---

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

**___________________****FORM 10-K___________________**



|x | ANNUAL
      REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934
|- | -----------------------------------------------------------------------------------------------

**For the Fiscal Year Ended
December 29, 2007OR**



|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------------

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

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

Delaware
    
    58-1972066(State or
      other jurisdiction of
    
    (I.R.S.
      Employerincorporation or organization)
    
    Identification No.)


221 West First Street, Kewanee,
Illinois 61443(Address of principal
executive offices) (Zip Code)

Registrants telephone number,
including area code:(309)
852-2131Securities registered
pursuant to Section 12(b) of the Act: NoneSecurities registered pursuant
to Section 12(g) of the Act:Common Stock $ 0.25 par
value(Title of Class)

Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. YesoNo x

Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. YesoNo x

Indicate by
check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes xNoo

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. x

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

| | Large
      accelerated filero | Accelerated
      filero          | 
| | ------------------------------ | --------------------------------- | 
| | Non-accelerated
      filero   | Smaller
      Reporting Company x | 

Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). YesoNo x

The aggregate market value of the
voting and non-voting stock held by non-affiliates as of June 30, 2007 was
approximately $5,600,195.

There were 2,018,345 shares of the
Registrants common stock outstanding as of March 15, 2008.

DOCUMENTS INCORPORATED BY
REFERENCE

Specified
portions of the registrants definitive proxy statement for its 2008 Annual
Meeting of Stockholders are incorporated by reference in Part III
hereof.

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FORWARD LOOKING STATEMENTS OR
INFORMATION

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

PART I

ITEM 1.  
BUSINESS

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

The Company
operates primarily in the work gloves and protective wear business segment. In
addition, the Company conducts operations in the pet supplies business segment
and promotional and specialty products segments. As described below, the Company
acquired a specialty lighting products business in 2005, a Canadian safety
products supplier in May, 2007 and a small balloon supplier for its promotional
products segment in November, 2007. Specialty lighting products are part of the
work gloves and protective wear business segment.

WORK GLOVES AND PROTECTIVE
WEAR

Through BMC,
the Company imports, markets and distributes gloves, boots and rainwear products
serving two primary markets  consumer and industrial. The consumer market
represents approximately 53% of BMC domestic gross product sales and consists of
retailers ranging from convenience stores to mass merchandisers as well as
hardware and grocery stores. The industrial market, which accounts for the
balance of sales in this segment, includes various commercial users of gloves
and protective wear. These end-users include companies in the agricultural,
automotive, energy, lumber and construction industries.

BMC
primarily markets its products through distributors and manufacturer
representatives. In addition, the Company sells directly through its own sales
force to certain major retail customers. BMC products are sold predominantly to
customers in the United States, with the Companys Boss Canada subsidiary
generating approximately 7% 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.

2

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

BMC sells to
a broad customer base approximating three thousand active accounts. Accordingly,
BMC has relatively little dependence on any one customer. At the end of 2007,
BMC had an open order backlog of approximately $1,134,000 down about $110,000
from the previous year.

The Company
ceased domestic manufacturing operations during 2000 and is now primarily an
importer and marketer. Finished goods in this segment are generally widely
available from a number of suppliers in various countries. The cost to import
many of the goods in this segment increased during 2007, particularly leather
products and goods made from oil based fabrics, (such as PVC and nylon), which
fluctuated with oil prices. Latex prices increased during the year causing the
cost of latex gloves and boots to increase. The strengthening of the Chinese
currency against the U.S. dollar and labor shortages in some areas of China have
resulted in cost pressure on all products imported from China. The Company has
occasionally experienced short-term limitations in the supply of certain
imported products, generally due to raw material shortages. Availability of
imported goods is further subject to interruptions in shipping as well as
import/export documentation and clearing. During the last half of 2007, the
Company started to experience production and shipping delays from China on
certain products in the work gloves and protective wear segment. Management
anticipates these product supply problems may have an adverse effect on sales in
the upcoming year. The Company hopes to alleviate potential shortages by
obtaining alternative sources of supply in other countries or from other
vendors.

The Company
is party to a long-term agreement with Caterpillar Inc. under which the Company
markets work gloves, rainwear and other products under the CAT® trademark. Sales
of CAT® products have steadily increased since their introduction in 2003, with
total sales of $2,752,000 in 2007, representing 7% of domestic sales in the work
gloves and protective wear segment for the year. The Company believes that the
CAT® trademark will provide additional sales growth opportunities, both foreign
and domestic, while allowing the Company to introduce new products that are less
sensitive to market pricing pressures. New products introduced in 2007 under the
CAT® trademark include tool belts, tool bags and hats with hands-free
illumination.

During the
second quarter of 2007, Boss Canada purchased all outstanding shares of
privately-held Navillus Group Inc., an Ontario corporation. Through its wholly
owned subsidiary, Canadawide Safety Inc. (Canadawide), the acquired company
imports and distributes safety goods and industrial work wear, including gloves,
protective eyewear, face and respiratory protection, as well as first aid and
industrial supplies. Immediately following the closing, Canadawide and Navillus
Group Inc. were merged with Canadawide as the surviving entity.

Management
believes Canadawides operations will complement its existing Boss Canada
business and provide cross-selling opportunities with both companies customers.
Canadawides broad line of safety products provides an instant expansion of Boss
Canadas product line, while Boss Canada will significantly bolster Canadawides
offering of work gloves, boots and rainwear.

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

PROMOTIONAL AND SPECIALTY
PRODUCTS

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

3

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

The
promotional products industry is comprised of over 20,000 registered
distributors serving a $18 billion market that has experienced substantial
growth over the past decade. This market is very competitive and Galaxy competes
against companies offering similar products as well as companies offering other
custom imprinted goods such as pens, t-shirts and caps. Galaxy competes on the
basis of quality, both in terms of the products offered and the printing
process; service, with Galaxy offering quick turn-around times (24 and 48 hour
rush service) as well as small minimums at competitive prices.

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

In November
of 2007, Galaxy Balloons Inc. acquired certain assets of Dipcraft Manufacturing
Company, a direct competitor operating in the promotional products industry.
Dipcraft, headquartered in Pittsburgh, PA., has been in the manufacturing and
balloon printing business since 1946. Dipcrafts production and printing
equipment have been consolidated into Galaxy Balloons state-of-the-art facility
in Lakewood, OH.

Due to its
broad customer base, Galaxy has little dependence on any one customer. In 2007,
Galaxys largest customer accounted for only 3.7% of total sales. Galaxys open
order backlog was not material at yearend due to the seasonal nature of sales in
this segment. Typically Galaxy doesnt have a large back order log because it
ships most of its orders in five days or less. Galaxy purchases the finished
goods on which it custom imprints products from a number of sources, both
domestic and international. Though suppliers are limited in certain product
areas, Galaxy has experienced no product shortages in recent years and
anticipates an adequate supply of goods in the coming year. During 2007, this
industry experienced a worldwide shortage of helium which has negatively
affected helium balloon sales. The helium shortage is expected to continue
through 2008 and will continue to adversely affect balloon sales.

In 2008,
Galaxy Balloons has expanded its sport line of products to include a wider array
of sport balls, sport luggage tags, sport and piggy banks, sport ball water
bottles, and sport lanyards. Galaxy has increased its line of ornaments to
include heart shaped shatter proof ornaments, glass ornaments and picture frame
ornaments. In addition, Galaxy is introducing the revolutionary new Magical
Balloon which is an ink-jettable balloon that will allow consumers to print
any image, photograph or message on a balloon by simply running it through their
ink jet printer.

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

PET SUPPLIES

The Company
developed its 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 in 2002 through the purchase of certain
assets from RocCorp, Inc. based in Cleveland, Ohio. 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.

4

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During the
first quarter of 2007, the Warren operations were consolidated from Kewanee,
Illinois into the Boss Pet operations in Cleveland, resulting in increased
operating and marketing efficiency. The pet supplies industry is extremely
competitive. The Company competes primarily in selected market niches by
focusing on customer service, specialized marketing, unique products and
competitive pricing.

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

The Company
generally has multiple sources of supply for substantially all of its product
requirements in this segment. Finished goods in this segment have generally been
readily available in sufficient quantities. However, the pet supplies segment is
subject to the same potential for product interruptions noted in the work gloves
and protective wear segment. Because of the seasonality in this segment, the
open order backlog was not material at the end of 2007 or 2006.

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 40% of sales in this segment
during 2007, while Warrens largest customer accounted for 22%.

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.

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 29, 2007, Boss employed 241 full-time associates, up 31 from the
previous year due to the higher employment levels at Galaxy and additions to the
staff at the Boss Manufacturing Company distribution center. The Company
employed no union employees at the end of 2007. Approximately 231 associates
were located in the United States with 10 located in Canada at yearend.

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

AVAILABLE INFORMATION

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

ITEM 1B.   UNRESOLVED STAFF
COMMENTS

Not applicable.

5

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ITEM 2.  
PROPERTIES

The
following table shows the location, general character, square footage,
approximate annual rent and lease expiration date of the principal operating
facilities owned or leased by the Company as of February 29, 2008. The principal
executive offices are located in Kewanee, Illinois.

|                     |  |            |  |                                |  | Square  |  | Annual |         |                 
|-------------------- |  | ---------- |  | ------------------------------ |  | ------- |  | ------ | ------- | ----------------
|Location             |  | City       |  | General Character              |  | Feet    |  | Rent   |         | Lease Expiration
|Br. Columbia, Canada |  | Vancouver  |  | Distribution                   |  | 5,600   |  | $      | 16,000  |                 
|Illinois             |  | Kewanee    |  | Administrative
      Office    |  | 10,200  |  | $      |        |                 
|Illinois             |  | Kewanee    |  | Distribution & Administration  |  | 147,000 |  | $      |        |                 
|Illinois             |  | Kewanee    |  | Distribution                   |  | 70,000  |  | $      |        |                 
|Illinois             |  | Kewanee    |  | Distribution                   |  | 19,000  |  | $      |        |                 
|Illinois             |  | Galesburg  |  | Distribution                   |  | 30,000  |  | $      | 75,000  |                 
|Ontario, Canada      |  | Concord    |  | Distribution & Administration  |  | 11,150  |  | $      | 67,000  |                 
|Ohio                 |  | Lakewood   |  | Printing,
      Distribution & |  | 85,000  |  | $      | 184,000 |                 
|                     |  |            |  | Administration                 |  |         |  |        |         |                 
|Ohio                 |  | Maple Hts. |  | Manufacturing, Distribution    |  | 50,000  |  | $      | 150,000 |                 
|                     |  |            |  | & Admin  Pet Supplies         |  |         |  |        |         |                 

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

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 2007.

