |  |     
|                                                       |  |  |  |      | (192   | )    |  |     
|Income
before income tax (expense) benefit             |  |  |  |      | 1,035  |      |  |     
|Income tax
(expense) benefit                           |  |  |  |      | 2,688  |      |  |     
|Net
income                                             |  |  |  | $    | 3,723  |      |  | $   
|Basic
earnings per common share                        |  |  |  | $    | 1.93   |      |  | $   
|Diluted
earnings per common share                      |  |  |  | $    | 1.72   |      |  | $   

See Notes to Consolidated Financial Statements.

F-5

---

Boss Holdings, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY Years Ended December
25, 2004, December 27, 2003, and December 28, 2002 (In Thousands)

|                                                                     |  | Common
      Stock |       | Additional
      Paid-in |  | Unearned |     | Accumulated |  | Accumulated
      Other
      Comprehensive |        | Treasury
      Stock |  | Total
      Stockholders
|-------------------------------------------------------------------- |  | ------------------ | ----- | ------------------------ |  | -------- | --- | ----------- |  | ------------------------------------------- | ------ | -------------------- |  | -------------------------
|
|Balance,
        December 29, 2001, as previously reported           |  |                    | 1,935 |                          |  | $        | 484 |             |  | $                                           | 67,437 |                      |  | $                        
|Cumulative
        effect of change in accounting principle (note 1) |  |                    |      |                          |  |          |    |             |  |                                             | 163    |                      |  |                          
|Balance,
        December 29, 2001, as restated                      |  |                    | 1,935 |                          |  |          | 484 |             |  |                                             | 67,600 |                      |  |                          
|Exercise
        of stock options                                    |  |                    | 18    |                          |  |          | 4   |             |  |                                             | 26     |                      |  |                          
|Issuance
        of stock options                                    |  |                    |      |                          |  |          |    |             |  |                                             | 154    |                      |  |                          
|Stock
        based compensation                                     |  |                    |      |                          |  |          |    |             |  |                                             |       |                      |  |                          
|Comprehensive
        income                                         |  |                    |       |                          |  |          |     |             |  |                                             |        |                      |  |                          
|Net
        income                                                   |  |                    |      |                          |  |          |    |             |  |                                             |       |                      |  |                          
|Foreign
        currency translation adjustment                      |  |                    |      |                          |  |          |    |             |  |                                             |       |                      |  |                          
|Unrealized
        (loss) on available for sale securities           |  |                    |      |                          |  |          |    |             |  |                                             |       |                      |  |                          
|Comprehensive income                                                 |  |                    |       |                          |  |          |     |             |  |                                             |        |                      |  |                          
|Balance,
        December 28, 2002                                   |  |                    | 1,953 |                          |  |          | 488 |             |  |                                             | 67,780 |                      |  |                          
|Net
        income and comprehensive income                          |  |                    |      |                          |  |          |    |             |  |                                             |       |                      |  |                          
|Issuance
        of stock options                                    |  |                    |      |                          |  |          |    |             |  |                                             | 31     |                      |  |                          
|Stock
        based compensation                                     |  |                    |      |                          |  |          |    |             |  |                                             |       |                      |  |                          
|Balance,
        December 27, 2003                                   |  |                    | 1,953 |                          |  |          | 488 |             |  |                                             | 67,811 |                      |  |                          
|Exercise
        of stock options                                    |  |                    | 19    |                          |  |          | 4   |             |  |                                             | 29     |                      |  |                          
|Comprehensive
        income                                         |  |                    |       |                          |  |          |     |             |  |                                             |        |                      |  |                          
|Net
        income                                                   |  |                    |      |                          |  |          |    |             |  |                                             |       |                      |  |                          
|Foreign
        currency translation adjustment                      |  |                    |      |                          |  |          |    |             |  |                                             |       |                      |  |                          
|Comprehensive income                                                 |  |                    |       |                          |  |          |     |             |  |                                             |        |                      |  |                          
|Share
        buyback (odd lots)                                     |  |                    | (21   | )                        |  |          | (5  | )           |  |                                             | (130   | )                    |  |                          
|Issuance
        of stock options                                    |  |                    |      |                          |  |          |    |             |  |                                             | 66     |                      |  |                          
|Stock
        based compensation                                     |  |                    |      |                          |  |          |    |             |  |                                             |       |                      |  |                          
|Balance,
        December 25, 2004                                   |  |                    | 1,951 |                          |  | $        | 487 |             |  | $                                           | 67,776 |                      |  | $                        

See Notes to Consolidated Financial Statements.