PART II

|ITEM 5. | **** | MARKET
      FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
|------- | ---- | ------------------------------------------------------------------------------------------------------------------------

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

6

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Stockholders
of record at December 29, 2007 numbered approximately 1,424. The Company has not
paid cash dividends on its Common Stock in the past and currently plans to
retain earnings, if any, for business development and expansion.

Quarterly Stock PricesFirst
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter2007 - High bid
    $
    7.50
    
    $
    8.00
    
    $
    8.48
    
    $
    8.982007  Low
      bid
    $
    6.05
    
    $
    7.07
    
    $
    7.17
    
    $
    7.352006 - High bid
    $
    7.90
    
    $
    7.79
    
    $
    6.50
    
    $
    6.652006  Low
      bid
    $
    7.50
    
    $
    6.50
    
    $
    6.05
    
    $
    6.07


There were no repurchases of common
stock during the three months ended December 29, 2007.

ITEM 6.   SELECTED FINANCIAL
DATA

The
following table contains selected consolidated financial data for the five-year
period ended December 29, 2007 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.

|                                                | As of                                        
|----------------------------------------------- | ---------------------------------------------
|                                                | 12/29/07                                     
|                                                | (Amounts in thousands, except per share data)
|Consolidated Balance Sheet Data                 |                                              
|Working
      capital                           | $                                            
|Total assets                                    |                                              
|Long-term debt,
      including current portion |                                              
|Stockholders equity                            | $                                            
|                                               
|                                                | Year Ended                                   
|                                                | 12/29/07                                     
|Consolidated Statement of Operations Data       |                                              
|Net sales                                       | $                                            
|Cost of sales                                   |                                              
|Gross profit                                    |                                              
|Operating expenses                              |                                              
|Operating income                                |                                              
|Interest income                                 |                                              
|Interest
      expense                          |                                              
|Other income                                    |                                              
|Net income
      before income taxes            |                                              
|Income tax (benefit) expense                    |                                              
|Net
      income                                | $                                            
|Basic earnings per share                        | $                                            
|Diluted earnings
      per share                | $                                            

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

7

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

CONTENTS

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

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

Executive Summary

2007 total
sales increased 2.9% over 2006. Promotional & specialty products sales
continue to improve, up 8% over last year which offset a decline in our consumer
work gloves and protective wear segment. Also contributing to the overall sales
improvement were the acquisition of Canadawide in the second quarter of 2007 by
Boss Canada, and the increase in CAT branded product sales.

Overall
gross profit improved 0.8% percentage points from 2006 to 2007. Price increases
put in place last year for work gloves and protective wear, along with
reductions in customer allowances and cooperative advertising programs,
increased the segment margin slightly. Pet supplies had the largest improvement
in gross margin, 6.4 percentage points. This improvement was the result of price
increases and the consolidation of the pet warehouses. Margins for promotional
and specialty products decreased 2.3 percentage points primarily as a result of
variation in the product mix.

The Company
generated operating earnings of $2,456,000 in 2007 compared to $2,203,000 in
2006. The Companys work gloves and protective wear and pet supplies segments
increased due to improved margins mentioned above. Operating earnings in the
promotional and specialty products segment decreased 17%, due primarily to
increased compensation expenses in operating costs.

Reduced bank
borrowings during 2007 resulted in an interest expense savings of $107,000. Net
income after recognition of tax expense for the year was $1,366,000 or a basic
net earnings per share of $0.68. The Company has substantial net operating loss
carryforwards from prior years which result in the Companys income being free
from federal income taxes. Accordingly, the recognition of income tax expense is
a non-cash item, as reflected in the attached statements of cash
flow.

Liquidity
continued to improve during 2007. The Companys aggressive growth and
acquisition activities over the past four years have generated significantly
higher revenues. Long-term debt decreased $22,000 during the year but included
an additional borrowing of $459,000 for the acquisition of Canadawide by Boss
Canada. In addition, the acquisition of certain Dipcraft assets by Galaxy, was
paid for with $350,000 of cash on hand. At the end of the year cash on hand was
$2,557,000, which was $1,555,000 above last year. These items are discussed in
further detail in the Liquidity and Capital resources section that follows.

Management
anticipates the following key factors will affect the Companys 2008 results: 1)
higher costs on imported goods, particularly on items coming from China as a
result of the strengthening of the Chinese currency to the US dollar, 2)
production and shipping delays from China on certain products in the work gloves
and protective wear segment, 3) whether the Company will be able to counter
margin erosion by implementing higher selling prices,

8

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4) the Companys ability to continue to
control selling and administrative expenses, 5) managements ability to improve
working capital asset utilization to reduce debt requirements, 6) continued
acceptance of CAT® products in the domestic market and continued expansion into
international markets, 7) the trend of major retailers importing products on a
direct basis, and 8) managements efforts to continue to grow Company revenues
through strategic acquisitions and the introduction of new
products.

Overall,
management anticipates modest sales growth in the coming year with operating
expenses increasing slightly. Margins are likely to remain under pressure in
2008, with cost increases continuing for a number of products. By focusing on
improved customer profitability, supply chain efficiency, inventory utilization
and sales growth in higher margin areas, management intends to offset cost
increases.

Critical Accounting
Policies

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

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

Revenue
Recognition

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

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

As of
December 29, 2007, the Companys accrual for customer advertising and
promotional activities totaled $540,000. The Company has received no material
allowances or credits from any vendors in connection with the purchase or
promotion of such vendors products.

9

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Accounts Receivable

Management
performs ongoing customer credit evaluations and adjusts credit limits based
upon payment history and the customers current credit worthiness, as determined
by review of available credit information. The Companys estimate for its
allowance for doubtful accounts related to trade receivables is based on two
methods. The amounts calculated from each of these methods are evaluated to
determine the total amount reserved. First, the Company evaluates specific
accounts on which available information indicates that the customer may have an
inability to meet its financial obligations. In these cases, based on the best
available facts and circumstances, the Company records a specific reserve for
that customer against amounts due to reduce the receivable to the amount that is
expected to be collected. Second, a general reserve is established for all
customers based on a range of percentages applied to aging categories. The
Company has consistently applied these percentages for a number of years and
management believes the results adequately provide for expected unrecoverable
accounts. However, should circumstances change, for example an unexpected
material adverse change in a major customers ability to meet its financial
obligation to the Company, managements estimate of the recoverability of
amounts due the Company could be reduced by a material amount. As of December
29, 2007, the Companys bad debt allowance totaled $225,000.

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 29, 2007, the
inventory valuation allowance totaled approximately $736,000. Should forecasted
product demand prove inaccurate, the Company may be unable to realize the
recorded value of certain products included in inventory.

Deferred Taxes

The Company
recognizes deferred tax assets and liabilities based on the differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities. Because of substantial losses in prior years, primarily during the
years 1995 through 1997, the Company has available NOL carryforwards of
$26,052,000 as of December 29, 2007.

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

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

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.

10

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Goodwill

In
connection with its purchases of Galaxy during 2004, Head-Lite, LLC., during
2005, and Canadawide during 2007, the Company has recorded goodwill of
$3,666,000. Goodwill represents the excess of purchase price and related costs
over the value assigned to the net tangible and identifiable intangible assets
of the business acquired. In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, the Company does not amortize the goodwill associated with
these acquisitions since it has an indefinite life. Instead, management will
test goodwill for impairment in the fourth quarter of each year, or if certain
circumstances indicate the existence of a possible impairment. Managements
impairment test will consider the carrying value of each acquisition, including
goodwill, in relation to its fair value based upon earnings
generated.

Pending Accounting
Pronouncements

In September
2006 the FASB issued SFAS 157 Fair Value Measurements which defines fair
value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands disclosures about fair
value measurements. The requirements of SFAS 157 are effective for fiscal years
beginning after November 15, 2007. However, the FASB has deferred the
implementation of SFAS 157 by one year for certain non financial assets and
liabilities, for which SFAS 157 will be effective or the fiscal years beginning
January 1, 2009. The Company does not expect SFAS 157 to have a material impact
on its results of operations, financial position, or cash flows.

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

In December
2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, (FAS
141R), which replaces FASB Statement No. 141. FAS 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. The Statement
also establishes disclosure requirements which will enable users to evaluate the
nature and financial effects of the business combination. FAS 141R is effective
as of the beginning of an entitys fiscal year that begins after December 15,
2008, which will be the Companys year beginning December 28, 2008. The Company
is currently evaluating the potential impact, if any, of the adoption of FAS
141R on the Companys financial statements.

Results of Operations

SalesSales by Segment $(000)
    
    2007
    
    2006
    
    2005Work Gloves & Protective Wear
    
    37,689
    
    37,257
    
    38,045Pet
      Supplies
    
    6,693
    
    6,414
    
    6,940Promotional & Specialty Products
    
    10,815
    
    9,992
    
    9,165Total
      Sales
    
    55,197
    
    53,663
    
    54,150


2007 Compared to
2006

Consolidated
sales increased 2.9% in 2007 compared to the prior year. The largest area of
sales growth for 2007 was in the promotional and specialty products segment, up
8.2% over the previous year. Work gloves and protective wear increased 1.2%.
Sales of pet products were up 4.3%.

Sales in the work gloves and
protective wear segment increased $432,000, or 1.2% with sales up slightly in
industrial products and down in consumer product sales. The main improvement
over last year came from CAT® branded sales which were up 22.8% and the addition
of Canadawide Safety to Boss Canada, which provided an additional $626,000 of
sales.

11

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Consumer
sales were down 5.4% in 2007 compared to 2006. The warm winter of 2006 / 2007
created an overstock situation that carried into the 2007 / 2008 winter season.
Winter glove orders for 2007, were received later in the year when a colder than
normal December arrived. 2007 sales also were effected by managements
termination of certain accounts which did not meet minimum profitability
criteria. Consumer sales also struggled late in the year due to the
unavailability of some styles because of delays in obtaining product from
China.

Over the
last few years, the Company has made an effort to grow the industrial portion of
the work gloves and protective wear segment by broadening its industrial
distributor customer base and offering more specialized products, expanding its
trade show presence, participating in industry specific buying groups and
supporting distributor efforts to educate end-users about application-specific
products. In addition, the Company has significantly expanded its presence in
the hardware distributor channel serving the industrial and safety market.
During 2007, industrial sales increased $172,000 or 1.1%. Pricing and
availability were major issues during the year. The instability of the cost of
products from foreign vendors made it difficult to establish a pricing format
with customers and a leather shortage along with Chinas production and delivery
issues caused availability problems.

Sales of
CAT® branded products totaled $2,752,000 in 2007, an increase over the previous
year of 22.8%. Expansion of the CAT® branded products into Europe, the Middle
East and Australia continues, representing 8% of the total CAT® branded product
sales. Additional CAT® branded products, such as tool bags and tool belts, are
scheduled to be added to the product offerings in 2008.

Sales in the
promotional and specialty products segments increased 8.2% or $823,000 over
2006. 2007 was a record sales year for promotional and specialty products with
sales reaching $10,815,000. Balloon sales were down 4% but a continued steady
growth in sport balls, holiday items, inflatables and toys more than made up for
the shortfall.

In 2008,
Galaxy plans to expand its sport line of products, ornaments and introduce the
new Magical Balloon which is an ink-jettable balloon that will allow consumers
to print any image, photograph or message on a balloon by simply running it
through their ink jet printer.

Sales of the
pet supplies segment increased 4.3% or $279,000 over 2006. New store openings
and expanded pet sections at major customers caused this sales growth. One major
customer continues to increase sales through a direct import program with the
Company. The direct import program resulted in price and margin reductions for
the Company. Management continues to offset such impacts by continuing to build
its customer base.

2006 Compared to
2005

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

2006 sales in the work gloves and
protective wear segment decreased $788,000, or 2.1% compared to 2005. During
2006 prices were increased several times to maintain margin as product costs,
particularly products constructed from split leather, latex and petroleum based
products such as PVC and polyester, continued to increase. Many competitors did
not increase their prices during 2006, so it was a challenge to maintain
sales.

Industrial
sales for 2006 decreased by approximately $111,000 on a 0.7% decrease in unit
volume, consumer sales increased slightly and sales of CAT® branded products
increased to $2,241,000.

2006 sales
in the promotional and specialty products segment increased 9.0% or $827,000
over 2005. Introduction of new products was the primary factor for the 2006
sales growth. The addition of Christmas candles and ornaments improved fourth
quarter sales in this segment.

12

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Sales in the
pet supplies segment during 2006 decreased 7.6% or $526,000 due to a direct
import program by a major customer. Although the Company continues to service
this customer, the direct import program resulted in price and margin
reductions.

|Gross
      Margin                  
|------------------------------------
|                                    
|Gross Margin by Segment
      $(000)
|Work Gloves & Protective Wear       
|Pet
      Supplies                  
|Promotional & Specialty Products    
|Total Gross
      Margin            

2007 Compared to
2006

In total,
margins were up as a percentage of sales during 2007. Margin increases in the
work gloves and protective wear segment, along with the pet segment combined to
offset the margin decline at the promotional and specialty products
segment.

Price
increases put in place during the last quarter of 2006 were realized in 2007 for
both work gloves and protective wear and pet supplies. This along with a
reduction in customer allowances and cooperative adverting programs increased
the margins in work gloves and protective wear. In addition, expense savings
were achieved at the pet segment as a result of the consolidation of the two
warehouses.

Margins in
the promotional and specialty products segment declined as a result of the
product mix. Balloon sales which, carry the highest margin, declined 4% during
2007. The sales shortfall was more than made up by the other products but at a
lower margin.

2006 Compared to
2005

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

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

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

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

13

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2007 Compared to
2006

On a
consolidated basis, operating expenses increased by $576,000 in 2007 compared to
the prior year. $290,000 of this increase was associated with the work gloves
and protective wear segment. The major increases came from $90,000 additional
display expense associated with increased volume from one major customer,
$96,000 of the increase came from the addition of Canadawide to the Boss Canada
operation and $276,000 came in additional compensation related to expanding the
year-end bonus program to include all employees. These increases were partially
offset with savings in wages and less commission expense from a reduction in
manufacturing sales representatives.

Operating
expenses decreased at the pet supplies segment in 2007 as a result of the
consolidation of the two pet companies into the Boss Pet facility in Cleveland.

In the
promotional and safety products segment, operating expenses also increased
$289,000. This major area of increase was $145,000 in salaries as a result of an
additional salesman and general salary increases. Also contributing to the
increase were advertising, commissions and year-end bonuses.

In the
corporate and other segment, 2007 operating expenses increased by $29,000 due
mostly to an increase in legal and consulting expenses.

2006 Compared to
2005

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

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

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

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

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

Operating Income

|                                                |  | 2007   |   | 2006 |      | 2005
|----------------------------------------------- |  | ------ | - | ---- | ---- | ----
|Operating Income (Loss) by
      Segment $(000) |  | $      |   | %    |      | $   
|Work Gloves & Protective Wear                   |  | 1,598  |   |      | 4.2  | %   
|Pet
      Supplies                              |  | 635    |   |      | 9.5  | %   
|Promotional & Specialty Products                |  | 1,228  |   |      | 11.4 | %   
|Corporate &
      Other                         |  | (1,005 | ) |      |     |     
|Total Operating
      Income                    |  | 2,456  |   |      | 4.4  | %   

2007 Compared to
2006

The Company
generated operating income of $2,456,000, which is an improvement over last
years earnings by $253,000. Operating income is up slightly in the work gloves
and protective wear segment as the gains from the improved margins are partially
offset by the increase in operating expenses. Earnings increased $509,000 in the
pet segment with the price increase and the consolidation of the two facilities.
Promotional and specialty products earnings declined, even with the additional
volume, as a result of lower margins and increased operating expenses.

14

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2006 Compared to
2005

Operating
income improved to $2,203,000, an increase of $682,000 over 2005 results. 2006
earnings increased in the work gloves and protective wear segment as a result of
improved margins and savings in operating expenses. Earnings also increased
above the prior year in the promotional and specialty products segment due to
additional sales volume. These increases more than offset a decline in earnings
in the pet supplies segment caused by increased costs and lower selling
prices.

Other Income
(Expense)

As a result
of decreased bank borrowings in 2007, interest expense decreased $107,000
compared to 2006. The Companys primary line of credit was not used at all
during the year and excess cash generated $85,000 of interest income.

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

Income Tax
Expense

Because of
losses in prior years, the Company has available, for U.S. income tax purposes,
NOL carryforwards of approximately $26,052,000. Prior to 2004, management
recorded a 100% valuation allowance offsetting this tax benefit due to
uncertainty regarding the Companys likelihood of realizing a material portion
of the NOL available. Management concluded during the third quarter of 2004 that
the Company was more likely than not to utilize approximately 25% of its
available NOL. Based on this conclusion, the Company reduced the valuation
allowance offsetting its deferred tax asset and recognized a tax benefit of
$3,127,000. During the fourth quarter of 2006, the Company reevaluated its
profitability trend from the traditional operating segments and the projected
profitability increase due to higher sales volumes being realized in the work
gloves and protective wear segment. As a result of this reevaluation, management
determined that it was more likely than not that it would be able to utilize an
additional $2,730,000 of the remaining NOL carryforwards. Accordingly, the
Company reduced its valuation allowance and recognized a $2,730,000 tax benefit.
In all subsequent periods, for book purposes, the Company will record income tax
expense on earnings at normal rates, approximately 39% currently, and reduce the
related deferred tax asset. The tax benefit and tax expenses recorded for book
purposes have no effect on the Companys actual tax liability.

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

Liquidity and Capital
Resources

2007 Compared to
2006

Operating
activities generated cash of $2,533,000 during 2007, which was primarily from
earnings and deferred tax expense. Inventories increased $1,100,000 and was
partially offset by an increase in accounts payable. Inventory increased by
$700,000 in the work gloves and protective wear segment and by $400,000 in the
promotional and specialty products segment. The additional inventory added in
the work gloves and protective wear segment was to reduce out of stock
situations which occurred in 2006. Inventory increased at promotional and
specialty products primarily due to the 16 new products added during the year.
Cash generated from operating activities in 2006 was $4,606,000. The main
difference from year to year was the increase in inventory in 2007, compared
with an inventory decrease in 2006.

Investing
activities used $1,230,000 in 2007 consisting of $343,000 for purchases of
property and equipment and $887,000 for the acquisitions of Canadawide Safety
and Dipcraft and the final Galaxy purchase payment. Purchases of property and
equipment for the year included warehouse improvements at the work gloves and
protective wear segment, facility improvements at the pet supplies segment as a
result of the consolidation of the two facilities and information technology
enhancements at the promotional and specialty products segment.