F-6

---

Boss Holdings, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 25, 2004,
December 27, 2003, and December 28, 2002 (Dollars in Thousands)

|                                                                                            |  |  |  | 2004 |        | 2003 |  | 2002
|------------------------------------------------------------------------------------------- |  |  |  | ---- | ------ | ---- |  | ----
|Cash Flows
from Operating Activities:                                                       |  |  |  |      |        |      |  |     
|Net
income                                                                                  |  |  |  | $    | 3,723  |      |  | $   
|Adjustments
to reconcile net income to net cash provided by (used in) operating activities: |  |  |  |      |        |      |  |     
|Depreciation
and amortization                                                               |  |  |  |      | 404    |      |  |     
|Stock based
compensation                                                                    |  |  |  |      | 74     |      |  |     
|Gain on
disposal of property and equipment                                                  |  |  |  |      | (32    | )    |  |     
|Gain on
marketable securities                                                               |  |  |  |      |       |      |  |     
|Deferred tax
benefit                                                                        |  |  |  |      | (2,712 | )    |  |     
|Changes in
assets and liabilities:                                                          |  |  |  |      |        |      |  |     
|(Increase)
decrease in:                                                                     |  |  |  |      |        |      |  |     
|Accounts
receivable                                                                         |  |  |  |      | (225   | )    |  |     
|Inventories                                                                                 |  |  |  |      | (2,686 | )    |  |     
|Prepaid
expenses and other current assets                                                   |  |  |  |      | (51    | )    |  |     
|Other
assets                                                                                |  |  |  |      | 23     |      |  |     
|Increase
(decrease) in:                                                                     |  |  |  |      |        |      |  |     
|Accounts
payable                                                                            |  |  |  |      | 5      |      |  |     
|Accrued
liabilities                                                                         |  |  |  |      | 76     |      |  |     
|Net cash
provided by (used in) operating activities                                         |  |  |  |      | (1,401 | )    |  |     
|Cash Flows
from Investing Activities:                                                       |  |  |  |      |        |      |  |     
|Proceeds from
disposition of property and equipment                                         |  |  |  |      | 1,712  |      |  |     
|Proceeds from
sale of available for sale securities                                         |  |  |  |      |       |      |  |     
|Purchases of
property and equipment                                                         |  |  |  |      | (147   | )    |  |     
|Acquisition
of stock in new subsidiary/operating assets                                     |  |  |  |      | (3,418 | )    |  |     
|Net cash
provided by (used in) investing activities                                         |  |  |  |      | (1,853 | )    |  |     
|Cash Flows
from Financing Activities:                                                       |  |  |  |      |        |      |  |     
|Net
borrowings (repayments) on revolving line of credit                                     |  |  |  |      | 98     |      |  |     
|Borrowing on
long-term obligations                                                          |  |  |  |      | 1,750  |      |  |     
|Repayment of
long-term obligations                                                          |  |  |  |      | (1,969 | )    |  |     
|Purchase and
retirement of stock                                                            |  |  |  |      | (135   | )    |  |     
|Proceeds from
exercise of stock options                                                     |  |  |  |      | 33     |      |  |     
|Net cash
provided by (used in) financing activities                                         |  |  |  |      | (223   | )    |  |     
|Effect of
exchange rate changes on cash                                                     |  |  |  | $    | 54     |      |  | $   
|Increase
(decrease) in cash and cash equivalents                                            |  |  |  | $    | (3,423 | )    |  | $   
|Cash and cash
equivalents:                                                                  |  |  |  |      |        |      |  |     
|Beginning                                                                                   |  |  |  |      | 4,479  |      |  |     
|Ending                                                                                      |  |  |  | $    | 1,056  |      |  | $   

See Notes to Consolidated Financial Statements.