15

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Financing
activities generated cash of $64,000 in 2007 as the Company paid off $427,000 of
the existing long-term debt, borrowed $405,000 for the acquisition of Canadawide
and collected cash from the exercise of stock options of $86,000.

As of
December 29, 2007, the Company had $2,557,000 in cash and the entire $7,000,000
revolving line of credit was available for borrowing. The Company was in
compliance with its credit facility loan covenants as of December 29, 2007.
Management renegotiated the line of credit at the beginning of 2006, increasing
the total line to $7,000,000 and extending the term until 2009 on improved
terms. Management believes the revolving credit facility should provide
sufficient liquidity for anticipated obligations going forward. The Company does
not have material commitments for future capital expenditures.

As of
December 29, 2007, the Company held in trust approximately $200,000 in
marketable securities representing deferred compensation benefits for certain
Company executives, directors and consultants. Such benefits are payable upon
termination of employment or services.

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

2006 Compared to
2005

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

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

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

Inflation

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

Off Balance-Sheet
Arrangements

The Company has no material
off-balance sheet arrangements.

ITEM 7A.   QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The
Companys primary market risk exposure consists of changes in short-term prime
and LIBOR interest rates on certain borrowings that bear interest at floating
rates. During 2004, the Company borrowed $1,750,000 under a term loan from its
primary lender in connection with the Galaxy acquisition. The Company entered
into an interest rate swap agreement that effectively fixed the interest rate on
approximately $1 million of the initial term loan at 6.32%.

16

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The face value of the swap agreement
declines ratably with the term loan principal. An increase of one percent per
annum in the effective interest rate would increase the Companys annual
interest approximately $5,000 on the floating portion of the term loan. The
Companys revolving credit facility also bears interest at a floating rate of
interest.

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

ITEM 8.   FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

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

| | (i)   |  | Report of Independent
      Registered Public Accounting Firm.                                                                                                      
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      
| | (ii)  |  | Consolidated Balance
      Sheets  as of December 29, 2007 and December 30, 2006.                                                                                  
| |      
| | (iii) |  | Consolidated
      Statements of Income, Cash Flows and Stockholders Equity for the years
      ended December 29, 2007, December 30, 2006 and December 31,
  2005.
| |      
| | (iv)  |  | Notes to the
      Consolidated Financial Statements.                                                                                                               
| |      
| | (v)   |  | Schedule II 
      Valuation and Qualifying Accounts.                                                                                                              

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

Not applicable.

ITEM 9A(T). 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.

Managements Annual Report on Internal
Control over Financial Reporting

The
Companys management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) under the Exchange Act as a process
designed by, or under the supervision of, the Companys principal executive and
principal financial and accounting officers and effected by the Companys board
of directors and management to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a
material effect on the financial statements.

17

---

Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

Our
management assessed the effectiveness of the Companys internal control over
financial reporting as of December 29, 2007. In making this assessment, the
Companys management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control Over
Financial Reporting  Guidance for Smaller Public Companies. Based on our
assessment, the Companys management concluded that, as of December 29, 2007,
our internal control over financial reporting was effective. This annual report
does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by the Companys registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only managements report
in this annual report. Accordingly, the Companys management assessment of the
effectiveness of our internal control over financial reporting as of December
29, 2007 has not been audited by our auditors, McGladrey & Pullen, LLP or
any other independent registered accounting firm.

PART III

ITEM 10.   DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The
information appearing in the Companys Definitive Proxy Statement prepared in
connection with its 2008 Annual Meeting of Stockholders (the Proxy Statement)
under the captions Election of Directors, Executive Officers, Compliance
with Section 16(a) of the Exchange Act, Code of Ethics and Corporate
Governance is incorporated herein by reference. The Proxy Statement is to be
filed no later than 120 days after the end of the fiscal year covered by this
Annual Report on Form 10-K.

ITEM 11.   EXECUTIVE
COMPENSATION

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

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

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

ITEM 13.   CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

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

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.

18

---

PART IV

ITEM 15.   EXHIBITS AND
FINANCIAL STATEMENTS SCHEDULES

| | (a) |  | List the
      following documents filed as a part of the report:                                                      
| | --- |  | -----------------------------------------------------------------------------------------------------------------------
| |    
| |     |  | (1)                                                                                                                    
| |     |  |                                                                                                                        
| |    
| |     |  | (2)                                                                                                                    
| |    
| | (b) |  | Exhibits:                                                                                                              
| |    
| |     |  | The exhibits
      filed with or incorporated into this report are listed in the Index to
      Exhibits which follows.

19

---

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/ STEVEN G. PONT                                            
|                               |  | STEVENG. PONT,Vice President of Finance                       
|                               |  | Principal
      Financial Officer and Chief Accounting Officer
|                               |  | Date: March 28,
      2008                                    

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

|By (Signature and
      Title) |  | /s/ G. LOUIS GRAZIADIO
      III          
|------------------------------ |  | ------------------------------------------
|                               |  | G. LOUISGRAZIADIOIII                      
|                               |  | Chairman of
      the Board and President,
|                               |  | Principal
      Executive Officer         
|                               |  | Date: March 28,
      2008                
|                              
|By (Signature and
      Title) |  | /s/ PERRY A. LERNER                       
|                               |  | PERRYA. LERNER,Director                   
|                               |  | Date: March 28,
      2008                
|                              
|By (Signature and
      Title) |  | /s/ LEE E. MIKLES                         
|                               |  | LEEE. MIKLES,Director                     
|                               |  | Date: March 28,
      2008                
|                              
|By (Signature and
      Title) |  | /s/ PAUL A. NOVELLY                       
|                               |  | PAULA. NOVELLY,Director                   
|                               |  | Date: March 28,
      2008                
|                              
|By (Signature and
      Title) |  | /s/ WILLIAM R. LANG                       
|                               |  | WILLIAMR. LANG,Director                   
|                               |  | Date: March 28,
      2008                

20

---

INDEX TO EXHIBITS

|**(3)(i)**  |  | Articles of
      Incorporation                                                                                                                                                                                                                                                                      
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                      
|3.1         |  | Certificate of Incorporation
      (incorporated by reference from the Companys Registration Statement on
      Form SB-2 - Registration No. 33-73118-A)                                                                                                                                            
|           
|3.1.1       |  | Amendment to Certificate of
      Incorporation, dated December 7, 1998 (incorporated by reference from the
      Companys Form 10-K for the year ended December 26, 1998)                                                                                                                          
|           
|3.1.2       |  | Amendment to Certificate of
      Incorporation, dated June 30, 2000 (incorporated by reference from the
      Companys Form 10-Q for the quarter ended July 1, 2000)                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                      
|**(3)(ii)** |  | **By-Laws**                                                                                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                      
|3.2         |  | By-Laws (incorporated by
      reference from the Companys Registration Statement on Form SB-2 -
      Registration No. 33-73118-A)                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                      
|**(10)**    |  | Material
    Contracts                                                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                      
|10.1        |  | 1998 Incentive Stock Option Plan,
      as amended (incorporated by reference from the Companys Registration
      Statement on Form S-8 dated February 1, 2001)                                                                                                                                    
|           
|10.2        |  | 1998 Non-Employee Director Stock
      Option Plan, as amended (incorporated by reference from the Companys
      Registration Statement on Form S-8 dated February 1, 2001)                                                                                                                        
|           
|10.3        |  | Loan and Security Agreement among
      Boss Holdings, Inc., Boss Manufacturing Company and American National Bank
      and Trust Company of Chicago, dated June 16, 2000 (incorporated by
      reference from the Companys Form 10-Q for the quarter ended July 1,
      2000)                   
|           
|10.3.1      |  | First Amendment to Loan and
      Security Agreement among Boss Holdings, Inc., Boss Manufacturing Company
      and American National Bank and Trust Company of Chicago, dated May 28,
      2002 (incorporated by reference from the Companys Form 10-Q for the
      quarter ended June 29, 2002)
|           
|10.3.2      |  | Second Amendment to Loan and
      Security Agreement among Boss Holdings, Inc., Boss Manufacturing Company
      and Bank One, N.A., dated April 15, 2003 (incorporated by reference from
      the Companys Form 10-Q for the quarter ended June 28, 2003)                                        
|           
|10.3.3      |  | Third Amendment to Loan Agreement
      among Boss Holdings, Inc., Boss Manufacturing Company and Bank One, N.A.,
      dated October 13, 2003 (incorporated by reference from the Companys Form
      10-K for the year ended December 27, 2003)                                                   
|           
|10.3.4      |  | Fourth Amendment to Loan
      Agreement among Boss Holdings, Inc., Boss Manufacturing Company and Bank
      One, N.A., dated March 17, 2004 (incorporated by reference from the
      Companys Form 10-Q for the quarter ended March 27, 2004)                                                    
|           
|10.3.5      |  | Fifth Amendment to Loan Agreement
      among Boss Holdings, Inc., Boss Manufacturing Company and Bank One, N.A.,
      dated July 30, 2004 (incorporated by reference from the Companys Form
      10-K for the year ended December 25, 2004)                                                      
|           
|10.3.6      |  | Sixth Amendment to Loan Agreement
      among Boss Holdings, Inc., Boss Manufacturing Company and JP Morgan Chase
      Bank, N.A., dated January 30, 2006 (incorporated by reference from the
      Companys Form 10-Q for the quarter ended April 1, 2006)                                        
|           
|10.4        |  | Boss Holdings, Inc. 2004 Stock
      Incentive Plan (incorporated by reference from the Companys definitive
      Proxy Statement filed April 30, 2004)                                                                                                                                             
|           
|10.5        |  | Stock Purchase Agreement dated
      July 30, 2004 between Boss Holdings, Inc. and Terrence J. Brizz regarding
      Galaxy Balloons, Incorporated (incorporated by reference from the
      Companys Form 8-K dated July 30, 2004)                                                                 

21

---

|14.1 |  | Code of Ethics for Senior
      Executive and Financial Officers (incorporated by reference from the
      Companys Form 10-K for the year ended December 25, 2004)                          
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|21.1 |  | Subsidiaries of the
      Registrant                                                                                                                                                          
|    
|23.1 |  | Consent of McGladrey &
      Pullen, LLP                                                                                                                                                      
|    
|31.1 |  | Certification of Principal
      Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.                                                                           
|    
|31.2 |  | Certification of Principal
      Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.                                                                           
|    
|32   |  | Certification of Chief Executive
      Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to section 906 of the Sarbanes-Oxley Act of
    2002.

22

---

















Boss Holdings, Inc. and
Subsidiaries

Consolidated Financial Statements
December 29, 2007

F1

---

McGladrey &
PullenCertified Public
Accountants



Report of Independent Registered Public
Accounting Firm

To the Board of Directors Boss
Holdings, Inc.

We have audited the accompanying
consolidated balance sheets of Boss Holdings, Inc. and subsidiaries as of
December 29, 2007 and December 30, 2006, and the related consolidated statements
of income, stockholders equity, and cash flows for each of the three years in
the period ended December 29, 2007. Our audits also included the financial
statement schedule listed in the Index at Item 15(a)(2). These financial
statements and schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of Boss Holdings, Inc. and subsidiaries as of December 29,
2007 and December 30, 2006, and the results of their operations and their cash
flows for each of the three years in the period ended December 29, 2007 in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects, the information set forth therein.

We were not engaged to examine
managements assertion about the effectiveness of Boss Holdings, Inc.s internal
control over financial reporting as of December 29, 2007 included in the
accompanying item 9A(T) Controls and Procedures and, accordingly, we do not
express an opinion thereon.

As described in Note 9 to the consolidated
financial statements, effective December 31, 2006, the Company adopted the
provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes.



Davenport, Iowa March 28,
2008

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

F2

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

|                                                                          | December, 29 |         | December, 30
|------------------------------------------------------------------------- | ------------ | ------- | ------------
|                                                                          | 2007         |         | 2006        
|Assets                                                                    |              |         |             
|Current
      Assets:                                                     |              |         |             
|Cash and cash equivalents                                                 | $            | 2,557   |             
|Accounts receivable, net of allowance for doubtful accounts
      and     |              |         |             
|returns 2007 $225; 2006 $221                                              |              | 8,278   |             
|Inventories                                                               |              | 15,983  |             
|Deferred tax asset                                                        |              | 1,199   |             
|Prepaid expenses and other                                                |              | 579     |             
|Total current assets                                                      |              | 28,596  |             
|Property and Equipment, net                                               |              | 3,528   |             
|Other
      Assets                                                        |              | 219     |             
|Intangibles, net of amortization 2007 $164; 2006 $110                     |              | 561     |             
|Goodwill                                                                  |              | 3,666   |             
|Deferred tax asset                                                        |              | 2,417   |             
|                                                                          | $            | 38,987  |             
|                                                                         
|Liabilities and Stockholders Equity                                      |              |         |             
|Current
      Liabilities:                                                |              |         |             
|Current portion of long-term debt                                         | $            | 511     |             
|Accounts payable                                                          |              | 2,370   |             
|Accrued payroll and related expenses                                      |              | 1,191   |             
|Accrued liabilities                                                       |              | 1,259   |             
|Total current liabilities                                                 |              | 5,331   |             
|Long-Term
      Debt                                                      |              | 2,054   |             
|Deferred Compensation                                                     |              | 200     |             
|Commitments and
      Contingencies (Note 4)                              |              |         |             
|Stockholders Equity:                                                     |              |         |             
|Common stock, $.25 par value; authorized 10,000,000 shares;
      issued  |              |         |             
|2,018,345 and 1,980,767 shares; outstanding 2,018,345
      and 1,980,767 |              |         |             
|shares in 2007 and 2006, respectively                                     |              | 505     |             
|Additional paid-in capital                                                |              | 66,463  |             
|Accumulated (deficit)                                                     |              | (35,809 | )           
|Accumulated other comprehensive income                                    |              | 243     |             
|Total stockholders equity                                                |              | 31,402  |             
|                                                                          | $            | 38,987  |             

See Notes to Consolidated Financial
Statements.

F3

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

Consolidated Statements of
IncomeYears Ended December 29, 2007,
December 30, 2006 and December 31, 2005 (Dollars in Thousands, Except Per
Share Data)

|                                                 | 2007  |        | 2006 |  | 2005
|------------------------------------------------ | ----- | ------ | ---- |  | ----
|Net sales                                        | $     | 55,197 |      |  | $   
|Cost of
      sales                              |       | 40,817 |      |  |     
|Gross profit                                     |       | 14,380 |      |  |     
|Operating
      expenses                         |       | 11,924 |      |  |     
|Operating income                                 |       | 2,456  |      |  |     
|Other income and
      (expenses):               |       |        |      |  |     
|Interest income                                  |       | 110    |      |  |     
|Interest expense                                 |       | (309   | )    |  |     
|Other                                            |       | 20     |      |  |     
|                                                 |       | (179   | )    |  |     
|Income before income tax expense
      (benefit) |       | 2,277  |      |  |     
|Income tax
      expense (benefit)               |       | 911    |      |  |     
|Net income                                       | **$** | 1,366  |      |  | $   
|Basic earnings
      per common share            | **$** | 0.68   |      |  | $   
|Diluted earnings per common share                | $     | 0.62   |      |  | $   

See Notes to Consolidated Financial
Statements.

F4

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

Consolidated Statements of
Stockholders EquityYears Ended
December 29, 2007, December 30, 2006 and December 31, 2005 (In
Thousands)

|                                     |                  |   |                |   |             |   |               |  |                       |   |               |  |                  |   |        |  |              |   |  |  |    |   |  |       |      |  
|------------------------------------ | ---------------- | - | -------------- | - | ----------- | - | ------------- |  | --------------------- | - | ------------- |  | ---------------- | - | ------ |  | ------------ | - |  |  | -- | - |  | ----- | ---- | -
|                                     |                  |   | **Additional** |   |             |   |               |  | **Accumulated Other** |   |               |  | **Total**       
|                                     | **Common Stock** |   | Paid-In        |   | Accumulated |   | Comprehensive |  | **Treasury Stock**    |   | Stockholders
|                                     | Shares           |   | Dollars        |   | Capital     |   | (Deficit)     |  | Income (Loss)         |   | Shares        |  | **Dollars**      |   | Equity
|Balance, December 25, 2004           | 1,951            |   |                | $ | 487         |   |               |  | $ 66,756              |   |               |  | **$**(41,759     | ) |        |  | $(62         | ) |  |  | (5 | ) |  | $     | (817 | )
|Exercise of stock options            | 35               |   |                |   | 9           |   |               |  | 78                    |   |               |  |                 |   |        |  |             |   |  |  |   |   |  |       |     |  
|Comprehensive income:                |                  |   |                |   |             |   |               |  |                       |   |               |  |                  |   |        |  |              |   |  |  |    |   |  |       |      |  
|Net income                           |                 |   |                |   |            |   |               |  |                      |   |               |  | 690              |   |        |  |             |   |  |  |   |   |  |       |     |  
|Other comprehensive income (Note 10) |                 |   |                |   |            |   |               |  |                      |   |               |  |                 |   |        |  | 118          |   |  |  |   |   |  |       |     |  
|Comprehensive income                 |                  |   |                |   |             |   |               |  |                       |   |               |  |                  |   |        |  |              |   |  |  |    |   |  |       |      |  
|Stock based compensation             |                 |   |                |   |            |   |               |  | 178                   |   |               |  |                 |   |        |  |             |   |  |  |   |   |  |       |     |  
|Balance, December 31,
      2005     | 1,986            |   |                |   | 496         |   |               |  | 67,012                |   |               |  | (41,069          | ) |        |  | 56           |   |  |  | (5 | ) |  |       | (817 | )
|Exercise of stock options            |                 |   |                |   |            |   |               |  |                      |   |               |  |                 |   |        |  |             |   |  |  |   |   |  |       |     |  
|Cancellation of treasury stock       | (5               | ) |                |   | (1          | ) |               |  | (816                  | ) |               |  |                 |   |        |  |             |   |  |  | 5  |   |  |       | 817  |  
|Comprehensive income:                |                  |   |                |   |             |   |               |  |                       |   |               |  |                  |   |        |  |              |   |  |  |    |   |  |       |      |  
|Net income                           |                 |   |                |   |            |   |               |  |                      |   |               |  | 3,894            |   |        |  |             |   |  |  |   |   |  |       |     |  
|Other comprehensive income (Note 10) |                 |   |                |   |            |   |               |  |                      |   |               |  |                 |   |        |  | (4           | ) |  |  |   |   |  |       |     |  
|Comprehensive income                 |                  |   |                |   |             |   |               |  |                       |   |               |  |                  |   |        |  |              |   |  |  |    |   |  |       |      |  
|Stock based compensation             |                 |   |                |   |             |   |               |  | 128                   |   |               |  |                 |   |        |  |             |   |  |  |   |   |  |       |     |  
|Balance, December 30, 2006           | 1,981            |   |                |   | 495         |   |               |  | 66,324                |   |               |  | (37,175          | ) |        |  | 52           |   |  |  |   |   |  |       |     |  
|Exercise of stock options            | 37               |   |                |   | 10          |   |               |  | 103                   |   |               |  |                 |   |        |  |             |   |  |  |   |   |  |       |     |  
|Comprehensive income:                |                  |   |                |   |             |   |               |  |                       |   |               |  |                  |   |        |  |              |   |  |  |    |   |  |       |      |  
|Net income                           |                 |   |                |   |            |   |               |  |                      |   |               |  | 1,366            |   |        |  |             |   |  |  |   |   |  |       |     |  
|Other comprehensive income (Note 10) |                 |   |                |   |            |   |               |  |                      |   |               |  |                 |   |        |  | 191          |   |  |  |   |   |  |       |     |  
|Comprehensive income                 |                  |   |                |   |             |   |               |  |                       |   |               |  |                  |   |        |  |              |   |  |  |    |   |  |       |      |  
|Stock based compensation             |                 |   |                |   |            |   |               |  | 36                    |   |               |  |                 |   |        |  |             |   |  |  |   |   |  |       |     |  
|Balance, December 29, 2007           | 2,018            |   |                | $ | 505         |   |               |  | **$****66,463**       |   |               |  | **$****(35,809** | ) |        |  | **$****243** |   |  |  |   |   |  | **$** |     |  

See Notes to Consolidated Financial
Statements.