F-7

---

Boss Holdings, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended December 25,
2004, December 27, 2003, and December 28, 2002 (Dollars in Thousands)

|                                                                        |  |  |  | 2004 |     | 2003 |  | 2002
|----------------------------------------------------------------------- |  |  |  | ---- | --- | ---- |  | ----
|Supplemental
Disclosures of Cash Flows Information, cash payments for:  |  |  |  |      |     |      |  |     
|Interest
paid                                                           |  |  |  | $    | 243 |      |  | $   
|Income taxes
(refunded) paid, net                                       |  |  |  |      | 101 |      |  |     
|Supplemental
Disclosures of Noncash Investing and Financing Activities: |  |  |  |      |     |      |  |     
|Assets
purchased under capital lease obligation                         |  |  |  |      | 318 |      |  |     
|Seller
financed property acquisition                                    |  |  |  |      |    |      |  |     

See Notes to Consolidated Financial Statements.

F-8

---

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, and pet supplies 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. All years presented contained 52 weeks.




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 $(31), $(43), and $269 for the
years ended 2004, 2003, and 2002, 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.




As of
December 25, 2004 and December 27, 2003, the Companys marketable equity
securities are held in trust under a deferred compensation arrangement, and are
included in other assets on the consolidated balance sheets.




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. Sales in any single foreign
geographic area or to any single customer did not exceed 10% of net sales for 2004, 2003, or 2002.


F-9

---

Boss Holdings, Inc. and Subsidiaries

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

Note 1.    Nature of Business and Summary of Significant
Accounting Policies (Continued)



Shipping and handling fees and costs: The
Company has adopted Emerging Issues Task Force (EITF) 00-10, Accounting for Shipping and Handling Fees and Costs. EITF 00-10
requires significant shipping and handling costs not classified as cost of sales to be disclosed in both the amount of such costs and the line item
that includes them in the consolidated statements of income. Shipping and handling charges to customers are included in revenue. Shipping and handling
costs are included in cost of sales.




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: The Company states inventory at
the lower of cost or market using primarily the first-in, first-out (FIFO) method.




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







|                               |  |  |  | Years  
|------------------------------ |  |  |  | -------
|Machinery and
equipment        |  |  |  | 3 
10 
|Office furniture
and equipment |  |  |  | 3 
 8 
|Buildings and improvements     |  |  |  | 20 
35



Depreciation expense was $384, $322, and $347 for
2004, 2003, and 2002, 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. The Company believes that no
impairment exists at December 25, 2004. Other intangible assets are recorded at cost and amortized over their estimated useful life.




Assets held for sale: Assets held for sale
were carried at the lower of cost or estimated fair value.




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 interest rate swap agreements and long-term obligations approximates fair value based upon borrowing rates currently
available to the Company for borrowings with comparable maturities.




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


F-10

---

Boss Holdings, Inc. and Subsidiaries

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

Note 1.    Nature of Business and Summary of Significant
Accounting Policies (Continued)

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.



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 earnings as incurred. For the years ended December 2004, 2003, and 2002 other income includes recognized foreign currency transactions
gains (loss) of approximately $0, $173, and $10, respectively.




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 2004, 2003, and 2002 was
$1,241, $1,107, and $1,109, respectively.




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.




Stock based compensation and recent accounting
pronouncements: On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), Share-Based
Payment, which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25 and SFAS 148. SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be valued at fair value on the date of grant and to be expensed over the applicable vesting
period. Pro forma disclosure of the income statement effects of share-based payments is no longer an alternative. SFAS 123 (R) would have been
effective at beginning of the third quarter of 2005; however, the Company has elected to early adopt using the modified retrospective method. Under
this approach all prior years presented have been 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.


F-11

---

Boss Holdings, Inc. and Subsidiaries

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

Note 1.    Nature of Business and Summary of Significant
Accounting Policies (Continued)



The impact of the adoption of SFAS 123(R) on net
income and basic and diluted earnings per shares is shown in the following table. There was no impact to income tax expense due to the 100% valuation
allowance.







|                                          |  |  |  | 2003 |      | 2002
|----------------------------------------- |  |  |  | ---- | ---- | ----
|Net
income:                               |  |  |  |      |      |     
|As
originally reported                    |  |  |  | $    | 628  |     
|Additional
stock compensation             |  |  |  |      | 60   |     
|As
currently reported                     |  |  |  | $    | 568  |     
|                                         
|Basic
        earnings per common share   |  |  |  |      |      |     
|As
originally reported                    |  |  |  | $    | 0.32 |     
|As
currently reported                     |  |  |  |      | 0.29 |     
|Diluted
        earnings per common share |  |  |  |      |      |     
|As
originally reported                    |  |  |  | $    | 0.30 |     
|As
currently reported                     |  |  |  |      | 0.27 |     



Reclassifications: Certain items in the
financial statements and footnotes have been reclassified, with no effect on equity, net income, or earnings per common share, to be consistent with
the classifications adopted for the year ended December 25, 2004.


|Note 2. |  | Property and Equipment
|------- |  | ----------------------



Property and equipment as of December 25, 2004 and
December 27, 2003 is as follows:







|                               |  |  |  | 2004 |       | 2003
|------------------------------ |  |  |  | ---- | ----- | ----
|Land                           |  |  |  | $    | 440   |     
|Machinery and
equipment        |  |  |  |      | 1,356 |     
|Buildings and
improvements     |  |  |  |      | 2,535 |     
|Office
furniture and equipment |  |  |  |      | 2,021 |     
|                               |  |  |  |      | 6,352 |     
|Less
accumulated depreciation  |  |  |  |      | 2,523 |     
|                               |  |  |  | $    | 3,829 |     

F-12

---

Boss Holdings, Inc. and Subsidiaries

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

Note 3.     Long-Term Obligations



Long-term debt as of December 25, 2004 and December
27, 2003 is as follows:







|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  | 2004 |       | 2003
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ---- | ----- | ----
|BHI revolving
line of credit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |  |  | $    | 98    |     
|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 4.06% as of December 25, 2004). 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. |  |  |  | $    | 1,668 |     
|Boss
Manufacturing Real Estate, Inc. mortgage note payable to a lender. Requires monthly principal payments of $6. Interest is at LIBOR plus 2.1% adjusted
monthly (effective rate of 3.22% as of December 27, 2003). Collateralized by all real and personal
property of Boss Manufacturing Real Estate, Inc. located in Springfield, Illinois.                                                                                                                                                                                                         |  |  |  |      |      |     
|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.                                                                               |  |  |  |      | 953   |     
|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%. All remaining principal is due April 2006.                                                                                                                                                                                                                                                                                                                                |  |  |  |      | 226   |     
|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.                                                                                                                                                                                                                                                                                         |  |  |  |      | 468   |     
|Boss
Manufacturing Company loan agreement with a local governmental agency. Requires monthly payments of $7, including interest at 3%, through June 2005.
Collateralized by certain real property of Boss Manufacturing Companys Kewanee, Illinois facilities.                                                                                                                                                                                                                                                                                          |  |  |  |      | 40    |     
|Non-interest
bearing obligations to former owner of Galaxy Balloons, Inc. payable in two equal annual installments through 2006.                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |      | 250   |     
|Capital lease
obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  |  |      | 317   |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |      | 4,020 |     
|Less current
maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |      | 762   |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  | $    | 3,258 |     

F-13

---

Boss Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)(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 31,
2005 |  |  |  | $ | 762   | 
|December 30,
2006 |  |  |  |   | 882   | 
|December 29,
2007 |  |  |  |   | 447   | 
|December 27,
2008 |  |  |  |   | 392   | 
|December 26,
2009 |  |  |  |   | 395   | 
|Thereafter        |  |  |  |   | 1,142 | 
|                  |  |  |  | $ | 4,020 | 



On July 30, 2004, the Company modified its loan and
security agreement (the Credit Agreement) with a commercial bank. The revised Credit Agreement expires in May 2006 and provides a revolving
credit facility up to $6,000 based on a formula that includes eligible accounts receivable and inventories. Interest is payable monthly at the
banks prime rate or, at the Companys option, LIBOR plus 2.1%. The Company incurs an unused line fee of 1/8% per annum on the unused portion
of the credit facility. As of December 25, 2004, the Company had borrowings of $98 on the revolving credit facility. Availability under this credit
agreement was $5,902 as of December 25, 2004.




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 $222 and $114 as of December 25, 2004 and December 27, 2003, respectively.


|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 $200, $250, and $226 for 2004, 2003, and 2002, respectively.