F5

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

|                                                                  | 2007  |           | 2006 |  | 2005
|----------------------------------------------------------------- | ----- | --------- | ---- |  | ----
|Cash Flows from Operating Activities:                             |       |           |      |  |     
|Net income                                                        | $     | 1,366     |      |  | $   
|Adjustments to reconcile net income to net cash provided
      by |       |           |      |  |     
|(used
      in) operating activities:                             |       |           |      |  |     
|Depreciation and amortization                                     |       | 534       |      |  |     
|Stock based compensation                                          |       | 36        |      |  |     
|Deferred tax expense (benefit)                                    |       | 772       |      |  |     
|Changes in assets and liabilities:                                |       |           |      |  |     
|(Increase)
      decrease in:                                     |       |           |      |  |     
|Accounts receivable                                               |       | 48        |      |  |     
|Inventories                                                       |       | (1,100    | )    |  |     
|Prepaid expenses and other current assets                         |       | 40        |      |  |     
|Other assets                                                      |       | 12        |      |  |     
|Increase
      (decrease) in:                                     |       |           |      |  |     
|Accounts payable                                                  |       | 579       |      |  |     
|Accrued liabilities                                               |       | 246       |      |  |     
|Net cash provided by (used in) operating
      activities         |       | 2,533     |      |  |     
|Cash Flows from Investing Activities:                             |       |           |      |  |     
|Purchases of property and equipment                               |       | (343      | )    |  |     
|Acquisitions                                                      |       | (887      | )    |  |     
|Net cash used in investing activities                             |       | (1,230    | )    |  |     
|Cash Flows from Financing Activities:                             |       |           |      |  |     
|Net borrowings on revolving line of credit                        |       |          |      |  |     
|Borrowing on long-term obligations                                |       | 405       |      |  |     
|Repayment of long-term obligations                                |       | (427      | )    |  |     
|Proceeds from exercise of stock options                           |       | 86        |      |  |     
|Net cash provided by (used in) financing
      activities         |       | 64        |      |  |     
|Effect of exchange rate changes on cash                           | **$** | 188       |      |  | $   
|Increase (decrease) in cash and cash
      equivalents            | **$** | **1,555** |      |  | $   
|                                                                  |       |           |      |  |     
|Cash and cash
      equivalents:                                  |       |           |      |  |     
|Beginning                                                         |       | **1,002** |      |  |     
|Ending                                                            | **$** | **2,557** |      |  | $   
|                                                                 
|(Continued)                                                      

F6

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

|                                                              |  | 2007 |     | 2006 |   | 2005
|------------------------------------------------------------- |  | ---- | --- | ---- | - | ----
|Supplemental Disclosures of Cash Flows Information,           |  |      |     |      |   |     
|cash
      payments for:                                      |  |      |     |      |   |     
|Interest paid                                                 |  | $    | 213 |      | $ | 412 
|Income taxes paid, net                                        |  |      | 224 |      |   | 91  
|Supplemental Disclosures of Noncash Investing and             |  |      |     |      |   |     
|Financing Activities:                                         |  |      |     |      |   |     
|Accrued acquisition contingency                               |  |      |    |      |   | 200 
|Reduction in net operating loss carryover due to
      excess |  |      |     |      |   |     
|tax benefits from the exercise of stock
      options         |  |      | 27  |      |   |    

See Notes to Consolidated Financial
Statements.

F7

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

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

Nature of business:

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

Significant accounting
policies:

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

Fiscal year: The Company maintains
a 52/53-week year ending on the last Saturday of the calendar year. Fiscal years
2007, 2006 and 2005 contained 52, 52 and 53 weeks, respectively.

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

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

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

An account is considered to be past due if
any portion of the receivable balance is past due more than 60 days. The
provision for bad debts charged to expense was $65, $3 and $117 for the years
ended 2007, 2006 and 2005, 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 income (loss) for
available for sale securities.

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

F8

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

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

Revenue recognition: The Company recognizes revenue and provides for the
estimated cost of returns and allowances in the
period goods are shipped to the customer based on its standard selling terms of
FOB shipping point, with title passing to the customer at time of shipment.
Shipping and handling charges billed to customers are included in revenues.
Sales in any single foreign geographic area or to any single customer did not
exceed 10% of net sales for 2007, 2006, or 2005. Taxes collected from customers
and remitted to government agencies for specific revenue producing transactions
are recorded net with no effect on the income statement.

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

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

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

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

**Years**Machinery and equipment
    
    10Office furniture
      and equipment
    
    3 - 10Buildings and improvements
    
    10 - 39


Depreciation expense was $492, $424 and
$401 for 2007, 2006 and 2005, 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 performs
its impairment test in December each year and believes that no impairment
exists as of December 29, 2007. Other intangible assets are recorded at cost and
amortized over their estimated useful life.

Long-lived assets are evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. The estimated future cash
flows are based upon, among other things, assumptions about expected future
operating performance, and may differ from actual cash flows. If the sum of the
projected undiscounted cash flows (excluding interest) is less than the carrying
value of the assets, the assets will be written down to the estimated fair value
in the period in which the determination is made. Management has determined that
no impairment of long-lived assets currently exists.

F9

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

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

The cost and accumulated amortization of
other intangible assets as of December 29, 2007 and December 30, 2006 is as
follows:

|                  |  | Estimated |  |      |         | Accumulated  |   | Net Book
|----------------- |  | --------- |  | ---- | ------- | ------------ | - | --------
|                  |  | Life      |  | Cost |         | Amortization |   | Value   
|                  |  | 2007     
|Customer Lists    |  |           |  |      |         |              |   |         
|Canadawide Safety |  | 4 Years   |  |      | 112,085 |              |   | 17,513  
|Dipcraft          |  | 5 Years   |  |      | 342,500 |              |   | 8,563   
|Galaxy            |  | 7 Years   |  |      | 170,000 |              |   | 77,418  
|Patents           |  | 10 Years  |  |      | 50,000  |              |   | 10,000  
|                  |  |           |  | $    | 674,585 |              | $ | 113,494 
|                 
|                  |  | 2006     
|Customer Lists    |  |           |  |      |         |              |   |         
|Galaxy            |  | 7 Years   |  |      | 170,000 |              |   | 54,648  
|Patents           |  | 10 Years  |  |      | 50,000  |              |   | 5,000   
|                  |  |           |  | $    | 220,000 |              | $ | 59,648  

Amortization of intangible assets is
expected to be approximately $124,000 for each of the next three years, $108,000
in 2011 and $88,000 in 2012.

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

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

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

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

F10

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

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

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

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

Advertising costs: The Company
generally expenses the cost of advertising the first time advertising takes
place. Costs of trade shows and developing advertising materials are expensed at
the time of the trade shows or as the advertising materials are produced and
distributed to customers. Advertising expense for 2007, 2006 and 2005 was $818,
$923 and $858, respectively.

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

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

Pending accounting prouncements: In
September 2006, the FASB issued SFAS 157, Fair Value Measurements , which
defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. The requirements of SFAS 157 are
effective for fiscal years beginning after November 15, 2007. However, the FASB
has deferred the implementation of SFAS 157 by one year for certain non
financial assets and liabilities, for which SFAS 157 will be effective or the
fiscal years beginning January 1, 2009. The Company does not expect the adoption
of SFAS 157 to have a material impact on the results of operations, financial
position, or cash flows.

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

F11

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

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

In December 2007, the FASB issued SFAS No.
141 (revised 2007), Business Combinations, (FAS 141R), which replaces FASB
Statement No. 141. FAS 141R establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in the
acquiree and the goodwill acquired. The Statement also establishes disclosure
requirements, which will enable users to evaluate the nature and financial
effects of the business combination. FAS 141R is effective as of the beginning
of an entitys fiscal year that begins after December 15, 2008, which will be
the Companys year beginning December 28, 2008. The Company is currently
evaluating the potential impact, if any, of the adoption of FAS 141R on the
Companys financial statements.