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







|Year
ending:                 |  |  |  |   |     | 
|---------------------------- |  |  |  | - | --- | 
|December 31,
2005            |  |  |  | $ | 337 | 
|December 30,
2006            |  |  |  |   | 170 | 
|December 29,
2007            |  |  |  |   | 148 | 
|December 27,
2008            |  |  |  |   | 148 | 
|December 26,
2009            |  |  |  |   | 148 | 
|Total minimum
lease payments |  |  |  | $ | 951 | 

F-14

---

Boss Holdings, Inc. and Subsidiaries

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

Note 4.    Commitments and Contingencies
(Continued)

Licensing:



During 2002, the Company entered into a license
agreement for the use of certain trademarks in its products. The agreement contains provisions for the payment of guaranteed or minimum royalties
through 2005. The Company incurred royalties of $182, $50 and none in 2004, 2003 and 2002, respectively. The Company will incur $150 of minimum royalty
payments in the year ending December 31, 2005 and expects to renew this agreement prior to expiration.


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.




The Company received a payment of $800 during the
second quarter of 2002 in settlement of its claims and security interests concerning a former officer and director of the Company and recorded a net
gain after legal expenses of $500 on this transaction.


|Note 5. |  | Stock Options
|------- |  | -------------



The Company has adopted two stock option plans
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.
Various vesting conditions apply to these options, based on either tenure or certain performance criteria. Stock option transactions are summarized as
follows:


|                                                          |  |  |  | Year ended |        
|--------------------------------------------------------- |  |  |  | ---------- | -------
|
|
|Outstanding,
beginning                                    |  |  |  |            | 361,080
|Granted                                                   |  |  |  |            | 24,500 
|Exercised                                                 |  |  |  |            | (18,666
|Cancelled                                                 |  |  |  |            |       
|Outstanding,
ending                                       |  |  |  |            | 366,914
|Options
exercisable, end of year                          |  |  |  |            | 286,304
|Weighted
average fair value per option of options granted |  |  |  |            |        

F-15

---

Boss Holdings, Inc. and Subsidiaries

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

Note 5.    Stock Options (Continued)



The following table summarizes information about
stock options outstanding as of December 25, 2004:







|Outstanding Options | 
|------------------- | 
|
|1.75                | 
|1.90                | 
|3.20                | 
|3.63                | 
|3.75                | 
|7.00                | 
|98.25               | 
|                    | 



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 2004, 2003, and 2002,
respectively; expected volatility of 51%, 53% and 53%; expected dividend yield of 0.0%; weighted average risk-free rate of return of 2.7%, 2.6% and
4.6%; and expected lives of 5 years. Compensation expense related to stock options was $74, $68, and $71 for 2004, 2003 and 2002
respectively.


|Note 6. |  | Earnings Per Share
|------- |  | ------------------



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







|                                                        |  |  |  | Year Ended |          
|------------------------------------------------------- |  |  |  | ---------- | ---------
|
|Numerator,
earnings attributable to common stockholders |  |  |  | $          | 3,723    
|Denominator:                                            |  |  |  |            |          
|Basic-weighted average common shares outstanding        |  |  |  |            | 1,932,000
|Dilutive
effect of employee stock options               |  |  |  |            | 231,000  
|Diluted
outstanding shares                              |  |  |  |            | 2,163,000
|Basic
earnings per common share                         |  |  |  | $          | 1.93     
|Diluted
earnings per common share                       |  |  |  |            | 1.72     

|Note 7. |  | Related Party Transactions
|------- |  | --------------------------



During 2004, 2003, and 2002, compensation, fees, and
expense reimbursements paid to directors or their affiliates totaled $358, $357, and $420, respectively.


F-16

---

Boss Holdings, Inc. and Subsidiaries

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

Note 8.    Acquisition



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 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 certain additional earn-out payments if Galaxys
future financial performance exceeds specified benchmarks. 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.




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 is as
follows:







|Acquisition
cost:                               |  |  |  |   |       |  
|----------------------------------------------- |  |  |  | - | ----- | -
|Base purchase
price                             |  |  |  | $ | 3,300 |  
|Tangible net
worth adjustment and closing costs |  |  |  |   | 318   |  
|Covenant not
to compete                         |  |  |  |   | 50    |  
|Total                                           |  |  |  |   | 3,668 |  
|Less term
note                                  |  |  |  |   | (200  | )
|Less covenant
not-to-compete                    |  |  |  |   | (50   | )
|Net cash
price                                  |  |  |  | $ | 3,418 |  
|Allocation of
purchase cost:                    |  |  |  |   |       |  
|Current
assets                                  |  |  |  | $ | 1,517 |  
|Property and
equipment                          |  |  |  |   | 691   |  
|Identified
intangibles and other assets         |  |  |  |   | 241   |  
|Goodwill                                        |  |  |  |   | 2,453 |  
|Accounts
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 years ended
December 25, 2004 and December 27, 2003:







|                                  |  |  |  | Twelve Months Ended |       
|--------------------------------- |  |  |  | ------------------- | ------
|
|Net
sales                         |  |  |  | $                   | 49,368
|Net earnings
before income tax    |  |  |  |                     | 1,690 
|Income tax
benefit (expense)      |  |  |  |                     | 2,635 
|Net
earnings                      |  |  |  |                     | 4,325 
|Basic
earnings per common share   |  |  |  |                     | 2.24  
|Diluted
earnings per common share |  |  |  |                     | 2.00  

F-17

---

Boss Holdings, Inc. and Subsidiaries

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

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:







|                                       |  |  |  | Year Ended |      
|-------------------------------------- |  |  |  | ---------- | -----
|
|Current
income tax (expense) benefit:  |  |  |  |            |      
|Federal                                |  |  |  | $          |     
|State and
local                        |  |  |  |            | (24  
|                                       |  |  |  |            | (24  
|Deferred
income tax (expense) benefit: |  |  |  |            |      
|Federal                                |  |  |  |            | 2,765
|State and
local                        |  |  |  |            | (53  
|                                       |  |  |  |            | 2,712
|Total
income tax (expense) benefit     |  |  |  | $          | 2,688



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 Ended |      
|--------------------------------------------------------------------------- |  |  |  | ---------- | -----
|
|Income tax
(expense) benefit computed at the U.S. corporate tax rate of 34% |  |  |  | $          | (352 
|Adjustments
attributable to:                                                |  |  |  |            |      
|State income
taxes                                                          |  |  |  |            | (77  
|Deferred tax
asset valuation allowance                                      |  |  |  |            | 3,127
|Other                                                                       |  |  |  |            | (10  
|Total
income tax (expense) benefit                                          |  |  |  | $          | 2,688

F-18

---

Boss Holdings, Inc. and Subsidiaries

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

Note 9.    Income Taxes (Continued)



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







|                                               |  | December
      25,
      2004 |        | December
      27,
      2003
|---------------------------------------------- |  | ----------------------------- | ------ | -----------------------------
|Deferred
        income tax assets:            |  |                               |        |                              
|Operating
        loss carryforwards           |  | $                             | 10,650 |                              
|Accounts
        receivable                    |  |                               | 95     |                              
|Accruals                                       |  |                               | 50     |                              
|Compensation
        related                   |  |                               | 209    |                              
|Inventories                                    |  |                               | 490    |                              
|Tax
        credit carryforwards               |  |                               | 331    |                              
|Gross
        deferred tax assets              |  |                               | 11,825 |                              
|Deferred
        tax asset valuation allowance |  |                               | 8,759  |                              
|Net
        deferred tax asset                 |  |                               | 3,066  |                              
|Deferred
        income tax liabilities:       |  |                               |        |                              
|Inventories                                    |  |                               |       |                              
|Fixed
        assets                           |  |                               | 533    |                              
|                                               |  |                               | 533    |                              
|Net
        deferred income tax asset          |  | $                             | 2,533  |                              



Included in the tax credit carryforward is
approximately $331 of alternative minimum tax credits and general business credits available to reduce future income taxes payable.




Income tax benefit for 2004 consisted primarily of
the Companys recognition of the portion of the benefit associated with its net operating loss carryforwards for federal income tax purposes which
is more likely than not to be realized prior to expiration. Income tax expense and benefit for 2003 and 2002 consist primarily of current state taxes
attributable to BMHI and its subsidiaries. Accrued liabilities include federal and state income taxes payable of $73 and $201 as of December 25, 2004
and December 27, 2003, respectively.