**NOTE 2.****PROPERTY AND EQUIPMENT**

Property and equipment as of December 29,
2007 and December 30, 2006 is as follows:

2007
    
    2006Land
    $
    440
    
    $
    440Machinery and
      equipment
    
    1,623
    
    
    1,662Buildings and improvements
    
    2,674
    
    
    2,652Office furniture
      and equipment
    
    2,622
    
    
    2,2407,359
    
    
    6,994Less accumulated
      depreciation
    
    3,831
    
    
    3,338$
    3,528
    
    $
    3,656


F12

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

**NOTE 3.****LONG-TERM OBLIGATIONS**

Long-term debt as of December 29, 2007 and
December 30, 2006 is as follows:

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | 2007 |       | 2006
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ----
|BHI
      revolving line of credit (A)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | $    |      |     
|Boss Holdings, Inc. term note payable
      to a lender. Requires monthly principal payments through July 2011 of $21
      plus interest at LIBOR plus 2.1%, adjusted monthly (effective rate of
      7.34% as of December 29, 2007). 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 |  |      | 916   |     
|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                                                                               |  |      | 797   |     
|Boss Canada Inc. term note payable to
      a lender. Requires monthly payment of $7 Canadian Dollar and $7 US Dollar,
      using 12/29/07 exchange rate of 1.0202, at 6.3% from June 2008 through May
      2014. Interest only monthly payments from June 2007 through May 2008.
      Collateralized by accounts receivable and inventory of Boss Canada Inc.
      located in Canada $400,000 Canadian Dollar / $408,080 US Dollar                                                                                                                                                           |  |      | 408   |     
|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                                                                                                                                                                                                                                                                                                           |  |      | 214   |     
|Boss Manufacturing Company loan
      agreement with a local governmental agency. Requires monthly payments of
      $3, including interest at 3%, through October 2012. Collateralized by
      certain real property of Boss Manufacturing Company's Kewanee, Illinois
      facilities                                                                                                                                                                                                                                                                                                         |  |      | 178   |     
|Non-interest bearing obligations
      to former owner of Canadawide Safety payable May 2008. $50,000 Canadian
      Dollar / $52,000 US Dollar                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |      | 52    |     
|Capital
      lease obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |      |      |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |      | 2,565 |     
|Less
      current maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |      | 511   |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | $    | 2,054 |     

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

Year
ending:December 27, 2008
    
    
    $
    511December 26,
      2009
    
    
    
    490December 25, 2010
    
    
    
    1,076December 31,
      2011
    
    
    
    273December 29, 2012
    
    
    
    105Thereafter
    
    
    
    110$
    2,565


F13

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

NOTE 3. LONG-TERM OBLIGATIONS
(Continued)

|(A) |  | On January 30, 2006, the Company
      modified its loan and security agreement (the Credit Agreement) with a
      commercial bank. The revised Credit Agreement expires in January 2009 and
      provides a revolving credit facility up to $7,000 based on a formula that
      includes eligible accounts receivable and inventories. Interest is payable
      monthly at the banks prime rate less 1.50% or, at the Companys option,
      LIBOR plus 1.0% (effective rate of 6.13% as of December 29, 2007). The
      Company incurs an unused line fee of 1/8% per annum on the unused portion
      of the credit facility. As of December 29, 2007, the Company had no
      borrowings on the revolving credit facility. Availability under this
      credit agreement was $7,000 as of December 29, 2007.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | 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 $200 and $349 as of December 29, 2007 and December 30, 2006,
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 $564, $422 and $402 for
2007, 2006 and 2005, respectively.

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

**Year
      ending:**December 27, 2008
    
    $
    345December 26,
      2009
    
    
    320Total minimum lease payments
    
    $
    665


Licensing:

Since 2002, the Company has been
a party to a license agreement for the use of certain trademarks in its
products, which contains provisions for the payment of guaranteed or
minimum royalties. The Company incurred royalties of $306, $249 and $221 in
2007, 2006 and 2005, respectively. The Company has extended the
agreement through 2009 with provisions for the payment of guaranteed or
minimum royalties of $320 in 2008 and $380 in 2009.

F14

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

NOTE 4. COMMITMENTS AND CONTINGENCIES
(Continued)

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.

NOTE 5. STOCK OPTIONS

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

|                       | Year
  Ended     
|---------------------- | -----------------
|                       | December 29, 2007
|                       |                  
|                       |                  
|                       |                  
|                       | **Shares**       
|Outstanding, beginning | 381,000          
|Granted                | 10,000           
|Exercised              | (45,000          
|Expired                | (10,000          
|Outstanding, ending    | 336,000          
|                      
|Options exercisable,   |                  
|end
      of year      | 329,333          
|                      
|Weighted average fair  |                  
|value per option of    |                  
|options granted        |                  

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 2007 and 2005, respectively;
expected volatility of 42% and 48%; expected dividend yield of 0.0%; weighted
average risk-free rate of return of 4.5% and 4.2%; and expected lives of 5
years. Compensation expense related to stock options was $36, $128 and $178 for
2007, 2006 and 2005, respectively.

As of December 29, 2007, the total
compensation cost of nonvested awards is approximately $11 which will vest in
2008. The intrinsic value of outstanding and vested options was $1,893 and
$1,882, respectively, as of December 29, 2007.

F15

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

NOTE 6. EARNINGS PER
SHARE

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

|                                          |  | Year
  Ended
|----------------------------------------- |  | ------------
|                                          |  | December 29,
|                                          |  | 2007        
|Numerator, earnings attributable to       |  |             
|common stockholders                       |  | $           
|                                         
|Denominator:                              |  |             
|Basic-weighted average common             |  |             
|shares outstanding                        |  |             
|Dilutive effect of employee stock options |  |             
|Diluted outstanding shares                |  |             
|                                         
|Basic earnings, per common share          |  | $           
|Diluted
      earnings, per common share  |  | $           

NOTE 7. RELATED PARTY
TRANSACTIONS

During 2007, 2006 and 2005, compensation,
fees, and expense reimbursements paid to directors or their affiliates totaled
$412, $343 and $327, respectively.

NOTE 8. ACQUISITIONS

Head-Lite:

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

F16

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

NOTE 8. ACQUISITIONS
(Continued)

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

Acquisition cost:Base
      purchase price
    $
    700Acquisition expenses
    
    49Less
      working capital purchase price adjustment
    
    (15
    )**Net
      purchase price**
    $
    734Allocation of purchase cost:Cash
    $
    25Accounts receivable
    
    75Inventory
    
    241Identified intangibles and other assets
    
    50Goodwill
    
    527Accounts payable assumed
    
    (177
    )Accrued liabilities assumed
    
    (7
    )**Net
      purchase price**
    
    734Less cash acquired
    
    25**Net
      cash paid**
    $
    709


Canadawide Safety, Inc:

On May 18, 2007, Boss Canada Inc. (Boss
Canada), an indirect subsidiary of BHI, purchased all outstanding shares of
privately held Navillus Group Inc., an Ontario corporation. Through its wholly
owned subsidiary, Canadawide Safety Inc. (Canadawide), the acquired company
imports and distributes safety goods and industrial work wear, including gloves,
protective eyewear, face and respiratory protection, as well as first aid and
industrial supplies. Immediately following the closing, Canadawide and Navillus
Group Inc. were merged with Canadawide as the surviving entity.

The base purchase price was Cdn$400,000
(approximately US$364,000), with Cdn$350,000 due on closing and Cdn$50,000 due
on May 18, 2008. Boss Canada utilized a term loan of Cdn$400,000 provided
through the Canadian branch of BHIs primary lender to acquire the shares and
pay down Cdn$50,000 of assumed debt. At the same time, Boss Canada entered into
a Cdn$100,000 line of credit for working capital requirements. There were no
borrowings under this line of credit at year end.

F17

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

NOTE 8. ACQUISITIONS
(Continued)

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

Acquisition cost:Base purchase price
    $
    364Closing Costs
    
    19**Total**
    $
    383Allocation of purchase cost:Current assets
    $
    216Property and equipment
    
    14Customer Lists
    
    100Goodwill
    
    255Accounts payable and accrued expenses
    
    (202
    )383Less Acquisition indebtedness
    
    46$
    337


Dipcraft Balloon
Company:

In November of 2007 Galaxy Balloons
acquired certain assets of Dipcraft Balloon Company for a total cash
consideration of $350,000. Fixed assets accounted for $7,500 of the purchase
with the remaining $342,500 assigned to customer list.

The Company also made the final $200,000
acquisition contingency payment in conjunction with the purchase of Galaxy
Balloons in 2004.

Had these acquisitions taken place on
December 31, 2005, consolidated sales and income would not have been
significantly different from the amounts reported for 2006 and 2007.

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 EndedDecember 29,
    
    December
      30,
    
    December 31,2007
    
    2006
    
    2005Current income tax expense:Federal
    $
    39
    
    $
    19
    
    
    $
    44State and local
    
    100
    
    
    51
    
    
    
    101139
    
    
    70
    
    
    
    145Deferred income tax expense (benefit):Federal
    
    759
    
    
    (2,127
    )
    
    
    336State and local
    
    13
    
    
    (5
    )
    
    
    (32
    )772
    
    
    (2,132
    )
    
    
    304Total income tax expense
      (benefit)
    $
    911
    
    $
    (2,062
    )
    
    $
    449


F18

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BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

NOTE 9. INCOME TAXES
(Continued)

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

Year EndedDecember 29,
    
    December 30,
    
    December 31,2007
    
    2006
    
    2005Income tax expense computedat the U.S. corporate tax rate of
      34%
    $
    774
    
    $
    623
    
    
    $
    387Adjustments attributable to:State income taxes, net of the federal
      benefit
    
    114
    
    
    46
    
    
    
    69Deferred tax asset valuation
      allowance
    
    
    
    
    (2,730
    )
    
    
    Other
    
    23
    
    
    (1
    )
    
    
    (7
    )Total income tax expense
      (benefit)
    $
    911
    
    $
    (2,062
    )
    
    $
    449


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

December 29,
    
    December 30,2007
    
    2006Deferred income tax assets:Operating loss carryforwards
    $
    8,858
    
    $
    9,562Accounts
      receivable
    
    100
    
    
    106Accruals
    
    103
    
    
    62Compensation
      related
    
    432
    
    
    491Inventories
    
    514
    
    
    577Tax credit
      carryforwards
    
    442
    
    
    407Gross deferred tax assets
    
    10,449
    
    
    11,205Deferred tax
      asset valuation allowance
    
    6,500
    
    
    6,500Net deferred tax assets
    
    3,949
    
    
    4,705Deferred income tax liabilities:Intangibles
    
    73
    
    
    60Property and equipment
    
    260
    
    
    302333
    
    
    362Net deferred income tax assets
    $
    3,616
    
    $
    4,343


Included in the tax credit carryforward is
approximately $442 of alternative minimum tax credits and general business
credits available to reduce future income taxes payable.