As of December 25, 2004, the Company had operating
loss carryforwards for U.S. income tax purposes of $31,325 available to reduce future taxable income through the following years:







|Year of
expiration: |  |  |  |   |        | 
|------------------- |  |  |  | - | ------ | 
|2009                |  |  |  | $ | 2,075  | 
|2010                |  |  |  |   | 2,039  | 
|2011                |  |  |  |   | 16,549 | 
|2012                |  |  |  |   | 9,197  | 
|2019                |  |  |  |   | 535    | 
|2021                |  |  |  |   | 930    | 
|                    |  |  |  | $ | 31,325 | 

F-19

---

Boss Holdings, Inc. and Subsidiaries

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

Note 10.    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 and rainwear 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 balloon, 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 and certain smaller operations are grouped into a
miscellaneous column entitled, Corporate and Other.







|                                        |  | Work
      Gloves
      and Protective
      Wear |        | Pet
      Supplies |  | Promotional
      and Specialty
      Products |       | Corporate
      and Other |  | Total
|--------------------------------------- |  | ------------------------------------------------- | ------ | ------------------ |  | ---------------------------------------------- | ----- | ------------------------- |  | -----
|2004:                                   |  |                                                   |        |                    |  |                                                |       |                           |  |      
|Revenue                                 |  | $                                                 | 33,118 |                    |  | $                                              | 6,087 |                           |  | $    
|Earnings
        (loss) from operations |  |                                                   | 1,309  |                    |  |                                                | 211   |                           |  |      
|Segment
        profit (loss)           |  |                                                   | 1,046  |                    |  |                                                | 117   |                           |  |      
|Total
        assets                    |  |                                                   | 21,265 |                    |  |                                                | 3,237 |                           |  |      
|Capital
        expenditures            |  |                                                   | 133    |                    |  |                                                | 14    |                           |  |      
|Depreciation                            |  |                                                   | 298    |                    |  |                                                | 19    |                           |  |      
|2003:                                   |  |                                                   |        |                    |  |                                                |       |                           |  |      
|Revenue                                 |  | $                                                 | 30,382 |                    |  | $                                              | 5,168 |                           |  | $    
|Earnings
        (loss) from operations |  |                                                   | 1,094  |                    |  |                                                | 183   |                           |  |      
|Segment
        profit (loss)           |  |                                                   | 1,472  |                    |  |                                                | 195   |                           |  |      
|Total
        assets                    |  |                                                   | 19,517 |                    |  |                                                | 2,410 |                           |  |      
|Capital
        expenditures            |  |                                                   | 1,396  |                    |  |                                                |      |                           |  |      
|Depreciation                            |  |                                                   | 297    |                    |  |                                                | 16    |                           |  |      
|2002:                                   |  |                                                   |        |                    |  |                                                |       |                           |  |      
|Revenue                                 |  | $                                                 | 30,413 |                    |  | $                                              | 2,642 |                           |  | $    
|Earnings
        (loss) from operations |  |                                                   | 1,896  |                    |  |                                                | (84   | )                         |  |      
|Segment
        profit (loss)           |  |                                                   | 2,260  |                    |  |                                                | (84   | )                         |  |      
|Total
        assets                    |  |                                                   | 17,957 |                    |  |                                                | 1,776 |                           |  |      
|Capital
        expenditures            |  |                                                   | 285    |                    |  |                                                | 12    |                           |  |      
|Depreciation                            |  |                                                   | 336    |                    |  |                                                | 3     |                           |  |      

F-20

---

Boss Holdings, Inc. and Subsidiaries

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

Note 11.    Quarterly Consolidated Financial Information
(Unaudited)



The following is a summary of the unaudited
quarterly results for fiscal 2004 and 2003:


|                                                       |  |  |  | First Quarter |           | Second Quarter |  | Third Quarter |           | Fourth Quarter |  | Total
|------------------------------------------------------ |  |  |  | ------------- | --------- | -------------- |  | ------------- | --------- | -------------- |  | -----
|2004:                                                  |  |  |  |               |           |                |  |               |           |                |  |      
|Net
sales                                              |  |  |  | $             | 10,265    |                |  | $             | 9,046     |                |  | $    
|Gross
profit                                           |  |  |  |               | 3,248     |                |  |               | 2,896     |                |  |      
|Net earnings
(loss)                                    |  |  |  |               | 76        |                |  |               | (20       | )              |  |      
|Net earnings
(loss), per common share:                 |  |  |  |               |           |                |  |               |           |                |  |      
|Basic                                                  |  |  |  | $             | 0.04      |                |  | $             | (0.01     | )              |  | $    
|Diluted                                                |  |  |  | $             | 0.03      |                |  | $             | (0.01     | )              |  | $    
|Denominator
for net earnings (loss), per common share: |  |  |  |               |           |                |  |               |           |                |  |      
|Basic                                                  |  |  |  |               | 1,936,000 |                |  |               | 1,919,000 |                |  |      
|Diluted                                                |  |  |  |               | 2,172,000 |                |  |               | 2,151,000 |                |  |      
|2003:                                                  |  |  |  |               |           |                |  |               |           |                |  |      
|Net
sales                                              |  |  |  | $             | 9,320     |                |  | $             | 8,495     |                |  | $    
|Gross
profit                                           |  |  |  |               | 3,086     |                |  |               | 2,593     |                |  |      
|Net earnings
(loss)                                    |  |  |  |               | 48        |                |  |               | 25        |                |  |      
|Net earnings
(loss), per common share:                 |  |  |  |               |           |                |  |               |           |                |  |      
|Basic                                                  |  |  |  | $             | 0.02      |                |  | $             | 0.01      |                |  | $    
|Diluted                                                |  |  |  | $             | 0.02      |                |  | $             | 0.01      |                |  | $    
|Denominator
for net earnings (loss), per common share: |  |  |  |               |           |                |  |               |           |                |  |      
|Basic                                                  |  |  |  |               | 1,939,000 |                |  |               | 1,939,000 |                |  |      
|Diluted                                                |  |  |  |               | 2,080,000 |                |  |               | 2,092,000 |                |  |      

F-21

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Boss Holdings, Inc. and Subsidiaries

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






|                                              |  |   |        | Additions | 
|--------------------------------------------- |  | - | ------ | --------- | 
|
|Year
        ended December 25, 2004:         |  |   |        |           | 
|Accounts
        receivable                   |  | $ | 294    |           | 
|Inventories                                   |  |   | 630    |           | 
|Deferred
        income tax asset             |  |   | 11,886 |           | 
|Total
        allowances deducted from assets |  | $ | 12,810 |           | 
|                                              |  |   |        |           | 
|Year
        ended December 27, 2003:         |  |   |        |           | 
|Accounts
        receivable                   |  | $ | 481    |           | 
|Inventories                                   |  |   | 706    |           | 
|Deferred
        income tax asset             |  |   | 12,145 |           | 
|Total
        allowances deducted from assets |  | $ | 13,332 |           | 
|                                              |  |   |        |           | 
|Year
        ended December 28, 2002:         |  |   |        |           | 
|Accounts
        receivable                   |  | $ | 458    |           | 
|Inventories                                   |  |   | 512    |           | 
|Deferred
        income tax asset             |  |   | 13,029 |           | 
|Promissory
        note receivable            |  |   | 948    |           | 
|Total
        allowances deducted from assets |  | $ | 14,947 |           | 

Notes:

|(a) |  | Write off of uncollectible accounts.
|--- |  | ------------------------------------

|(b) |  | Write off of obsolete inventory.
|--- |  | --------------------------------

|(c) |  | Maintenance of a valuation allowance discussed in Note 1 and
Note 9 to the consolidated financial statements.
|--- |  | -------------------------------------------------------------------------------------------------------------

|(d) |  | Write off of a 100% valuation allowance for a contingent asset,
the settlement of which is discussed in Note 4 to the consolidated financial statements.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) |  | Balance related to Galaxy acquisition.
|--- |  | --------------------------------------

F-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                                                                                                                                              
|10.4    |  |  |  | Executive Severance Agreement by and between Boss Holdings, Inc. and J. Bruce Lancaster dated July 16, 2001 (incorporated by reference from
the Companys Form 10-K for the year ended December 29, 2001)                                                                    
|10.5    |  |  |  | Boss
Holdings, Inc. 2004 Stock Incentive Plan (incorporated by reference from the Companys definitive Proxy Statement filed April 30,
2004)                                                                                                                                 
|10.6    |  |  |  | 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)                                                           
|14.1    |  |  |  | Code of Ethics for Senior Executives and Financial Officers                                                                                                                                                                                                                  
|21.1    |  |  |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                               
|23.1    |  |  |  | Consent of McGladrey & Pullen, LLP                                                                                                                                                                                                                                           
|23.2    |  |  |  | Consent of Grant Thornton LLP                                                                                                                                                                                                                                                

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|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.

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