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

F19

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BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

NOTE 9. INCOME TAXES
(Continued)

As of December 29, 2007, the Company had
operating loss carryforwards for U.S. income tax purposes of $26,052 available
to reduce future taxable income through the following years:

Year of expiration:2011
    
    $
    15,3872012
    
    
    9,1972019
    
    
    536Thereafter
    
    
    932$
    26,052


On December 31, 2006, the Company adopted
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
Interpretation of SFAS No. 109 (FIN 48). This statement clarifies the criteria
that an individual tax position must satisfy for some or all of the benefits of
that position to be recognized in a companys financial statements. FIN 48
prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected
to be taken on a tax return, in order for those tax positions to be recognized
in the financial statements. The adoption of FIN 48 had no impact on the
Companys consolidated financial statements.

As of December 29, 2007 the aggregate
amount of the unrecognized tax benefit, which is included in accrued expenses,
was approximately $103,000. The accrual increased by approximately $23,000
during the year. All unrecognized tax benefits, if recognized, would affect the
effective tax rate. The liability for unrecognized tax benefits includes accrued
interest for tax positions, which either do not meet the more-likely-than-not recognition threshold or where the tax benefit is measured
at an amount less than the tax benefit claimed or expected to be claimed on an
income tax return.

NOTE 10. COMPREHENSIVE INCOME
(LOSS)

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

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

Year EndedDecember 29,
    
    December 30,
    
    December 31,2007
    
    2006
    
    2005Foreign currency items:Beginning balance
    $
    25
    
    
    $
    29
    
    
    $
    (62
    )Current period
      change
    
    219
    
    
    
    (4
    )
    
    
    91Ending balance
    
    244
    
    
    
    25
    
    
    
    29Interest swap agreements, net of income taxes:Beginning balance
    
    27
    
    
    
    27
    
    
    
    Current period
      change
    
    (28
    )
    
    
    
    
    
    
    27Ending balance
    
    (1
    )
    
    
    27
    
    
    
    27Accumulated other comprehensive
      income
    $
    243
    
    
    $
    52
    
    
    $
    56


F20

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BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

NOTE 11. OPERATING SEGMENTS AND RELATED
INFORMATION

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

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

|                              |  | Work       |        |          |   |                   |             |               |        |       |   |        |   | 
|----------------------------- |  | ---------- | ------ | -------- | - | ----------------- | ----------- | ------------- | ------ | ----- | - | ------ | - | 
|                              |  | Gloves and |        |          |   |                   | Promotional |               |        |       |   |        |  
|                              |  | Protective |        | Pet      |   | **and Specialty** |             | **Corporate** |        |       |  
|                              |  | Wear       |        | Supplies |   | Products          |             | and Other     |        | Total
|2007                          |  |            |        |          |   |                   |             |               |        |       |   |        |   | 
|Revenue                       |  | $          | 37,689 |          | $ | 6,693             |             | $             | 10,815 |       | $ |       |   | 
|Operating income
      (loss) |  |            | 1,598  |          |   | 635               |             |               | 1,228  |       |   | (1,005 | ) | 
|Goodwill                      |  |            | 813    |          |   |                  |             |               | 2,853  |       |   |        |   | 
|Total assets                  |  |            | 26,203 |          |   | 3,013             |             |               | 6,087  |       |   | 3,684  |   | 
|Capital expenditures          |  |            | 143    |          |   | 118               |             |               | 82     |       |   |       |   | 
|Depreciation                  |  |            | 322    |          |   | 33                |             |               | 137    |       |   |       |   | 
|                              |  |            |        |          |   |                   |             |               |        |       |   |        |   | 
|2006:                         |  |            |        |          |   |                   |             |               |        |       |   |        |   | 
|Revenue                       |  | $          | 37,257 |          | $ | 6,414             |             | $             | 9,992  |       | $ |       |   | 
|Operating income
      (loss) |  |            | 1,568  |          |   | 126               |             |               | 1,485  |       |   | (976   | ) | 
|Goodwill                      |  |            | 527    |          |   |                  |             |               | 2,853  |       |   |        |   | 
|Total assets                  |  |            | 23,601 |          |   | 2,919             |             |               | 5,471  |       |   | 4,588  |   | 
|Capital
      expenditures    |  |            | 137    |          |   | 41                |             |               | 103    |       |   |       |   | 
|Depreciation                  |  |            | 282    |          |   | 19                |             |               | 123    |       |   |       |   | 
|                              |  |            |        |          |   |                   |             |               |        |       |   |        |   | 
|2005:                         |  |            |        |          |   |                   |             |               |        |       |   |        |   | 
|Revenue                       |  | $          | 38,045 |          | $ | 6,940             |             | $             | 9,165  |       | $ |       |   | 
|Operating income
      (loss) |  |            | 1,002  |          |   | 356               |             |               | 1,192  |       |   | (1,029 | ) | 
|Goodwill                      |  |            | 527    |          |   |                  |             |               | 2,653  |       |   |       |   | 
|Total assets                  |  |            | 25,500 |          |   | 2,905             |             |               | 4,646  |       |   | 2,390  |   | 
|Capital
      expenditures    |  |            | 311    |          |   | 1                 |             |               | 59     |       |   |       |   | 
|Depreciation                  |  |            | 284    |          |   | 19                |             |               | 98     |       |   |       |   | 

F21

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

NOTE 12. QUARTERLY CONSOLIDATED
FINANCIAL INFORMATION (UNAUDITED)

The following is a summary of the
unaudited quarterly results for fiscal 2007 and 2006:

|                           | First   |           | Second  |  | Third   |           | Fourth  |  |      
|-------------------------- | ------- | --------- | ------- |  | ------- | --------- | ------- |  | -----
|                           | Quarter |           | Quarter |  | Quarter |           | Quarter |  | Total
|2007                       |         |           |         |  |         |           |         |  |      
|Net sales                  | $       | 13,369    |         |  | $       | 12,963    |         |  | $    
|Gross profit               |         | 3,204     |         |  |         | 3,231     |         |  |      
|Net income                 |         | 126       |         |  |         | 170       |         |  |      
|                           |         |           |         |  |         |           |         |  |      
|Net earnings, per          |         |           |         |  |         |           |         |  |      
|common
      share:        |         |           |         |  |         |           |         |  |      
|Basic                      | $       | 0.06      |         |  | $       | 0.08      |         |  | $    
|Diluted                    | $       | 0.06      |         |  | $       | 0.08      |         |  | $    
|                           |         |           |         |  |         |           |         |  |      
|Denominator for net        |         |           |         |  |         |           |         |  |      
|earnings (loss),
      per |         |           |         |  |         |           |         |  |      
|common
      share:        |         |           |         |  |         |           |         |  |      
|Basic                      |         | 1,997,404 |         |  |         | 2,007,703 |         |  |      
|Diluted                    |         | 2,182,560 |         |  |         | 2,205,085 |         |  |      
|                           |         |           |         |  |         |           |         |  |      
|2006:                      |         |           |         |  |         |           |         |  |      
|Net sales                  | $       | 13,676    |         |  | $       | 12,074    |         |  | $    
|Gross profit               |         | 3,067     |         |  |         | 2,763     |         |  |      
|Net income (loss)          |         | (51       | )       |  |         | (44       | )       |  |      
|                           |         |           |         |  |         |           |         |  |      
|Net earnings (loss), per   |         |           |         |  |         |           |         |  |      
|common
      share:        |         |           |         |  |         |           |         |  |      
|Basic                      | $       | (0.03     | )       |  | $       | (0.02     | )       |  | $    
|Diluted                    | $       | (0.03     | )       |  | $       | (0.02     | )       |  | $    
|                           |         |           |         |  |         |           |         |  |      
|Denominator for net        |         |           |         |  |         |           |         |  |      
|earnings (loss),
      per |         |           |         |  |         |           |         |  |      
|common
      share:        |         |           |         |  |         |           |         |  |      
|Basic                      |         | 1,981,000 |         |  |         | 1,981,000 |         |  |      
|Diluted                    |         | 1,981,000 |         |  |         | 1,981,000 |         |  |      

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

F22

---

BOSS HOLDINGS, INC. AND
SUBSIDIARIES

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

|                              |  |           |        | Additions  |   |                |   |           
|----------------------------- |  | --------- | ------ | ---------- | - | -------------- | - | ----------
|                              |  |           |        | Charged to |   | Charged        |   |           
|                              |  |           |        | Costs and  |   | to
      Other |   |           
|                              |  | Beginning |        | Expenses   |   | Accounts       |   | Deductions
|Year ended December 29, 2007: |  |           |        |            |   |                |   |           
|Accounts receivable           |  | $         | 282    |            | $ | 57             |   |           
|Inventories                   |  |           | 842    |            |   | 267            |   |           
|Deferred income tax asset     |  |           | 6,500  |            |   |               |   |           
|Sales allowance               |  |           | 627    |            |   | 1,620          |   |           
|Total allowances deducted     |  |           |        |            |   |                |   |           
|from assets                   |  | $         | 8,251  |            | $ | 1,944          |   |           
|                             
|Year ended December 30, 2006: |  |           |        |            |   |                |   |           
|Accounts receivable           |  | $         | 361    |            | $ | 3              |   |           
|Inventories                   |  |           | 821    |            |   | 72             |   |           
|Deferred income tax asset     |  |           | 9,230  |            |   | (2,730         | ) |           
|Sales allowance               |  |           | 669    |            |   | 2,024          |   |           
|Total allowances deducted     |  |           |        |            |   |                |   |           
|from assets                   |  | $         | 11,081 |            | $ | (631           | ) |           
|                             
|Year ended December 31, 2005: |  |           |        |            |   |                |   |           
|Accounts receivable           |  | $         | 276    |            | $ | 117            |   |           
|Inventories                   |  |           | 799    |            |   | 19             |   |           
|Deferred income tax asset     |  |           | 9,230  |            |   |               |   |           
|Sales allowance               |  |           | 518    |            |   | 1,648          |   |           
|Total allowances deducted     |  |           |        |            |   |                |   |           
|from assets                   |  | $         | 10,823 |            | $ | 1,784          |   |           

Notes:

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

F23

---